Butters v. SWN Prod. Co.

• Decision Date: 30 March 2020
• Docket Number: CIVIL ACTION NO. 4:17-CV-797
• Parties: GARY R. BUTTERS, as Co-Trustee of THE BUTTERS CLINTON COUNTY GAS PROTECTOR TRUST, DAVID F. BUTTERS, individually, TERRY L. BUTTERS, individually, and GLEN E. BUTTERS, individually, Plaintiffs v. SWN PRODUCTION COMPANY, LLC, Defendant
• Court: U.S. District Court — Middle District of Pennsylvania

GARY R. BUTTERS, as Co-Trustee of THE BUTTERS CLINTON COUNTY GAS PROTECTOR TRUST,DAVID F. BUTTERS, individually, TERRY L. BUTTERS,individually, and GLEN E. BUTTERS, individually, Plaintiffs v. SWN PRODUCTION COMPANY, LLC, Defendant

CIVIL ACTION NO. 4:17-CV-797

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

March 30, 2020

(Chief Judge Conner)

MEMORANDUM

This case involves a dispute over two oil and gas leases between plaintiffs and defendantSWN Production Company, LLC("SWN").Plaintiffs advance claims for quiet title and declaratory judgment.They specifically ask that we find that SWN is in violation of its lease agreements and no longer maintains an interest in the leased property.SWN now moves for summary judgment, claiming it has extended the leases by continuing drilling operations with due diligence and thus retains an interest in the leases.We will deny SWN's summary judgment motion.

I.Factual Background & Procedural History¹

Plaintiffs own several tracts of property in Morris Township, Tioga County, Pennsylvania, that are subject to two oil and gas leases: the "Butters Living Trust Lease" and the "David and Terry Butters Lease."(Doc. 72 ¶ 1).Plaintiffs are the lessors of the properties.(Id.)SWN is a Texas limited liability company engaged in the production of oil and gas.(Doc. 7 ¶ 5).SWN is the lessee of the two leases at issue in this case.(Doc. 72 ¶¶ 1, 8, 10;seealsoDoc. 72-1).

A.Lease Assignments and Transfers

SWN obtained its interest in the leases through a complicated series of transactions involving a variety of entities that assigned their rights, titles, and interests in the Butters Living Trust Lease and the David and Terry Butters Lease.(SeeDoc. 7 ¶¶ 29-37).Two prior interest holders are particularly relevant here: Chesapeake Appalachia, LLC("Chesapeake") and Southwestern Energy Production Company("Southwestern Energy").Chesapeake obtained an interest in the leases in 2010, retroactive to 2006, (Doc. 7 ¶ 30;Doc. 58 ¶ 30), and conducted drilling activities on the subject property, (Doc. 72 ¶ 7;Doc. 77 ¶ 7).SouthwesternEnergy is SWN's corporate predecessor.(Doc. 7 ¶ 37;Doc. 58 ¶ 37).Southwestern Energy first obtained an interest in the subject leases and property in January 2013.(Doc. 7 ¶ 33;Doc. 58 ¶ 33).It obtained a greater interest in September 2014.(Doc. 7 ¶ 36;Doc. 58 ¶ 36).Southwestern Energy converted into SWN in January 2015.(Doc. 7 ¶ 37;Doc. 58 ¶ 37).Upon conversion, SWN obtained a 100% interest in the leases.(Doc. 72 ¶ 10;Doc. 77 ¶ 10).

B.Relevant Lease Provisions

The Butters Living Trust Lease covers just over 242 acres of land on plaintiffs' property.(Doc. 7 ¶ 16;Doc. 72-1at 3).The David and Terry Butters Lease covers roughly 214 acres of land on plaintiffs' property with hydrocarbon rights under about 203 acres of the lot.(Doc. 7 ¶ 17;Doc. 72-1at 10).The leases are identical in all relevant respects.(Doc. 7 ¶¶ 18, 19, 21).

Both leases establish a primary term of five years.(Id.¶ 18).That five-year period commenced on December 8, 2005, and was scheduled to terminate on the fifth anniversary of the leases' execution.(Id.)Under the leases, the lessee has an option to extend the primary term for an additional five years upon payment of $45 per net-acre.(Id.¶ 19).This extension of the primary term takes effect on the date that the leases would have expired, in effect creating a ten-year primary term.(Id.)Before the initial five-year primary term expired, the lessees exercised the option to extend the primary term to December 8, 2015.(Doc. 72 ¶ 5;Doc. 77 ¶ 5).

The leases each contain a "habendum clause" setting forth five means by which the lessee can extend the leases beyond the primary term and into asecondary term.(SeeDoc. 72-1).As relevant here, the habendum clauses provide that the leases will "remain in full force and effect" beyond the primary term

as long thereafter as (1)drilling operations continue with due diligence, provided that LESSEE has commenced drilling operations on any portion of the premises or any lands pooled or unitized therewith, within the primary term, (2) an application for a drilling permit is pending with the appropriate authorities, and LESSEE, after grant of such permit, commences drilling operations within a reasonable time thereafter and continues same with due diligence, provided said permit application was filed prior to the expiration of the primary term, (3) oil and gas or either of them is produced or withdrawn from any portion of the premises or any lands pooled or unitized therewith, (4) gas storage operations are conducted in or on any portion of the premises or (5) a completed oil or gas well would be capable of producing oil or gas from any portion of the premises or any lands pooled or unitized therewith, but for acts of God, unavailability or interruption of markets or pipelines, delays due to pending governmental or regulatory authorization, or any other causes, which have caused LESSEE not to commence production from such well or to suspend production from such well.

(Id. at 3, 10)(emphasis added).The leases also define "operations":

Operations.Whenever used in this lease, the word "operations"(unless specified to the contrary) shall mean operations for and any of the following: dirt work, building of roads and locations, drilling, testing, completing, reworking, recompleting, deepening, plugging back, repairing, abandoning or dewatering (meaning pumping or flowing of water and/or associated hydrocarbons from a well) of a well in search of or in an endeavor to obtain, increase or restore and/or market or render marketable or more valuable production of oil or gas, and/or production, actual or constructive, of oil or gas.

(Id. at 5, 12).

C. Broughton Pad and Drilling Activities

SWN's summary judgment motion concerns SWN's activities on what we will refer to as the "Broughton Pad."The Broughton Pad is found on SWN's leased land, on which SWN has drilled two wells: the "Broughton #5H well" and the "Broughton #3H well."(SeeDoc. 72 ¶¶ 23, 49).

1.SWN's "Continuous Operations Schedule"

SWN claims that, in November 2015, it implemented a "Continuous Operations Schedule" guiding its operations on the Broughton Pad.(Id.)SWN further claims—and plaintiffs dispute—that Continuous Operations Schedules were part of its standard business practices in Pennsylvania at the time.(Id.¶ 24;Doc. 77 ¶ 24).Plaintiffs also contest, citing expert testimony, whether Continuous Operations Schedules like the one used by SWN were part of the oil and gas industry's standard business practices in Pennsylvania.(Doc. 77 ¶ 24).

According to SWN, its Continuous Operations Schedule was designed to ensure that operations took place on the Broughton pad every 60 to 90 days.(Doc. 72 ¶ 25).SWN asserts that this Schedule was intended to guarantee that SWN "diligently . . . [met] lease development obligations."(Id.)Plaintiffs dispute whether SWN's Continuous Operations Schedule was in fact intended to satisfy its due diligence obligations under the leases and whether adherence to a Schedule like SWN's constitutes good faith behavior.(Doc. 77 ¶¶ 24-25).Plaintiffs rejoin that the Schedule was instead intended to comply with SWN's standard lease provision prohibiting the cessation of operations for more than 90 days.(Id.¶ 25).

2.Initial Activities on the Broughton #5H Well

In May 2011, Chesapeake drilled the Broughton #5H well to a total depth of 11,277 feet.(Doc. 72 ¶ 7;Doc. 77 ¶ 7).When SWN's predecessor, Southwestern Energy, first acquired an interest in the leases from Chesapeake in 2013, there was no pipeline connected to the pad.(Doc. 72 ¶¶ 8-9;Doc. 77 ¶¶ 8-9).SWN claims it had plans to complete the well at the time, (Doc. 72 ¶ 11), but plaintiffs dispute that claim, (Doc. Doc. 77 ¶ 11).²Southwestern Energy obtained a greater interest in the leases in September 2014 before converting into SWN in January 2015.(Doc. 7 ¶¶ 36, 37;Doc. 58 ¶¶ 36, 37).

In June 2015, SWN filed an application for inactive well status for the Broughton #5H well with the Pennsylvania Department of Environmental Protection("DEP").(Doc. 72 ¶ 17;Doc. 77 ¶ 17).SWN's application described the Broughton #5H well as a "[t]emporarily abandoned well awaiting installation of a pipeline."(Doc. 72 ¶ 17;Doc. 77 ¶ 17;Doc. 72-13at 2).SWN withdrew its application for inactive status in January 2016.(Doc. 72 ¶ 28;Doc. 77 ¶ 28).

3.Transition to the Broughton #3H Well and Work on the Broughton Pad

In April 2015, before SWN applied for inactive status on the Broughton #5H well, it scheduled surveys for a second well—the Broughton #3H well—to be drilledon the Broughton Pad.(Doc. 72 ¶ 15;Doc. 77 ¶ 15).Using those surveys, SWN filed a well location plat for the Broughton #3H well with the DEP.(Doc. 72 ¶ 16;Doc. 77 ¶ 16).SWN submitted a permit application to the DEP to drill the Broughton #3H well in July 2015.(Doc. 72 ¶ 19;Doc. 77 ¶ 19).DEP approved the application in August 2015.(Doc. 7 ¶ 66;Doc. 58 ¶ 66).

Various construction activities took place on the Broughton Pad between June 2015 and December 2015, including, for example, paving the entrance to the Pad.(Doc. 72 ¶¶ 18, 20).SWN also describes various operations related to drilling on the Broughton #3H well before the expiration of the primary term.Specifically, SWN conducted activities like "spudding, drilling conductor hole, installing cellar, setting wellhead cage and disposing of drilling waste."(Id.¶ 21).

Testimony from SWN officials suggests that the Broughton Pad was put on a Continuous Operations Schedule.(Id.¶ 23).Plaintiffs agree that the Broughton #3H well was put on the Continuous Operations Schedule, but cite internal SWN reports that indicate the Broughton #5H well was omitted from the Continuous Operations Schedule.(Doc. 77 ¶ 23).Plaintiffs also disagree with SWN's assertion that the Broughton #3H well was "sp...