The Supreme Court of Appeals of West Virginia recently held that the consent and ratification of non-participating royalty interest (“NPRI”) holders are not required for an operator to pool or unitize an oil and gas lease. The holding in Gastar Exploration, Inc. v. Contraguerro, 800 S.E.2d 891, Supreme Court of Appeals of West Virginia, No. 16-0429, May 31, 2017, reversed a trial court ruling.
Gastar Exploration, Inc. (“Gastar”) acquired an oil and gas lease from PPG Industries, Inc. (the “PPG Lease”) covering 3,000+ acres of land in Marshall County. The PPG Lease contained industry-standard provisions related to pooling, specifically granting Gastar the right to pool or unitize parts of the leased premises with other lands and leases and reducing proportionately the royalty payable on production from any such unit. Gastar did not obtain the NPRI holders’ consent to the unit before designating the unit in the public records and commencing operations and production. In fact, the trial court determined that the NPRI holders were unaware of their royalty interest until contacted by Gastar to sign ratifications to the PPG Lease after production began. The NPRI holders refused to sign any consent or ratification of the lease.
The NPRI holders filed a declaratory judgment action seeking a declaration of their rights and status regarding the PPG Lease. Relying on a legal theory known as cross-conveyancing of interests adopted by Texas courts, the trial court granted summary judgment in favor of the NPRI holders and ruled that the PPG Lease and designated unit were void until the NPRI holders consented to and authorized the operations. On appeal, the Court addressed “whether the validity of the pooling provision in the [PPG Lease] and the designated [unit] is dependent upon the consent and ratification of the NPRI holders.”
Reasoning and Holding
When Gastar appealed, the NPRI holders asked the Court to reach the same result. The cross-conveyance theory championed by the NPRI holders and adopted by the trial court rested on “the premise that mineral interests involved in the pooled unit are actually conveyed to other owners within the pooled unit in proportion to the acreage allocated by each to the unit.” In its opinion, the West Virginia Supreme Court noted that several jurisdictions, including Texas, Mississippi, Illinois and California, have adopted this theory. However, the Court observed a competing theory called the contract theory for pooling which rejects the notion that property interests themselves are conveyed, and focuses instead on the contractual rights associated with royalty payments. The Court reviewed West Virginia precedent and determined that West Virginia follows the contract theory of pooling. The Court stated that affirming the trial court would create uncertainty in oil and gas law in the state as well as lead to the Draconian result of an NPRI holder “unilaterally voiding an entire pooling agreement involving thousands as of acres and the bargained-for rights of dozens of other interest holders.” Indeed, the Court found that the cross-conveyance theory effectively re-conveyed the executive right to lease to the NPRI holders, a right that does not attach to an NPRI.
The Court rejected the cross-conveyance theory adopted by the trial court and concluded that “pooling results in a consolidation of contractual and financial interests regarding the drilling and production of oil and gas from the combined parcels of land.” As such, the Court held that
[W]here a lessee designates tracts of land for pooling regarding horizontal drilling and production of oil and gas from the Marcellus Shale Formation, which includes nonparticipating royalty interests, consent or ratification by the holders of the nonparticipating royalty interests to the pooling is not required, where the holders of the nonparticipating royalty interests have conveyed the oil and gas in place and the executive leasing rights thereto to the lessor.
For Additional Information
A complete copy of the Supreme Court of Appeals Opinion can be found here.