Gastar Exploration, Inc. v. Contraguerro

• Decision Date: 31 May 2017
• Docket Number: No. 16-0429,16-0429
• Citation: 800 S.E.2d 891
• Parties: GASTAR EXPLORATION, INC., Defendant Below Petitioner v. Joyce CONTRAGUERRO, et al., Plaintiffs Below, Respondents
• Court: West Virginia Supreme Court

800 S.E.2d 891

GASTAR EXPLORATION, INC., Defendant Below Petitioner

v.Joyce CONTRAGUERRO, et al., Plaintiffs Below, Respondents

No. 16-0429

Supreme Court of Appeals of West Virginia.

Submitted: May 23, 2017

Filed: May 31, 2017

William M. Herlihy, Esq., Spilman Thomas & Battle, PLLC, Charleston, West Virginia, Matthew P. Heiskell, Esq., Spilman Thomas & Battle, PLLC, Morgantown, West Virginia, Counsel for Gastar Exploration, Inc.

Jeremy M. McGraw, Esq., James G. Bordas, Jr., Esq., James G. Bordas, III, Esq., James B. Stoneking, Esq., Bordas & Bordas, PLLC, Wheeling, West Virginia, Counsel for Joyce Contraguerro, et al.

Mychal S. Schulz, Esq., Matthew Casto, Esq., Babst Calland Clements & Zomnir, P.C., Charleston, West Virginia, Counsel for PPG Industries, Inc.

Ancil G. Ramey, Esq., Steptoe & Johnson, PLLC, Huntington, West Virginia, W. Henry Lawrence, Esq., Allison J. Farrell, Esq., Lauren A. Williams, Esq., Steptoe & Johnson PLLC, Bridgeport, West Virginia, Counsel for Amicus Curiae, West Virginia Oil and Natural Gas Association

George A. Patterson, III, Esq., John W. Woods, III, Esq., Bowles Rice LLP, Charleston, West Virginia, Counsel for Amicus Curiae, Independent Oil and Gas Association of West Virginia, Inc.

Justice Ketchum :

This appeal concerns a voluntary pooling and unitization lease provision regarding horizontal drilling and production of oil and gas from the Marcellus Shale Formation. The lessor is PPG Industries, Inc., ("PPG") and the lessee is Gastar Exploration USA, Inc., aka Gastar Exploration, Inc., ("Gastar"). The lease covered 3,285.6874 acres in Marshall County, and 700 acres thereof were designated by the lessee, Gastar, as the Wayne/Lily Unit for purposes of pooling the oil and gas interests held by various individuals and entities.¹

PPG and Gastar, defendants in the action below, challenge the April 1, 2016, order of the Circuit Court of Marshall County which granted partial summary judgment in favor of the plaintiffs, Joyce Contraguerro, et al .² Although not parties to the PPG-Gastar lease, the plaintiffs ("NPRI holders") collectively hold a one-fourth nonparticipating royalty interest in the oil and gas underlying a 105.9 acre parcel included within the 700 acre Wayne/Lily Unit. The NPRI holders do not own any interest in the surface of the 105.9 acre parcel, nor do they live on the property.

Generally, a nonparticipating royalty interest ("NPRI") describes a right to share in royalties from oil and gas drilling and production operations where the holder thereof has conveyed away all other interests in the oil and gas he or she may have had, including any possessory interest and the right to lease the minerals. See Benjamin Holliday, New Oil and Old Laws: Problems in Allocation of Production to Owners of Non-Participating Royalty Interests in the Era of Horizontal Drilling , 44 Saint Mary's L. J. 771, 799 (2013) ("An NPRI is a nonpossessory interest, which means that the NPRI owner does not own the minerals in place but instead holds only a presently vested right to a stated fraction of production from any and all minerals produced.").

In Davis v. Hardman , 148 W.Va. 82, 133 S.E.2d 77 (1963), the terms "nonparticipating royalty interest" and "interest in oil and gas in place" were compared:

The distinguishing characteristics of a non-participating royalty interest are: (1) Such share of production is not chargeable with any of the costs of discovery and production; (2) the owner has no right to do any act or thing to discover and produce the oil and gas; (3) the owner has no right to grant leases; and (4) the owner has no right to receive bonuses or delay rentals. Conversely, the distinguishing characteristics of an interest in minerals in place are: (1) Such interest is not free of costs of discovery and production; (2) the owner has the right to do any and all acts necessary to discover and produce oil and gas; (3) the owner has the right to grant leases, and (4) the owner has the right to receive bonuses and delay rentals.

(citation omitted) 148 W.Va. at 90, 133 S.E.2d at 81-82.

PPG and Gastar challenge the circuit court's entry of partial summary judgment in favor of the NPRI holders. The circuit court ruled that the pooling provision in the PPG-Gastar lease and the designated Wayne/Lily Unit are void until such time as pooling is consented to and ratified by the NPRI holders.

This Court is of the opinion, however, that the circuit court committed error in ruling that the validity of the pooling provision and the Wayne/Lily Unit was dependent upon the consent and ratification of the NPRI holders. Consequently, we reverse the April 1, 2016, order and enter judgment in favor of PPG and Gastar.³

I. Factual Background

A. The Nonparticipating Royalty Interests

By deed made November 6, 1933, Mabell Sims Theiss and her sister, Ada Sims Parsons, acquired a one-half interest in the oil and gas in place underlying a 105.9 acre parcel in Franklin District, Marshall County. Thereafter, by deed made October 2, 1946, Mabell Sims Theiss and Ada Sims Parsons conveyed to John Wenzel the right "to lease said land for oil and gas purposes and receive any and all delay rentals that may be received under and by virtue of any lease executed by him, his heirs or assigns, covering said land." As a result, Mabell Sims Theiss and Ada Sims Parsons retained a one-half nonparticipating royalty interest in the 105.9 acres, without leasing rights which they had conveyed to John Wenzel. Wenzel had no right to receive royalties. His leasing rights were later acquired by PPG.

The current NPRI holders trace their royalty interest in the 105.9 acre parcel back to the one-fourth nonparticipating royalty interest of Mabell Sims Theiss. Mabell Sims Theiss died intestate, and her property passed to Eva Adele Minor, her sole heir. Eva Adele Minor also died intestate, and her one-fourth nonparticipating royalty interest in the 105.9 acres passed to her heirs, the NPRI holders. The NPRI holders derived no royalty interest from Ada Sims Parsons.

B. The Oil and Gas Lease and Operations Agreement

PPG's leasing rights, derived from the 1946 deed to John Wenzel, were described by the circuit court as follows: "PPG acquired the surface acreage associated with the 105.9 acre mineral estate and holds an 'executive right' to lease certain mineral interests underlying that tract of land. Defendant PPG does not own any royalty interest in the 105.9 acre mineral estate."⁴

On February 25, 2011, PPG, as lessor, entered into an Oil and Gas Lease and Operations Agreement (the "lease") with Gastar, the lessee.⁵ PPG and Gastar are the only parties to the lease, and the lease covers 3,285.6874 acres, including the 105.9 acre parcel from which the interest of the NPRI holders arises. The granting clause, set forth in section 2 of the lease, provides in part:

PPG, for valuable consideration, including the payment of the agreed lease bonus, and subject to the provisions of this Lease, hereby grants, leases and lets the Leased Premises exclusively to Lessee [Gastar], without warranties or covenants of title of any nature and without any other warranties or representations, for the sole purpose of exploring for Oil and Gas in the Marcellus Shale Formation by geological, geophysical, seismic, and other methods, and of drilling, producing and operating Gas Wells or Oil Wells for recovering, removing and marketing Oil, Gas, and all associated Hydrocarbons from the Marcellus Shale Formation and all products produced therewith or which may be derived therefrom[.]

Gastar was required under the lease to make bona fide efforts to develop the leased premises in a prudent and workmanlike manner and at locations "likely to be capable of producing Hydrocarbons in Paying Quantities." In Section 9 of the lease, PPG granted Gastar the right "to pool or unitize parts of the Leased Premises with other lands or leases, whether owned by Lessee or by others at a time before or after drilling to create Pooled Horizontal Well Tracts." Furthermore, Section 9 provided regarding royalties: "Royalty on production of Hydrocarbons from a Pooled Horizontal Well Tract shall be reduced to the proportion that the amount of the Leased Premises acreage placed within the Pooled Horizontal Well Tract bears to the total acreage in the Pooled Horizontal Well Tract."

C. The Wayne/Lily Unit and Requested Ratification

On March 7, 2012, Gastar recorded a designation of pooled unit in the Office of the Clerk of the County Commission of Marshall County.⁶ The designation, known as the Wayne/Lily Unit, provided that 700 acres of the leased premises in Franklin District, including the subject 105.9 acres, would be pooled to facilitate the exploration, development, production and marketing of oil and gas. The designation addressed royalties as follows: "Each royalty and overriding royalty owner shall be compensated based on their pro rata share of ownership in each tract within the Unit and in the proportion of their tract acreage contribution to the total amount of acreage included in the Unit."

The Wayne/Lily Unit contains eight oil and gas wells drilled by Gastar. The circuit court determined that five of the eight wells in the Unit have horizontal well bores which penetrate the minerals underlying the 105.9 acre parcel. Soon after placement of the wells, Gastar began production operations within the Unit. The circuit court found that the NPRI holders were not asked to consent to the pooling of their royalty interests prior to the time Gastar established the Wayne/Lily Unit or prior to the commencement of production operations within the Unit.

Thereafter, Gastar began contacting the NPRI holders individually, asking each NPRI holder to sign and return a ratification of the February 25, 2011, lease between PPG and Gastar. The ratification covered all terms of the lease, including the pooling provision.⁷ The NPRI holders state that they were unaware of their royalty interests before Gastar contacted them....