Hall, E. v. CNX Gas
137 A.3d 597
| Pa. Super. Ct. | 2016Background
- The Halls (Earl Sr., Betty Jane, Earl Jr.) leased oil and gas rights to CNX (and predecessor) on Fayette County properties; leases use identical royalty clause: one-eighth of the net amount realized at the wellhead for gas sold at the well, or one-eighth of the net amount realized from sale when gas is sold/used beyond the well.
- Gas from multiple wells is commingled in a gathering system before sale; CNX measures volume at each wellhead, totals volumes at the sales point, and allocates the proceeds pro rata by each well’s share of wellhead volume.
- Some gas is “lost” (leakage/evaporation) or “used” (compression, flaring, operations) prior to the point of sale; lost/used volumes do not reach the point of sale and thus produce no sale proceeds.
- The Halls sued, seeking an accounting and claiming CNX breached the lease by allocating lost/used gas pro rata among lessors rather than paying royalties on wellhead-measured volumes (i.e., they argued CNX may only deduct actual lost/used volumes measured from each well).
- The trial court granted CNX summary judgment; this appeal challenges whether CNX may proportionately allocate lost/used gas absent an express lease provision allowing that allocation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CNX may allocate lost/used gas pro rata among lessors absent an express lease term authorizing allocation | Halls: Lease did not authorize pro rata allocation of lost/used gas; under Pomposini, rights not expressly or fairly impliedly granted remain with lessor, so CNX may only deduct actual lost/used volumes attributable to each well (i.e., royalties based on wellhead volumes) | CNX: Leases pay one-eighth of net amount realized at point of sale; lost/used gas never reaches sale so produces no royalty; CNX allocates proceeds (not lost/used gas) pro rata by wellhead volume — no deduction of lost/used gas from royalties | Court: Affirmed summary judgment for CNX; lost/used gas is not part of the royalty (royalty is on amounts realized at sale), so no missing allocation term exists and no pro rata deduction of lost/used gas from royalties occurred |
Key Cases Cited
- T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261 (Pa. 2012) (oil and gas leases are contracts governed by contract law)
- Pomposini v. T.W. Phillips Gas & Oil Co., 580 A.2d 776 (Pa. Super. 1990) (rights not expressly or fairly impliedly granted to lessee are retained by lessor)
- J.K. Willison v. Consol. Coal Co., 637 A.2d 979 (Pa. 1994) (contract construction follows the plain meaning of the agreement)
- Daley v. A.W. Chesterton, Inc., 37 A.3d 1175 (Pa. 2012) (summary judgment standard and appellate review principles)
- Humberston v. Chevron U.S.A., Inc., 75 A.3d 504 (Pa. Super. 2013) (contract interpretation seeks parties’ intent as manifested in writing)
- Kilmer v. Elexco Land Servs., Inc., 990 A.2d 1147 (Pa. 2010) (upholding net-back/post-production cost allocation under certain lease language)
- Banks Engineering Co. v. Polons, 752 A.2d 883 (Pa. 2000) (discussing supplying reasonable terms to contracts under appropriate circumstances)