Ascent Res. – Marcellus, LLC v. Huffman

• Decision Date: 18 November 2020
• Docket Number: No. 19-0347,19-0347
• Parties: ASCENT RESOURCES – MARCELLUS, LLC, Plaintiff Below, Petitioner v. Donald E. HUFFMAN and Triple L Land and Mineral, LLC, Defendants Below, Respondents
• Court: West Virginia Supreme Court

851 S.E.2d 782

ASCENT RESOURCES – MARCELLUS, LLC, Plaintiff Below, Petitioner

v.Donald E. HUFFMAN and Triple L Land and Mineral, LLC, Defendants Below, Respondents

No. 19-0347

Supreme Court of Appeals of West Virginia.

Submitted: October 7, 2020

Filed: November 18, 2020

Kenneth E. Tawney, Esq., Dale H. Harrison, Esq., Thomas J. Hurney, Jr., Esq., Jackson Kelly PLLC, Charleston, West Virginia, Counsel for the Petitioner.

Jeremy B. Cooper, Esq., Blackwater Law PLLC, Aspinwall, Pennsylvania, Counsel for the Respondents.

HUTCHISON, Justice:

In this appeal from the Circuit Court of Tyler County, we are asked to review an order denying an oil and gas drilling company's motion for a declaratory judgment. In the order, the circuit court refused to imply into an existing oil and gas lease a covenant to pool and unitize the lease with nearby mineral estates.

We find no error in the circuit court's order. In the absence of language in an oil and gas lease showing the parties contemplated that a lessee has a right to pool and unitize the lease with other estates, the circuit court correctly concluded that there can be no implied covenant to pool or unitize.

I. Factual and Procedural Background

This case concerns a ninety-four-acre tract of land in Tyler County. Defendants below Roy D. Haught and Betty Hadley owned a 50% interest in the oil and gas mineral estate beneath the tract. The defendants have since conveyed an unknown portion of their estate to Donald E. Huffman and Triple L Land and Mineral, LLC, who are now acting in the place of the defendants in this appeal. On February 6, 1980, the defendants’ predecessor in interest executed an oil and gas lease permitting the drilling of wells on the tract to produce oil and gas. The 1980 lease is still in effect because wells on the tract continue to produce oil and gas.

Plaintiff Ascent Resources – Marcellus LLC¹ ("Ascent") owns the other 50% interest in the oil and gas estate. Furthermore, Ascent has since become the successor in interest to the 1980 lease. Hence, Ascent holds the sole right to drill wells on the tract and to produce oil and gas.

On June 8, 2016, Ascent brought an action against the defendants seeking a declaratory judgment regarding the 1980 lease. Ascent sought a declaration that the 1980 lease contained an implied covenant to pool or unitize the lease with other mineral interests. Ascent declared that it wanted to drill modern, horizontal well bores into the Marcellus shale formation beneath the tract, hydraulically fracture the shale, and produce oil and gas. However, Ascent contended that oil and gas could only be economically produced from the Marcellus shale formation if the "drilling units" are large enough to accommodate a well bore that extends horizontally at least 2,500 feet in length. Ascent maintains that the parties’ ninety-four-acre tract, operating alone, is too small to support the drilling of the horizontal well bore.

In its declaratory judgment complaint, Ascent admitted that the 1980 lease only granted Ascent the right to drill, develop, and operate for oil and gas on the ninety-four-acre tract. Ascent also admitted that there is no language in the 1980 lease expressly permitting Ascent to unitize or pool the lease with other nearby mineral interests to create a drilling unit large enough to justify exploiting the shale formations.²

To enable Ascent to economically drill the horizontal well bore, it asked the circuit court for a declaration that the 1980 lease contained an implied covenant to unitize or pool the lease with other mineral interests. Ascent sought the implied right given that modern leases often have language that allows lessees to aggregate mineral interests to create drilling units sufficient in size to support drilling in shale formations.

Ascent subsequently filed a motion for summary judgment, asserting that there were no questions of material fact existing for resolution. Ascent asked the circuit court to declare that pooling and unitization are reasonably necessary to develop the minerals, and that pooling and unitization would place no unreasonable burden on the owner of any interest in the ninety-four-acre tract. Furthermore, Ascent, as lessee of the mineral and gas rights, requested a declaration adding five paragraphs to the parties’ 1980 lease. Specifically, Ascent moved the circuit court for an order

declaring that Ascent has the implied right to pool and unitize the Subject Lease with other mineral leases or mineral interests as a necessary adjunct to its right to drill and operate the premises for oil and gas upon the following terms and conditions:

1. Lessee shall have the right to pool, unitize, or combine all or parts of the Leasehold with other lands, whether contiguous or not contiguous, leased or unleased, whether owned by Lessee or by others, at a time before or after drilling, to create drilling or production units.

2. Pooling or unitizing in one or more instances shall not exhaust Lessee's pooling and unitizing rights, and Lessee shall have the right to change the size, shape, and conditions of operation of any unit created and to make concomitant changes in payments.

3. Lessee shall allocate production from each well in a unit among each of the leases in the unit as a percentage of that leasehold's acreage in the unit compared to the total leasehold acreage in the unit. Lessee shall then pay the royalties specified in each lease based upon the sale price of the production allocated to that lease.

4. Drilling, operations in preparation for drilling, production, shut-in production from the unit, or payment of royalty on any part of the unit (including non-Leasehold land) shall have the same effect upon the terms of the Subject Lease as if a well were located on, or the subject activity were attributable to, the Leasehold.

5. Lessee shall record among the land records of the county the declaration of pooling and any amendments thereto and attempt to furnish a copy to Lessor or their known successors and assigns, although failure to furnish a copy to any Lessor shall not operate to void or terminate any drilling unit that has been formed.

In support of its request that the circuit court incorporate these five terms and conditions into the 1980 lease, Ascent attached an affidavit from an energy development expert. The expert opined that the terms "are customary today in the oil and gas industry for pooling." Another affidavit attached to the motion attested that the parties’ ninety-four-acre tract had insufficient space to support drilling a horizontal well in a shale formation, and that the 1980 lease must be pooled with other mineral interests to create a drilling unit large enough to accommodate horizontal drilling.³

In an order filed March 5, 2019, the circuit court found the 1980 lease did not grant Ascent an express right to pool or unitize the lease with other oil and gas interests. More importantly, the circuit court found that nothing in the lease was unclear or unambiguous regarding pooling and unitization. The circuit court concluded that, in the absence of ambiguity, there is nothing for the circuit court to interpret and, therefore, that the court was powerless to write a new or different contract for the parties. Furthermore, the circuit court found that implying a covenant of pooling and unitization would impose burdens upon the estate that were never bargained for or contemplated by the parties in 1980 and are not reflected in the terms of the lease. Hence, the circuit court refused to imply a new covenant into the 1980 lease permitting pooling and unitization, and refused to imply the five "customary" terms and conditions regarding pooling and unitization that Ascent sought to have judicially incorporated into the lease. The circuit court denied the motion for summary judgment and rejected Ascent's request for a declaratory judgment.⁴

Ascent now appeals the circuit court's order.

II. Standard of Review

Because the purpose of a declaratory judgment action is to resolve legal questions, "[a] circuit court's entry of a declaratory judgment is reviewed de novo. " Syl. pt. 3, Cox v. Amick , 195 W. Va. 608, 466 S.E.2d 459 (1995). See also , Syl. pt. 1, Painter v. Peavy , 192 W. Va. 189, 451 S.E.2d 755 (1994) ("A circuit court's entry of summary judgment is reviewed de novo. ").

III. Discussion

Ascent argues that it presented affidavits to the circuit court and that the defendants offered nothing to refute the evidence in those affidavits. Ascent claims that these facts establish that it cannot develop the oil and gas in the Marcellus shale formation without pooling or unitizing the 1980 lease with other mineral interests in nearby tracts. Because the circuit court failed to adopt Ascent's uncontroverted facts, Ascent contends that the circuit court committed clear error.

Furthermore, Ascent argues that the circuit court erred in finding the 1980 lease was "clear and unambiguous." Ascent admits that the lease is silent regarding pooling, unitizing, and technologically-advanced drilling methods, but it argues that the silence actually created an ambiguity. In other words, Ascent maintains the circuit court should have equated silence with ambiguity and then determined whether there was an inchoate or implied right to pool or unitize in the 1980 lease.

Finally, Ascent contends that it is a common practice for courts to imply new rights into old leases. For instance, this Court has recognized leases may incorporate an implied covenant requiring the lessee to develop mineral interests ( St. Luke's United Methodist Church v. CNG Dev. Co. , 222 W. Va. 185, 192, 663 S.E.2d 639, 646 (2008) ); an implied covenant requiring a lessee to market oil and gas produced from a well ( Wellman v. Energy Res., Inc. , 210 W. Va. 200, 211, 557 S.E.2d 254, 265 (2001) ); or an implied obligation requiring the lessee to protect the leased premises from drainage by oil and gas wells placed on adjacent property (Syl. pt. 1, Adkins v....