A Landman’s Perspective on Free Gas Provisions in Oil and Gas Leases
June 15, 2012 2012 American Association of Professional Landmen Conference San Francisco, California
Joseph L. Stephenson©
Copyright 2012 by Joseph L. Stephenson. All rights reserved.
About the Author
Joseph L. Stephenson is a native of Jasper, Alabama. He graduated from the University of Alabama in 1976 with a B. S. in Commerce and Business Administration. His land-related work experience consists of ten years as a landman in the surface coal mining industry of Alabama and twenty-three years as an oil and gas landman. He has worked for River Gas Corporation, ConocoPhillips Company, Dominion Exploration and Production Company and is currently employed as Land Manager of GeoMet Operating Company, Inc. in Birmingham, Alabama. Mr. Stephenson is a member, director, and past president of the Black Warrior Association of Professional Landmen. He is also a member and past director of the American Association of Professional Landmen. His other professional affiliations include the Appalachian Association of Professional Landmen, the National Association of Lease and Title Analysts, and the National Notary Association.
Disclaimer: Joseph L. Stephenson is not an attorney and cannot render legal advice, nor does he purport to do so herein. Joseph L. Stephenson makes no warranty or representations and assumes no responsibility or liability as to the usefulness, reliability, correctness and/or acceptability of the information, ideas and/or interpretations of the written/oral material presented herein. The reader is encouraged to consider the contents of this paper as an introduction to the subject matter. This paper is prepared solely for educational purposes to enhance the reader’s knowledge and understanding of the subject matter. It is not intended to be a substitute for consultation with legal counsel. Prior to application of any procedure or suggestion stated herein, consultation with, and assistance from, an attorney should be sought. Anyone relying upon the statements, contents and/or comments found in this paper and/or presented during the associated seminar agrees to do so at his/her own cost, risk and expense and agrees to indemnify Joseph L. Stephenson and the American Association of Professional Landmen for such reliance. GeoMet Operating Company, Inc. was not involved in the preparation of this paper and the opinions and views expressed herein do not represent any view of GeoMet Operating Company, Inc.
This paper is based on the personal experience of the author, on situations that have been reported in court cases in different parts of the U.S., and instruments that have been placed of record at courthouses or otherwise made known in the public domain. The reference to court cases, and any commentary on same, reflects only the personal views of the author. Each case is fact-specific and comments on one case may not be applicable to a case in another jurisdiction that considered similar issues but may have reached a different conclusion of law. Every attempt was made to ensure that the materials contained herein are accurate, but errors or omissions may be contained herein. When reviewing a West’s Digest for a specific state, the West Key Cite Number relevant to free gas is 79.5 under “Mines and Minerals” (“furnishing gas or oil to lessor”). When using the Westlaw database for free gas, it is 260k79.5.
1 INTRODUCTION
This paper is intended to focus on various aspects of free gas provisions, background on the history of free gas clauses in oil and gas leases (and court cases related to their use), how the clauses have evolved, current trends in their use, and providing the reader with insight gained by the author in his experience in securing leases with and without free gas clauses. A free gas provision might be styled to address either “domestic use” or “agricultural use.” Discussion on those terms is found further in this paper. The use of the term “lessee” and “operator” will be used interchangeably herein, recognizing that an operator of a well might not be the lessee burdened with the free gas obligation.
Why should we be concerned about gas produced from a well being delivered to a house in accordance with a free gas provision? The date of March 18, 1937 is certainly one to remember. On that day, there was a school explosion in New London, Texas that killed 300 students and teachers. The explosion was the result of untreated gas that was being delivered to that facility from nearby wells. The gas was not odorized. The explosion was heard four (4) miles away. When it was confirmed that an undetected leak in a pipeline allowed gas to accumulate under the building, thus being the cause of the explosion, laws were passed in Texas and elsewhere requiring an odorizing agent (such as mercaptan) to be added to natural gas delivered to consumers.
The free gas clause originated when natural gas did not have much value or marketable use. A little history will set the stage for how and why this clause came into use. A few thousand years ago, the Chinese were aware of the burning aspect of natural gas that seeped out from fissures and springs. They installed bamboo piping to transport the gas to a location on the sea shore to speed up the evaporation process of drying brine by boiling it over a gas flame so that salt was the end product. In 1770, oil and gas was discovered by people drilling salt wells in what is now West Virginia. When gas was encountered, the gas was sometimes piped away in hollow logs and flared or used at a location where the salt water could be boiled (such as what William Tompkins did in 1841 at his salt furnace at Burning Springs, West Virginia). The gas would then be used to boil the salty water so that salt was rendered. The use of this natural fuel eliminated the need to use wood to fuel a fire (or wait on the water to evaporate when diverted to drying pans). This simple and effective use of natural gas demonstrated that gas could be put to a limited, but beneficial use.
Depending on whose land the salt well(s) was drilled on if a well had a surplus of gas, or the operator had no use of the gas, the operator of the salt well(s) had no objection to a landowner connecting to the well and taking the surplus gas for his use at a home on the premises. If several houses or a town was in close proximity and if a great deal of gas was produced, it became evident that the gas could be used for indoor lighting, streetlights, etc. Recognizing the value of the gas, although of limited use, the first commercial well drilled for the purpose of producing natural gas was drilled in 1821 by William Hart in Fredonia, New York. Mr. Hart located his well site near a creek that had gas bubbles visible on the surface. He drilled 27 feet and found gas. More wells were drilled in that area, and the Fredonia Gas Light Company was
2 formed and became the first U.S. natural gas company.1 As contracts were entered into for the purpose of drilling for oil and gas (with oil being the primary reason for drilling where oil could be piped into tanks and hauled away), lessees did not object to agreeing to allow the lessor to lay a pipe to the well and take gas for use at a home on the lease, especially if there was no market for the gas in view of the remote location of the well, or if the lessee did not need to use that gas for its operations on the lease. The earliest instrument that this author has seen that granted the right to develop “petroleum and natural gas” is a West Virginia “Agreement” dated 1894 that provided: “First party to have gas free for household use from any well on the premises making his own connections.” Free gas clauses also evolved from the custom and practice of deeds being prepared to convey surface rights that also included a right for the new surface owner to use coal found on the land for domestic (or “shop”) use.2
Oil and gas leases have been “held by production” in the eastern part of the U.S. for over 100 years. For example, the 2005 Pennsylvania case of Deynzer v. Columbia Gas of Pennsylvania, Inc., 2005 PA Super 122, 875 A.2d 298 (PA. 2005) addressed a dispute over a free gas provision in an oil and gas lease dated 1900. In those early days of oil and gas drilling in areas where shallow wells could be drilled that would produce gas, it was not practical to lay pipelines a great distance to pipe gas from a well that might be a low producer. However, companies were formed like “cooperatives” 3 (like people paying someone to grow a garden and the cooperative members having the right to either pick vegetables themselves or have vegetables delivered to their home). While not directly tied to the issue of free gas, there has been a fair amount of litigation involving liability associated with the companies that contracted to deliver gas from a well(s) to the members that contracted for gas service. In the past, a high degree of responsibility for the safe delivery of gas and liability for failure to do so has been placed on companies that serve the public by commercially providing gas as opposed to lessees/operators that had a contractual agreement to provide free gas via an oil and gas lease.
In the northern part of Alabama, use of free gas provisions in oil and gas leases were phased out of use by the mid 1970’s. The typical provision in Alabama leases was: “Lessor shall have the privilege at his risk and expense of using gas from any gas well on said land for stoves and inside lights in the principal dwelling thereon out of any surplus gas not needed for operations hereunder.” Such clauses were typically used in Alabama by companies with offices outside of Alabama that may have been accustomed to taking leases in other parts of the country where this provision was more prevalent. The cited provision is identical or very similar to what had been in common use in other states. Various printing companies in Alabama provided such lease forms. Hederman Brothers in Jackson, Mississippi likewise printed a lease form with a free gas clause in it in up to the mid-1970’s.4 The Kansas Blue Print Co., Inc.’s 1977 book of oil and gas
1 Loy v. Madison & Hancock Gas Co., 156 Ind. 332, 58 N.E. 844 (Ind. 1900) offers insight into how groups of investors would buy shares of stock in a company that owned a gas well for the purpose of being supplied gas from that well(s).
2 Warfield Natural Gas Co. v. Moore, 281 Ky. 689, 136 S.W.2d 1086 (Ky. 1940) cites a case that dealt with the issue of a deed that included a domestic coal use right.
3 For example, see Graves v. Key City Gas Co., 83 Iowa 714, 50 N.W. 283 (Iowa 1891) that cites a contract dated June 3, 1880 wherein a 20-year free gas obligation was created. The case addressed the implications of a user consuming more gas than was customary in the city.
3 forms illustrates 42 oil and gas leases it offered to print, with 36 of those pre-printed lease forms having a free gas clause in them.
Free gas clauses in oil and gas leases are still being used in other parts of the country, especially in the eastern U.S.5 A 2001 Kentucky case stated that it is common for a producer’s lease to require the lessee to allow one household to receive free gas.6 Lessor free gas provisions have been prevalent in Appalachian states where oil and gas production has been taking place for over 100 years. Those leases are held by production and the free gas provisions in those leases are still valid. Some companies in the eastern U.S. have departments that are designated to handle “fee gas” issues. The Internet has provided mineral and surface owners access to a tremendous amount of information to assist them in learning more about the management of their property rights. The use of a free gas clause in an oil and gas lease, or commentary on such use, has been the topic of discussion by state agencies and land-related companies in areas such as New York7, North Dakota8, Ohio9, Pennsylvania10, and West Virginia.11
A lot of thought should be given by a lessee as to whether or not it will agree to have a free gas provision in an oil and gas lease, and if so, consultation with legal counsel is necessary in order to address the wide range of issues that must be taken into account in such a lease provision.
When a free gas clause is drafted, the provision can be styled so that the free gas is being reserved by the lessor. Or, it might be designed so that the lessor grants the lessee all of its rights in the gas in exchange for a royalty and an obligation to provide free gas. One attorney has
4 Hederman’s “Alabama Produces 88-D9803 (Revised 2-4-49) With Pooling Provision”
5 Schetroma, General Reflections upon the Evolving Eastern Oil and Gas Lease, 30 Energy & Min. L. Inst. 14 (2009), P. 468.
6 Harmon v. McMasters, 57 S.W.3d 850 (Ky. Ct. App. 2001); Warfield Natural Gas Co. v. Moore, 281 Ky. 689, 136 S.W.2d 1086 (Ky. 1940) gives a snapshot in history as to the court’s perception of usage of free gas clauses at that time when it said that “it is customary for oil and gas leased in this state, indeed, it is almost a universal custom for such leases throughout the United States, to allow the lessor sufficient free gas to heat and light the dwelling on the leased premises.”
7 New York Division of Mineral Resources, Landowner’s Guide to Oil & Gas Leasing
8 Cooperative Extension Service of the North Dakota State University, North Dakota Oil & Gas Leasing Consideration, Bulletin 39
9 Ohio State University Extension Fact Sheet on Leasing Farmland for Oil and Gas Production; also see Ohio Department of Natural Resources, Division of Mineral Resources Management; also see Cuyahoga Soil and Water Conservation District Oil & Gas Lease Information for Landowners; Geauga Soil and Water Conservation District Things to Consider Before Signing a Lease.
10 Pennsylvania Department o Agriculture publication Negotiating Oil and Gas Leases on Pennsylvania Farmland
11 See West Virginia Farm Bureau, Policy Book on Mineral Leases and Operation; also see Information about Oil and Gas Leasing for Surface Owners Who Also Own Their Minerals, by David McMahon, Attorney at Law, Charleston, WV
4 written that the lessee may find it difficult to impose conditions for use upon the lessor if those conditions are not cited in the free gas covenant.12
Free gas clauses are found in the royalty clause of oil and gas leases, or in the clause that grants the lessee free use of gas and water from the premises, or in a part of the lease that addresses the free gas right as a separate lease provision by itself. However, such clauses might be a special provision (“rider”) added to the lease as an addendum. Or, it can be a handwritten note beside the printed text of the lease. They can also be found as letter agreements with surface owners as part of the consideration of granting a surface use agreement. In that situation, consultation with the lessor should take place in order to secure the lessor’s consent to allow that use of gas and to treat the surface owners’ use of gas as an authorized aspect of the lessee’s use of gas on the premises. Otherwise, the lessor might expect payment of royalty on the gas consumed by that third party.
The typical oil and gas lease executed by a mineral owner (lessor) and favored by the lessee grants the lessee the right to use gas produced from the leased premises for the benefit of the lease without an obligation to pay for that gas. Some people might argue that that it is only right for the lessor to have the right to use gas produced from a well drilled on his land for the benefit of a house or some other structure located on the leased premises. However, while such benefit to the lessor has the appearance of being reasonable, this paper will discuss various issues that can lead to a dispute and/or litigation between the lessor and his lessee.
If a mineral owner (prospective lessor) is adamant on wanting a free gas clause, the challenge is on the landman to have a lengthy discussion with that mineral owner as to all of the issues that should be addressed either in the lease provision specifying the right, or a side agreement that addresses the gas use. The landman can use this paper as a resource tool in going over the wide range of issues that the mineral owner needs to be briefed on. After the first meeting, the landman can meet with the mineral owner again (after having discussed the free gas issue with his attorney) and present a draft free gas clause to that prospective lessor for his review. The landman should stress that the landowner consult with an attorney in view of the risks involved. Since the landman discussed the issues with the mineral owner and notes were taken as to the mineral owners’ concerns and the lessee’s concerns, it might be appropriate for the agreement to be written with a provision stating that both sides participated in its creation, and that both sides consulted with legal counsel, or had the opportunity to do so. If a side agreement is to be used in a state such as Alabama where the notarial certificate must state that the signer acknowledged that he/she was informed of the contents of the instrument, there might be advantages to having that side agreement notarized. Alabama’s courts have been somewhat consistent in ruling that the signer was charged with knowing the impact of what they signed, regardless of who prepared the document.13 Therefore, an acknowledgment before a notary in a state such as Alabama might prove useful later if the landowner claims he did not know (or was not informed of the contents of the instrument) that he was signing.
12 Schetroma’s General Reflections Upon the Evolving Eastern Oil and Gas Lease, 30 Energy & Min. L. Inst., Ch. 14, P.468 (2009).
13 For example, see Finch v. Auburn Nat’l Bank, 646 So.2d 64 (Ala. Civ. App. 1994).
5 A deed conveying surface rights (reserving mineral rights to the grantor) and granting the new surface owner the right to have gas from wells drilled on the grantor’s mineral ownership at a nominal price might be an inducement for someone to buy property.14 A real estate advertisement on the Internet for a farm in Ohio described a residence and several farm structures on it (barn, garage, shop building, corn crib, and sheds) and was touted as being a “great and rare auction opportunity” for purchase because one of the perks was a “free gas allocation.” That advertisement reminded me of how a lessee/operator could find itself in the middle of litigation when someone buys property and does not confirm the existence or limitation of the “free gas” right and the use of that gas is called into question.15
TERMS AND PHRASES
►Abandonment of Well/Availability of Gas – Oil and gas leases taken today that include a free gas provision typically state that such use is subject to the right of abandonment and surrender by lessee under the terms of the lease without liability or obligation to the lessor in respect to the free gas. As long as the lease grants the lessee the undisputed right to plug and abandon a well, regardless of whether the well is profitable or not, a lessor typically cannot interfere with that action simply because it will eliminate the lessor's ability to take free gas from a well. 16 However, older leases were not styled as they are today. Those older leases sometimes had language obligating the lessee to leave a well in good condition upon abandonment, and thus the lessee might not be able to remove its equipment and fixtures so that the lessor could take the well over.17 When the well take- over issue comes up, courts will take into account the fair market value of the pipe, etc. that is being left behind by the lessee.18 If a lessee decides to postpone its abandonment plans for a reasonable period of time so that its lessor can continue to have free gas from the uneconomic well, that delay in abandonment should not work as a waiver of the lessee’s right to abandon and remove its equipment and fixtures.19 Depending on the situation in which abandonment took place, equipment left on the premises upon abandonment may become part of the realty of the lessor. 20 The right of the lessee to remove casing that may be of value may also be a factor to take into account. The lessee also wants to avoid being prohibited from having the right to test, re-work, deepen, plug- back, shut-in, or perform any other type work on the well if such work is deemed as an interruption
14 Slife v. Kundtz Properties, Inc., 40 Ohio App. 2d 179, 318 N.E.2d 557, 69 O.O.2d 178 (Ohio 1974)
15Schlup v. Bourdon, 33 Kan. App. 2d 564, 105 P.3d 720, (Kan. App. 2005); also see Untied v. J.J. Detweiler, 2009 WL 2457824 (Ohio App. 5 Dist.) as to a deed that had an alleged free gas agreement attached as an addendum that the court ruled lacked sufficient information to constitute an enforceable written contract; also see Sethi v. Antonucci, 126 Ohio App. 3d 382, 710 N.E.2d 719 (7th Dist. Mahoning County 1998)
16 Blankenship v. United Fuel Gas Co., 307 S.W.2d 928 (Ky. 1957); Hammons v. Pure Oil Co., 309 Ky. 495, 218 S.W.2d 22 (Ky. 1949); Wade v. Lillard, 201 Okla. 520, 207 P.2d 771 (Okla. 1949)
17 Ohio Oil Co. v. Griest, 30 Ind.App. 84, 65 N.E. 534 (Ind. Int. App. Ct. 1902)
18 Hammons v. Pure Oil Co., 309 Ky. 495, 218 S.W.2d 22 (Ky. 1949)
19 For example, see McLeon v. Wells, 207 Ark. 303, 180 S.W.2d 325 (Ark. 1944)
20 See Blair and Odom, Who Owns the Hole?, May/June 2010 issue of Landman magazine.
6 of availability of gas to the lessor. The lessee should take care to make sure that the free gas clause does not guarantee the availability or deliverability of gas to the lessor. Also see MINING PLANS.
►Accommodations – Black’s Law Dictionary, Sixth Edition, defines an accommodation as “an arrangement or engagement made as a favor to another, not upon a consideration received.” An example of an accommodation would be a lessee that postpones its abandonment plans so that the lessor can have an extended time to benefit from the use of free gas.21 A lessee might also allow its lessor to take casinghead gas from an oil well as long as such use does not interfere with the lessee’s need for that gas to operate the oil well. As long as the free gas clause is styled so that the lessor is only entitled to be supplied with gas from “gas wells”, a lessee that has allowed its lessor to take gas from an oil well may not be obligated to continue furnishing the lessor with that gas (even if that practice has taken place for several years) since the lease did not obligate the lessee to do so.22 Or, envision that a well(s) drilled on a lease stops producing gas (or is shut-in for some reason) that was the source of domestic gas for the lessor and a lessee allows its lessor to connect to another source of gas as a temporary accommodation while it contemplates further development of the lease or otherwise addresses the issue causing the well to be shut-in. Courts generally view the lessee’s action as not invoking the principle of equitable estoppel against the lessee because the act of providing gas from elsewhere was not required under the terms of the lease.23
►Acknowledgement of Risk – A statement to this effect is typically found in a free gas provision. An example is “Lessor understands and recognizes that the gas delivered by the lessee is production gas that is high pressure, explosive, flammable and odorless and does not meet pipeline quality standards. Lessor agrees that any gas taken or used by lessor will be at Lessor’s sole risk, cost, expense and responsibility.”24 An attorney may want language in the clause to make it very clear that the lessor has been advised as to the risk of taking the gas.
►Acquiescence – Black’s Law Dictionary, Sixth Edition, defines acquiescence as “conduct recognizing the existence of a transaction, and intended, in some extent at least, to carry the transaction, or permit it to be carried, into effect.” When a lessee “looks the other way”, a court might view that acquiescence as the lessee’s ratification of what was done. A court might be faced with rendering a practical construction of a free gas clause that is silent as to where the gas is to be used and will take into account a lessor’s tap into a pipeline that the lessee knows is in existence and allows such tap to continue for an extended period of time as supporting a finding that gas can be used by the lessor off-lease.25 However, a past practice of the lessor that a lessee was aware of that is deemed as wasteful may not be allowed to continue when brought before a
21 McLeon v. Wells, 207 Ark. 303, 180 S.W.2d 325 (Ark. 1944)
22 Cranston v. Miller, 208 Ark. 156, 185 S.W.2d 920 (Ark. 1945); Breedlove v. Pennzoil Co., 184 W. Va. 44, 399 S.E.2d 187 (W. Va. 1990)
23 Ludolph v. Tuel and Thoemen, Inc., 6 Ohio Misc. 117, 214 N.E.2d 696 (Ohio Com.Pl. 1965)
24 The Perfect Oil and Gas Lease: Why Bother!, Pharo & Danielson, RMMLF Volume 50, 2004
25 Harbert v. Hope Natural Gas Co., 76 W.Va. 207, 84 S.E. 770 (W.Va. 1915)
7 court.26 And, a well might be drilled on a lease and the lessor connects to it and receives free gas but the well later becomes a poor producer (that is ultimately plugged) and the lessee allows its lessor to connect to a pipeline that transports gas from other wells so that it can continue to have a supply of free gas. If the lease is styled so that a payment of rental after the primary term will allow the lessee to hold that lease, a court might view the free gas covenant as an essential part of the lease and require the lessee to also allow the lessor to continue taking gas from the lessee’s pipeline for so long as the lessee wants to hold the lease (or drill a well on the lease that can be a source of free gas) since the lessee allowed that practice in the past when it did not have to.27 Also see ACCOMODATION.
►Agricultural Use - Examples are: running generators that operate water pumps for irrigation systems (common in the western U.S.), running a pump to keep ponds from freezing where feed must get to the fish (such as catfish ponds in areas where freezing is a problem), running drying appliances to blow heated air across harvested grain such as corn, soybeans, wheat, barley, and oats (common in New York and the mid-west), heating chicken houses to keep birds from freezing (they can huddle up and smother each other without adequate heat), or running a water cooling system in chicken houses to keep the birds cool in hot weather (they will die from heat exposure). The lessee should consider placing a limit on the amount of gas to be used, and a limit on where the gas will be consumed to avoid problems later.28
► Amendments to Free Gas Clause – Litigation might take place when a lessor does not recognize the binding effect of a post-lease agreement between the lessor and lessee that affects the terms of the free gas provision. A lease modification might be written to expand on the original free gas provision by allowing the lessor to take gas not otherwise authorized under the free gas provision, but the use by the lessor might be made expressly subject to disconnection by the lessee if it deems that the supplying of such gas is not safe or proper. In that situation, a court might deem the disconnection proper in view of the risk to public health and safety due to the explosive and poisonous nature of the gas being taken.29 Some leases have language in them to address the issue of amendments by stating that the lease can only be modified by another duly signed and dated agreement, and that the lease is the entire understanding of the parties thereto. If that language is in the lease, a prospective lessee may want to ask its attorney if that language is also applicable to the free gas covenant to ensure that the lessor cannot later claim that there was another arrangement relevant to the free gas covenant. See also VERBAL AGREEMENTS.
►Apportionment – While the quantity of gas allowed to be taken may be able to be shared between two or more parties on the leasehold, the amount of gas stipulated in the clause cannot
26 For example, see United Carbon Co. v. Ramsey, 350 S.W.2d 454 (Ky. 1961) citing 25 years of taking gas at a house with an inappropriate regulator.
27 Ketchum v. Chartiers Oil Co., 121 W.Va. 503, 5 S.E.2d 414, (W. Va. 1939)
28 For example, see D. R. Lauck Oil Co., v. Breitenbach, 20 Kan.App.2d 877, 893 P.2d 286 (Kan.App. 1995)
29 See Chevron U.S.A., Inc. [as SACROC, Unit Operator] v. Stoker, 666 S.W.2d 379 (Tex. App. Eastland 1984) where the residue gas being taken had high levels of carbon dioxide, sulfur dioxide, and liquid hydrocarbons.
8 be increased without the lessee’s consent.30 And, there might be “dual rights” to use free gas where separately owned tracts of land are described on a single lease, thus raising the issue of entitlement to a reasonable consumption of domestic gas due to language contained in a deed in their source of title.31 Or, if multiple buildings are taking gas and there was no limit to that practice, or there is no limit to the amount of gas to be taken, the lessee may ask a court to make a determination as to what is a reasonable limit on gas to be provided. Problems arise when more than one party is taking gas and the operator shuts off the supply of gas due to excess use. The party that thinks it has the superior right to the gas will typically bring the matter into court. The operator will probably be a neutral party because it just wants to know who it is required to supply gas to. For example, when a lessor that owned both the surface and minerals when he signed the lease sells part of the surface where the principal dwelling is located, and the lease restricts free gas to one dwelling on the lease, unless the lessor/grantor of the deed reserved the free gas right to himself for use on another part of the lease, since the free gas covenant typically runs with the land (and attaches to the dwelling), the new owner of the house may be entitled to the entirety of the gas allowed under the free gas covenant.32 If the grantor in this example had reserved the entirety of the gas, he could have done that since he still owned part of the surface that was subject to the lease since he could transfer the free gas right from one place of use to another on the lease. And, the grantor could later release that right to be assured that the covenant did not run with the land if he later sold the land to avoid a possible consequence of his royalty income being reduced due to gas consumed by a future owner of the surface that could use that right. A lease with a free gas provision that describes more than one tract of mineral owned by different parties (known as a “community lease”) can pose a problem when a dispute arises as to use of the gas due to more than one house located on the lease. A lessee’s proposal to apportion the gas between the different surface owners based on their proportionate share of the surface in the production unit might be viewed as a reasonable solution to resolve the conflict.33
► Appurtenant Structures – Black’s Law Dictionary, Sixth Edition defines appurtenant as “belonging to; accessory or incident to; adjunct, appended, or annexed to.” See CURTILAGE.
►Arbitration – Rather than be subject to court proceedings that could involve a trial by jury, before adopting a free gas clause for use, a lessee may want to talk with its attorney regarding the benefits of language in a free gas clause/Gas Use Agreement whereby the parties agree to waive the right to trial, and instead, be subject to binding arbitration.
►Assignment – A right to free gas is a real property right that can be assigned or transferred.34 Depending on how the free gas provision is written, the lessee may want to include a restriction 30 Warfield Natural Gas Co. v. Moore, 281 Ky. 689, 136 S.W.2d 1086 (Ky. 1940)
31 United Fuel Gas Co. v. Moles, 122 W.Va. 577, 11 S.E.2d 369 (W.Va. 1940) addressed apportionment of the free gas upon the division of the land.
32 Sutherland v. Fox, 2005 WL 877935 (Ohio.App.5.Dist.Ashland.Co., 2005)
33 Coleman v. Lindsey, 314 Ky. 273, 234 S.W.2d 950 (Ky. 1950)
34 For example, see Kimble v. Wetzel Natural Gas Co., 134 W. Va. 761, 61 S.E.2d 728 (W.Va. 1950)
9 (such as lessee consent not to be unreasonably withheld) or an outright prohibition on assignment of this right to another party that has no relationship to the leased premises. An example of a clause addressing a transfer of ownership is: “Lessor further agrees that upon the sale or transfer of the leasehold premises wherein someone other than the Lessor is entitled to take the gas under this paragraph, that the gas supply will be terminated by Lessee until the Buyer of the property executes an agreement regarding the usage of the gas in the same form as the within agreement. In the absence of such an agreement, free gas under this provision shall terminate the within right of free gas because the right of free gas is not assignable without the consent of the Lessee.”35 The free gas covenant may have been one that was agreed to as a special concession or as a special courtesy at the time. During lease discussions, both lessor and lessee might agree that it may not be in the best interest of either party for that right to go to someone else and the provision may need to be styled so that it is a personal right to the lessor and it is not transferable. For example, the lessor may have been someone who worked in the oil and gas business and was familiar with gas pipeline equipment, installation, and long-term maintenance. A new owner of the land might not have any knowledge on such things, and as such, is more likely to encounter a problem that he cannot resolve (and thus ignores) due to not having “trouble-shooting” skills. Consent to assignment provisions can put the lessee in the position of requiring a successor in interest to execute an agreement for gas service that would emphasize the safe use of gas, the explosive nature of gas, and also include a waiver of liability by such user. An attorney might suggest a short sentence to the effect that while lessee consent to the transfer of the free gas right is required, the rights of the lessee under the lease remain freely assignable. 36 See also TRANSFER OF FREE GAS RIGHT; PERSONAL RIGHT; COVENANT RUNNING WITH THE LAND.
►Breach – Several cases have been brought to court by lessors that asserted a breach of contract against a lessee because gas was not being made available for domestic use, when in fact, it was the burden of the lessor to lay pipeline to the well as a condition of getting the gas.37 The covenant to provide free gas can be styled with certain obligations for the lessor to abide by in view of the safety issues associated with natural gas. The lessee may want a provision in the free gas clause or the Gas Use Agreement to address failure by the lessor to comply with any condition or limitation contained in the provision/agreement. This is where the written notice from the lessee to the lessor setting out the grounds of the breach will be a critical factor. If the lessor fails to correct the breach within a specified period of time after receipt of such notice, then the Agreement might be styled so that, at the option of the lessee, the free gas right terminates (or is suspended until the breach is resolved). The safe use of such gas should be of
35 Lease form (a lessee’s form) on file with author. The free gas clause includes language requiring the lessor to be bound by the reasonable rules and regulations of the lessee, and it goes into great detail as to other matters resulting in the free gas clause being the longest clause in the oil and gas lease.
36 The lessee will want to make sure that the consent to assignment language takes into account the rule in Dumper’s Case so that one approval of an assignment is not later deemed as an implicit consent to all future assignments. A paper that addresses this issue, and one that is quite informative, is Cryder & Larken, Consent Provisions in Natural Resources Agreements, 30 Energy & Min. L. Ins., Ch. 3 (2009).
37 For example, see Cline v. Southern Star Cent. Gas Pipeline, Inc., 356 F. Supp. 2d 1203, 162 O.G.R. 244 (D. Kan. 2005)
10 utmost importance to both parties, and courts recognize that.38 Also see NOTICE and CURING PERIOD.
►Buy-Out Provision – A lessor obviously sees the economic benefit of being provided with free gas if a well is drilled on the lease. The lessee (or its successor) might see that as a liability that it is not comfortable with. When negotiating the lease, the lessor might be receptive to getting either a yearly payment in lieu of free gas, or a total buy-out of that obligation. In regard to an annual payment, a 100-acre lease in West Virginia that this author has seen addressed this issue by stating: “Lessor agrees to accept at any time at the option of Lessee a cash payment of Seventy-Five ($75.00) Dollars per annum in full consideration, in lieu of this free gas privilege.” Or, the lessee could propose a one-time payment to eliminate the free gas provision.39 It will be a judgment call by the lessee as to how much it is willing to pay to eliminate the free gas obligation that the lessor is insisting on. See also, Rental in Lieu of Providing Free Gas.
►Casinghead Gas – Casinghead gas is produced from oil wells. It may have to be processed before it can be used for domestic use.40 As long as the lessee is paying its lessor royalty on the oil produced and sold, if the lease grants the lessee the right to use gas for operations on or off the premises, the lessee can do so with no obligation to pay the lessor for that gas consumed, and the lessee may not be obligated to provide the lessor with any part of that gas stream for domestic use.41 Gasoline, residue gas, and other properties are extracted from casinghead gas. If the free gas provision says that the gas is to be provided from a well where “gas only” is found, the courts typically rule that casinghead gas produced from an oil well does not have to be provided for “domestic use” under a free gas provision.42 However, when the free gas clause simply makes reference to a “well” drilled on the lease and a lessor has been taking casinghead gas from an oil well, and the lessee later wants to stop that practice, a court will look at the circumstances under which the lessor was allowed to take the casinghead gas (e.g., how long had the gas been used, and if the casinghead gas would otherwise be vented and wasted), a court might construe the free gas provision as being applicable to casinghead gas.43 See also RESIDUE GAS.
38 Cline v. Southern Star Cent. Gas Pipeline, Inc., 356 F. Supp. 2d 1203, 162 O.G.R. 244 (D. Kan. 2005) cites rules and regulations of the lessee as to safe use being reasonable conditions for the use of gas.
39 An example of such a clause can be found in the paper written by Russell L. Schetroma, 30 Energy & Min. L. Inst. (2009), Page 496.
40 Sinclair Oil & Gas Company v. Huffman, 376 P.2d 599 (Okla. 1962) goes into detail as to the processing of casinghead gas as it differentiates between gas from an oil well and gas from a well where gas only is found (which was the description in the free gas clause that specified the source from which the lessor would have free gas).
41 Mid-South Oil Co. v. Cochran, 238 Ky. 737, 38 S.W.2d 687 (Ky. 1931)
42For example, see Cranston v. Miller, 208 Ark. 156, 185 S.W.2d 920 (Ark. 1945); Hein v. Shell Oil Co., 315 Ill.App. 297, 42 N.E.2d 949 (Ill.App. 4 Dist. 1942) ; Weaver v. Graham, 109 Kan. 450, 199 P. 924 (Kan. 1921)
43 Sheridan Oil Co. v. Cunningham, 186 Okla. 618, 99 P.2d 497 (Okla. 1940) ; Sheridan Oil Co. v. Miller, 208 Ark. 156, 185 S.W.2d 920 (Ark. 1945) . Both cases dealt with the same lease provision citing “well” instead of “gas well.”
11 ► Cessation of Gas Production or Diminished Production – Great care must be taken to ensure that a free gas provision does not require the lessee to continue providing the lessor with free gas even though the well that had been supplying the gas is no longer in production, or it has become cost prohibitive to continue operating the well at its lower level of production.44 It should be very plain in the lease that the lessee is under no obligation to furnish gas to the lessor if none is being produced from the lease. A free gas clause might state: “…nor shall Lessee be liable for any shortage or failure in the supply of gas for said domestic use.”45 Also see ABANDONMENT.
►Cheap Gas – A “cheap gas” covenant is one that provides a party with gas at a price that is below market value, or perhaps at a rate that cannot increase. This type of provision can be found in oil and gas leases, right-of-way grants, or some other type of contract. A lessor might want either a well drilled on the lease so that he has access to free gas, or the lessee might be obligated to make gas available to the lessor at a reasonable (or “cheap”) price from some other source.46 Depending on how the covenant is written, a court might rule that it imposes objectionable conditions or limitations upon present or future interests due to a below-market price (and perhaps unlimited use of gas) and can have the effect of discouraging a lessee from development of the lease because of the lessee’s cost to produce the gas when it is obligated to provide below-market price gas to the lessor.47 In an oil and gas lease, this covenant may be triggered when a free gas user has exceeded its limit on free gas, and the free gas covenant may entitle the user to consume additional gas at a price below market value.48 Clauses providing for gas to be made available at prices at or below market value have been used in the past by pipeline companies as part of the consideration in acquiring pipeline rights-of-way from surface owners. When the cheap gas covenant is part of the consideration for a party granting a right-of- way (such as for a gas pipeline), as long as the owner of that right-of-way wants to retain its rights, it can be obligated to provide gas at the low price stated in the right-of-way as long as it wants to retain its easement rights.49 It can avoid that obligation by surrendering its easement rights, but that may not be practical, and the pipeline owner will have to live with the terms of the deal.
44 Boal v. Citizens’ Natural Gas Company, 23 Pa.Super.339, 1901 WL 3207 (Pa. Super. 1903) dealt with a lease with a 21-year term that had a free gas provision that did not specify where the gas would come from, and the lease did not have a forfeiture clause – the lessee was deemed obligated to the lessor to provide free gas to the lessor regardless of where it had to come from for the 21 year term of the lease; also see Mitchell Energy v. Stagl, 27 Pa. D. & C. 3d 132, 1983 WL 204 (Pa. 1983)
45 Lease form on file with author.
46 Richardson v. Northwest Central Pipeline Corp., 241 Kan. 752, 740 P.2d 1083 (Kan. 1987) cites a rather lengthy lease provision on this subject matter that is worth reading.
47 Kentucky-West Virginia Gas Company v. Martin, 744 S.W.2d 745 (Ky. Ct. App. 1987)
48 For example, see Jolynne Corporation v. Michels, 191 W. Va. 406, 446 S.E.2d 494 (W. Va. 1994) that cites a free gas clause in a lease that allowed the lessor to pay for excess gas consumed at “wholesale rates”
49 Alderson v. Empire Natural Gas Co., 116 Kan. 501, 227 P.347 (Kan. 1924)
12 ►Compliance with Regulations and Law – Both parties to the free gas covenant may want to make it clear that the exercise of the free gas right will be implemented in accordance with a broad range of references to Federal, State, and local laws, regulations, codes, etc.
►Compression and Pipeline Pressure – The parties to a free gas provision should have a clear perception and understanding as to certain operational issues. One of those issues is how compression and line pressure might affect delivery of free gas. What is best for the operator in getting gas from the well head to a purchasing pipeline may not be compatible with how the free gas user intends to take gas. The lessee must have the superior right to install compressors to accelerate the flow of gas from the well even if such use interferes with the lessee's taking of gas.50
►Conditioning of Gas – This is one aspect of providing free gas that the lessee must take into account, and a lessor might argue that the lessee has the duty to treat the gas so that gas provided to the lessor is in a useable condition.51 The lessee is usually best suited for conditioning the gas for its use by a landowner. There are numerous issues to be taken into account, such as: (i) moisture that can rust metal pipe resulting in leaks or otherwise interfere with the flow of gas, (ii) inert gas (carbon dioxide) and other impurities that may affect the burning of the gas, (iii) poisonous and corrosive gas (sulphur dioxide, aka “SO2 gas”; hydrogen sulfide, aka, “H2S gas” or “sour gas”) that could go undetected if a leak occurred, or (iv) liquefiable hydrocarbons (paraffin) that could block a pipeline or otherwise ignite under certain conditions. While facilities to condition gas before it reaches a point of sale may exist, those facilities may be a great distance from the area where the gas is being taken by a landowner at the tap. Odorization of the gas should also be taken into account. If the lessor is to pay for some or all of the cost associated with the conditioning, there should be a process whereby the lessee provides a bill or invoice to the lessor and it then has a reasonable period of time (e.g., ten days after receipt of the notice) to make a payment to lessee for the conditioning fee (or excess use of gas), and failure to tender such payment could result in suspension or termination of the right to free gas. “Green gas” and “wet gas” are terms for untreated gas. An example of how some companies style free gas provisions to address the possibility that only raw gas will be delivered is: “It is understood and agreed by Lessor that such gas will be in its natural, unprocessed, unoderized state…”52 See ODORIZING; DIRTY GAS.
50 Bassell v. West Virginia Central Gas Co., 86 W. Va. 198, 103 S.E. 116, 12 A.L.R. 1398 (W. Va. 1920) recognized the right of the lessee to use compression, but also recognized that if such use prevented the lessor from having gas delivered to his house, the lessee would have to furnish the lessor with gas from another location. See also Pittsburgh & West Virginia Gas Co. v. Nicholson, et al , 87 W. Va. 540, 105 S.E. 784, 12 A.L.R. (W. Va. 1921) citing that once a well is drilled on a lease with a free gas covenant, the lessee is obligated to continue providing gas even if it becomes burdensome and oppressive to do so, inferring that the lessor has a higher priority to that gas than the lessee.
51 For example, see Schell v. Oxy USA, Slip Copy, 2009 WL 2355792 (Tenth Cir. D.Kan. 2009) that was a lawsuit to certify a class action brought by lessors against their lessee wherein the issue of who had the responsibility of removing hydrogen sulfate (H2S) from the gas to make it useable for domestic purposes was presented to the court. Also see Weiss v. Thomas & Thomas Development Company, 680 N.E.2d 1239 (Ohio 1997) regarding one court’s position regarding the duty of care that an operator owes to a free gas user with regard to dirty gas.
52 Lease form on file with author.
13 ►Confidentiality – If the lessee is willing to take a lease with a free gas provision due to an extenuating need for the lease, and it is the only such lease (or one of a few) that is contemplated to be taken in the area, the lessee may want to use a Memorandum of Lease rather than recording the long form lease with its free gas provision. While word will eventually get out that a lessor was able to negotiate for free gas, use of a confidentially provision (with a financial penalty stipulation) as part of the free gas covenant might help in preventing or discouraging the lessor from talking to neighbors about the free gas right.
►Consideration – A free gas clause is generally considered as part of the consideration (in addition to bonus consideration) offered to induce a mineral owner to execute the lease.53 Furthermore, a free gas covenant can also be considered as a rental, thus demonstrating the inducement of a lessor to sign a lease beyond the expectation of receiving royalty.54 Great care must be exercised in how the free gas provision is styled. For example, a lessor may have been taking free gas from a well drilled on the lease, and the lessee later installs compression facilities that results in suction that prevents the flow of gas to house of the lessor. The lessee might be obligated to provide the lessor with gas from some other source (even if doing so creates an extra financial expense on the lessee) since the free gas covenant was an integral part of the consideration of the lessor signing the lease.55 Another pitfall is including a deadline for free gas to be provided to the lessor under the free gas covenant. In that situation, a lessee would have to drill a well on the lease and provide gas to the lessee by the stipulated date, or else provide the lessee with domestic gas from some other source.56 Or, a lessee might take a lease on deep rights where that lease obligates the lessee to make a payment to the lessor in lieu of furnishing free gas for so long as a specified shallow gas unit is in operation. If not worded correctly, the payment obligation can outlive the life of the lease taken on the deep rights and continue for so long as the shallow gas unit produces gas.57 A company that is building a natural gas pipeline might agree to modify its standard right-of-way agreement to include a provision allowing a surface owner to have “free gas” or purchase gas from a tap on the pipeline at a reasonable cost in exchange for executing the right-of-way agreement. If the company later wants to get out of that contractual arrangement, its only recourse may be to abandon its pipeline in order to terminate the gas use obligation.58
►Contractors and Visitors – The lessee may want to include in its “Gas Use Agreement” a stipulation that the lessor is required to inform its contractors and visitors of the dangers of
53 Indiana Natural Gas & Oil Co. v. Leer, 34 Ind. App. 61, 72 N.E. 283 (Ind. 1904); South Penn Oil Co. v. Edgell, 48 W. Va. 348, 7 S.E. 596 (W. Va. 1900); Breedlove v. Pennzoil Co., 184 W. Va. 44, 399 S.E.2d 187 (W. Va. 1990)
54 Jackson v. Farmer, 225 Kan. 732, 594 P.2d 177 (Kan. 1979)
55 Bassell v. West Virginia Central Gas Co., 86 W. Va. 198, 103 S.E. 116, 12 A.L.R. 1398 (W. Va. 1920)
56Indiana Natural Gas & Oil Co. v. Hinton, 159 Ind. 398, 64 N.E. 224 (Ind. App. 1902)
57 Blanzy v. Delta Oil Co., Inc., 2008 WL 3851578 (Mich. App. 2008)
58 Richardson v. Mustang Fuel Corp., 1989 Ok 53, 772 P.2d 1324 (Okla. 1989)
14 natural gas and working in proximity to the service pipeline that provides gas to the place of consumption.59 See also GAS USE AGREEMENT.
►Covenant Running With the Land60 – A free gas covenant in an oil and gas lease is typically deemed to be one that runs with the land (unless it is styled as a personal covenant).61 The typical language in an oil and gas lease that makes the lease binding on the parties and their successors and assigns is what the courts view as evidence that the covenant was intended to run with the land. The courts also recognize that it is the surface owner, not the mineral owner that is the party that has the need for the gas. The covenant that runs with the land is considered as attaching to the first dwelling on the lease to use the gas. If part of the land where the well that is providing gas to the original dwelling is later sold, that original dwelling continues to have the right to the free gas. Notwithstanding language in the deed to the contrary, the party that buys the tract where the well is located has no right to free gas even though the well location burdens his surface ownership.62 Problems come up when a lessor sells all of the surface and retains the mineral rights.63 Unless the deed conveying surface rights states that the right to free gas under the oil and gas lease is not being conveyed, that right passes to the new surface owner. In a situation such as that, the lessor (now a mineral owner only) will not have the benefit of the free gas. The impact to the mineral owner/lessor is that the free gas is now being provided to another party and the lessor’s revenue stream is reduced due to gas being produced and diverted for domestic use. This can be a good scenario to present to a prospective lessor in suggesting that the free gas right be a personal one that terminates upon the fee owner (lessor) conveying the surface to someone else while retaining the mineral rights. If the free gas covenant is a “standard clause” in a lease form in a leasing play, the landman, with his employer’s concurrence, will want to take each prospective lessor’s ownership into account when making the lease offer. A party such as a timber company may have no interest in wanting that provision in the lease. The landman should discuss this issue with the mineral owner and strike that provision if possible. However, the better practice would seem for the company to reconsider having a free gas clause in its standard form lease, and instead, only use that type of clause when it is necessary to secure the lease. Also see PERSONAL RIGHT COVENANT RUNNING WITH THE MINERAL.
►Covenant Running With the Mineral – A free gas covenant typically runs with the land (the surface) that is subject to the lease since a mineral owner that does not live on the land (e.g., having sold the surface but retained the mineral rights after signing the lease) will have no way
59 See http://en/wikipedia.org/wiki/List_of_pipeline_accidents for an extensive list of pipeline accidents in the U.S. from the 1960s to present. Numerous accidents are cited as the result of work conducted in proximity to service pipelines.
60 For a good overview of this aspect of real property law, see David A. Thomas , “How Far Does the Covenant Run? Covenants That Run With the Land in Oil and Gas Transactions”, 53 Rocky Mt. Min. Inst., Ch. 19-1 (2007).
61 Richardson v. Northwest Central Pipeline Corp., 241 Kan. 752, 740 P.2d 1083 (Kan. 1987); United Fuel Gas Co. v. McCoy, 307 S.W.2d 176 (Ky. 1957)
62 Stapleton v. Columbia Gas Transmission Corp., 2 Ohio App.3d 15, 440 N.E.2d 575 (Ohio App. 1981); Sethi v. Antonucci, 126 Ohio App. 3d 382, 710 N.E.2d 719 (7th Dist. Mahoning County 1998); Pritchard v. Jacobs , 2007- Ohio- 6699, 2007 WL 4374289 (Ohio Ct. App. 7th Dist. Harrison Co. 2007)
63 Wagner v. Hamilton, 303 Ky. 120, 196 S.W.2d 973 (Ky. 1946)
15 to utilize the free gas right.64 When a fee owner of the surface and mineral sells the surface where a house is located that is using the free gas retains the mineral rights but does not sell the rest of the land that is subject to the lease, the free gas right will not be a covenant running with the mineral simply because the mineral was reserved – the owner of the house using the gas will have that free gas right since the right attached to the structure using the gas.65 A free gas covenant will run with the mineral when that clause is written so that the free gas can be used by the lessor at a location off of the lease (e.g., “in one dwelling house on or off said land…”).66 See also COVENANT RUNNING WITH THE LAND.
►Curing Period – There should be a clear understanding as to how long a period the lessor has to make repairs or replace defective or inefficient equipment before the gas supply is suspended or permanently terminated (if the lessor is responsible for that work). The last thing an operator wants is dealing with a surface owner that keeps promising to take care of a problem and the problem continues to exist with the potential of getting worse, resulting in waste or setting up a potential for a gas explosion. Curing periods are typically included in Gas Use Agreements.67 See also GAS USE AGREEMENTS.
►Curtilage68 – The Real Estate Dictionary, Fifth Edition defines this term as “the grounds and secondary buildings surrounding a house which are commonly used in connection with the everyday use of the house, usually fenced.” Black’s Law Dictionary, Sixth Edition defines it as “a word derived from the Latin “cohors” (a place enclosed around a yard) and the old French cortilliage or courtillage which today has been corrupted into court-yard. Originally, it referred to the land and outbuildings immediately adjacent to a castle that were in turn surrounded by a high stone wall; today, its meaning has been extended to include any land or building immediately adjacent to a dwelling, and usually it is enclosed some way by a fence or shrubs.” This word is found in cases when the court considered the intent of the extent of free gas use in relation to local custom and usage in an area.69 Also see DOMESTIC; MESSUAGE.
►Damages Owed to Lessor Upon Cessation of Gas Delivery – If a court determines that the lessee unreasonably disconnected the supply of gas being used for domestic purposes, one way that the court will consider the issue of damages is looking at the value of the gas that the
64 Warfield Natural Gas Co. v. Small, 282 Ky. 347, 138 S.W.2d 488 (Ky. 1940)
65 Stapleton v. Columbia Gas Transmission Corp., 2 Ohio App.3d 15, 440 N.E.2d 575 (Ohio App. 1981)
66 Kimble v. Wetzel Natural Gas Co., 134 W. Va. 761, 61 S.E.2d 728 (W.Va. 1950)
67 Warfield Natural Gas Co. v. Jude, 261 Ky. 113, 87 S.W.2d 108 (Ky. 1935)
68 See also Hall v. Philadelphia Co., 72 W.Va. 573, 78 S.E. 755 (W.Va. 1913); Warfield Natural Gas Co. v. Moore, 281 Ky. 689, 136 S.W.2d 1086 (Ky. 1940) citing that the language in the free gas clause did allow free gas use to apply to more than one building on the lease, but only as to those buildings that were in existence at the time the lease was signed, and if the primary dwelling were to burn, the house built to take its place would be entitled to use gas as the original house did.
69 For example, see Hall v. Philadelphia Co., 72 W.Va. 573, 78 S.E. 755 (W.Va. 1913) and United Carbon Company v. Conn, 351 S.W.2d 189 (Ky. 1961) that cite the term “curtilage.”
16 landowner was deprived of that would have been reasonably necessary to heat his home.70 In considering whether damages are proper, a court can also take into account the difference in rental value of property with reasonable sufficiency of gas and with what was actually supplied.71 This issue can also come up when a lease is amended in such a way that there is an inference that payment of rental to retain the lease requires the lessee to provide free gas even though a well has not been drilled on the lease.72 In the Riggsby case, the lessee provided domestic gas from another source for a while and later disconnected that gas supply. The court ruled that the lessor was entitled to damages in the amount of the difference in value of use of the premises by the lessor with and without the gas.
►”Dirty Gas” – This is a term used in the industry regarding raw gas that has not been run through a separator to remove impurities. As cited in the Weiss case73, gas containing dirt and debris can gradually erode the interior of a regulator, causing it to fail. Failure of a regulator can result in a high volume of gas rupturing a pipeline coupling or connections with appliances that could result in an explosion. Dirty gas can also be gas that is not clean due to foreign matter such as crude oil being in it that can damage pumps and equipment that is burning the gas.74 Also see CONDITIONING OF GAS.
►”Domestic” Use – As cited in a Kansas case involving a free gas provision in a pipeline right- of-way agreement, when the term “domestic purposes” is part of the free gas provision, such gas cannot be used for agricultural or irrigation use.75 That court went on to say that use in the principal dwelling does not allow unlimited use of gas as such would be economically unfeasible for the party providing the gas. As a general rule, use of the term “domestic” in a clause restricts gas usage on the premises to the principal dwelling on the property. To quote from another case that gives background on the Latin word “domus”, “The word domestic is a derivative one, expressing some relation to the house or home, and extending to things outside the house as well as within it…its meaning depends upon the connection in which it is used.” 76 “Domestic” use usually infers a limitation of use to one household and typically will not include other buildings such a dairy building or garage unless the covenant specifically names those additional structures.77 The house is typically located on the leased premises. And, the right to use gas typically runs with
70 Stone v. United Fuel Gas Co., 111 W. Va. 569, 163 S.E. 48 (W. Va. 1932)
71 Ludolph v. Tuel and Thoemen, Inc., 6 Ohio Misc. 117, 214 N.E.2d 696 (Ohio Com.Pl. 1965)
72 Riggsby v. Swiss Oil Corp., 240 Ky. 543, 42 S.W.2d 732 (Ky. 1931)
73 Weiss v. Thomas & Thomas Development Company, 680 N.E.2d 1239 (Ohio 1997) cites the duty of care that an operator has to a free gas user with regard to making sure that pipelines, appliances, etc. are in good working order.
74 Reeves County Gas Company v. Church, 464 S.W.2d 489 (TX Civ.App. 1971) is a case that illustrates the problems when gas contaminated with oil is used to fuel machinery. It also cited the rise of a legal duty to eliminate the problem once the entity providing gas took an affirmative course of action to address the problem in installing a filter or trap on the line to eliminate the oil.
75 Rinehart v. Northern Natural Gas Co., 25 Kan. App. 2d 649, 967 P2d 1090 (Kan. Ct. App. 1998)
76 Hall v. Philadelphia Co., 72 W.Va. 573, 78 S.E. 755 (W.Va. 1913) citing also that curtilage and messuage are domestic premises.
17 the house that was on the leased premises when the lease was entered into, but it can attach to the first house built on the leased premises after the lease goes into effect. Also see DWELLING.
►Dwelling – Under the common law, a dwelling house includes the cluster of buildings in which a man with his family resides and extends to such outbuildings as are within the curtilage.78 In the Conn case, the court said that a “dwelling house” can include structures that serve a residence (such as a wash house that contains a hot water heater for the home, a small building containing a sleeping room used by a member of the immediate family, and the garage). Under the common law, the term “mansion house” is interchangeably used with “dwelling house” and “homestead”, and in its singular sense means that only one dwelling can use the gas.79 A dwelling can also be defined as “any and every settled habitation of a man and his family is his house or dwelling.”80 When the free gas covenant makes reference to dwellings or other structures, the free gas covenant will attach to those structures rather than being a personal right of the original owner.81 In other words, the free gas covenant is usually one that runs with the surface of the leased land and is not part of the mineral estate, and the dwelling on the surface of a leased parcel (usually the first dwelling that connects to a source of gas for domestic use) will typically be the sole beneficiary of the free gas right stated in the oil and gas lease. If other houses tap into the gas being supplied to the principal dwelling without the consent of the lessee, the lessee will typically be within its right to disconnect those other houses from that gas supply.82 See also PRINCIPAL DWELLING.
►Equipment and Appliance Installation, Maintenance, and Repair – The lessor should be expected to maintain regulators and equipment in good repair and to check for gas leaks and operate the same so as not to cause waste or unnecessary leaks of gas. The lessee will also want to have assurance that stoves, driers, heaters, lights, etc. that burn the gas have safety components that will shut the flow of gas off in the event the pilot light is extinguished or the equipment is otherwise compromised to the point of the steady burning of the gas being interrupted.
►Excess Use – Another term for this situation is “overburn.” This situation occurs when the gas user takes more gas than what the free gas provision allows, or the lessee believes that such use is more than a reasonable amount of gas for the use originally intended when no limit was placed on the right. To put limits on gas use in perspective, according to Ohio’s Dorfman Production Company web site, the average home across the entire Columbia Gas system consumes only about 131,000 cubic feet of gas per year. In terms of gasoline use, 200 Mcf per
77 Sanford v. Witherspoon, 142 Pa. Super. 71, 15 A.2d 496, (Pa. 1940)
78 United Carbon Company v. Conn, 351 S.W.2d 189 (Ky. 1961)
79 Stapleton v. Columbia Gas Transmission Corp., 2 Ohio App.3d 15, 440 N.E.2d 575 (Ohio App. 1981)
80 Sanford v. Witherspoon, 142 Pa. Super. 71, 15 A.2d 496, (Pa. 1940)
81 Wagner v. Hamilton, 303 Ky. 120, 196 S.W.2d 973 (Ky. 1946); Blair v. Sturgill, 311 Ky. 622, 224 S.W.2d 928 (Ky.1949); Patrick v. Allen, 350 S.W.2d 481 (Ky. 1961)
82 Universal Resources Corp. v. Ledford, 961 P2d 593 (Colo. App. 1998)
18 year equates to about 1,400 gallons of gasoline equivalent (gge) per year.83 Some free gas provisions are styled so that if the lessor takes excess gas (above the limit stated in the clause), he will be required to pay for the excess gas at a certain rate, preferably a rate that is tied to a current fair price (such as what the lessee was paid for gas it sold during that period, or a field market rate or the rates charged by a gas utility in the nearest town) rather than a fixed rate that, over a period of time, might be below current pricing and thus imposing an economic burden on the producer. Some clauses have required the lessor to pay the lessee a “fair domestic rate” for excess gas used, but that practice could lead to a dispute regarding a mutually agreeable price. Also, if the lessor does not make payment, the lessor may want to have the ability to deduct payment for such excess gas from any rentals or royalties accruing to the lessor, and if such non- payment is greater than the ability of the producer to recoup from such deduction, the clause might address termination of the free gas right. Also see WASTE
►”Free Gas” – While a free gas provision may not actually state the term “free gas”, the use of the gas for “domestic purposes” by the lessor equates to a meaning that the lessor is to be provided gas without an obligation to pay the lessee for that gas. Thus, if the lease requires furnishing free gas and payment of a rental or royalty, the value of the gas consumed cannot be deducted from the lease rental or royalty.84
►Gas Not Used – A lessor may want to exercise his right to free gas immediately after a well has been placed into production, or he may postpone making arrangements to take the gas or he may not have need of the gas at all. If the free gas right is not exercised, or if it is exercised in the later part of the year resulting in the lessor not using the maximum amount of gas he was entitled to, the lessor typically is not entitled to monetary compensation for the value of the gas not taken.85 The lessee may want the free gas provision to clearly state that there is no right to “make up gas” beyond the quantity of gas that the lessor is entitled to in any year. However, the lessor may want the provision to say that the lessee will purchase the seven-eighths share of the unused free gas allotted to the lessor at the wholesale wellhead price and pay the lessor for that unused gas by the close of the calendar year.86 If the lessor has not used his full amount of gas, some provisions state that the taking is not cumulative (in other words, unused quantity cannot be carried forward to the following year). When the lessor is responsible for laying a pipeline to connect to the well, the lessor must put itself in position to receive the gas and, in typical free gas provisions, will not be entitled to recover the value of “cumulative” gas not delivered in prior years due to the failure of the lessor to install the delivery pipeline.87 A free gas right (an interest in real property) attached to a “principal dwelling” has been challenged in court under an
83 May 13, 2008 Pittsburgh Post Gazette, Private Sector: It’s a Gas, Gas, Gas
84 Bellevue Gas & Oil Co. v. Pennell, 76 Kan. 785, 92 P. 1101 (Kan. 1907)
85 Bucher v. Plymouth Oil & Gas Co., 140 N.E. 940 (Ohio 1923) cites failure of the lessor to lay a pipeline to the well as required in the free gas covenant, thus resulting in the lessee being unable to deliver the gas
86 Such a provision is suggested by the February 1985 issue of Agricultural Law Update in an article entitled Preparing an Addendum to an Oil and Gas Lease to Reflect Landowner Concerns, by Paul L. Wright.
87 Hetrick v. Apollo Gas Co., 415 Pa. Super. 189, 608 A.2d 1074 (Pa. 1992) ; Lewis v. United Gas Co., 75 Pa. Super. 44, 1920 WL 1594 (Pa. Super. 1920)
19 assertion of adverse possession by another landowner that was using gas when the principal dwelling was not. The court did not find merit in that argument.88
►Gas Use Agreement – This is the term commonly used for the agreement that a lessee/operator wants a free gas user to execute prior to making a gas connection. Some free gas clauses make reference to this type of agreement, with the execution of it by the lessor being a condition precedent to the privilege of taking gas, and if the taking of gas is in dispute, a court will look at the reasonableness of the terms of the Gas Use Agreement.89 The language in the free gas clause might be worded such as “…lessor shall subscribe and be bound by the reasonable rules and regulations of the lessee, or his assigns, published at such time relating to such use of gas.”90 Another example of language to address this issue is: “In the event Lessor elects to take gas pursuant to this paragraph, Lessor agrees to enter into a Gas Use Agreement acceptable to Lessee.”91 Such agreements can also be deemed as a binding contract that is supplemental to the free gas clause in the lease.92 Courts may have to determine if the terms of a lease provision remain intact in view of language used in a Gas Use Agreement.93 These agreements will provide reasonable rules and regulations of the lessee relating to the use of the free gas being provided, and will address safety and procedural matters (such as using a certified and qualified party to install the pipeline or make the connection) that go into more detail than what is contained in a covenant granting free gas. The agreement might address what state is designated as being the governing law in the event of litigation. Reasonable fees associated with making the connection may also be required. A key part of such agreements is the right of the lessee to suspend or terminate the supply of gas if the user is not complying with the terms of the Gas Use Agreement, or to suspend gas delivery if the property is sold or transferred to another party and the new party has not, or will not, subscribe to the Gas Use Agreement. Also see COVENANT RUNNING WITH THE LAND.
►Gas Storage Well – This author has seen one lease in West Virginia that allowed the lessor to take its free gas from either a “gas production or gas storage well” completed and operated by the lessee on the leased premises. It is beyond the scope of this paper to address issues of gas storage and the ultimate payment of royalty to those parties owning an interest in the stored gas. Allowing a lessor to take gas from a gas storage well when a gas producing well has not been drilled on the lease could result in accounting issues that a lessee would prefer to avoid.
88 Thomas v. Thomas, 767 S.W.2d 507 (Tex. App. Amarillo, 1989) – the lessee was not aware of the second house using gas until it discovered the use; the lessee requested the two landowners to resolve the issue of which dwelling would use gas thereafter.
89 Cline v. Southern Star Cent. Gas Pipeline, Inc., 356 F. Supp. 2d 1203, 162 O.G.R. 244 (D. Kan. 2005)
90 Pittsburgh & West Virginia Gas Co. v. Nicholson, 87 W. Va. 540, 105 S.E. 784, 12 A.L.R. (W. Va. 1921)
91 Lease form on file with author.
92 Warfield Natural Gas Co. v. Jude, 261 Ky. 113, 87 S.W.2d 108 (Ky. 1935)
93 Adams v. Public Utility Commission, 819 A.2d 631 (Pa. 2003)
20 ► Geographic Limit as to Use of Gas – Most provisions state that gas will be used on the leased premises (and may further restrict the consumption to specific uses or types and number of structures). If the provision is not specific in limiting use to a location on the lease, and the lessor fulfills its obligation to lay pipeline to the well on the lease (or lay his service line to a pipeline that serves that well on the lease), one court has ruled that the lessor is within its right to take the gas for off-lease use.94 If the lease states that the gas is to be used “on said land”, the gas cannot be used at some location off the lease without the lessee’s consent.95 The parties are free to negotiate for use to take place at a location off the lease, or a lessee might accept a lease rider that a court will deem as having no geographic limit since that was not addressed in the rider. 96 There can be advantages to limiting gas use to a dwelling within a certain distance of the well if the lessee is going to be the party responsible for installing the connecting pipeline.
►Indemnification97 – There are numerous variations on how this issue is addressed in a free gas clause. Any contemplated free gas clause should be discussed with legal counsel before agreeing to use it. Indemnification deserves special attention due to the changing nature of court decisions that seem to be holding industry to a higher duty of care in relation to the public’s health, safety and welfare.98 The overall format of the free gas clause should emphasize the danger of natural gas. The indemnification language can include a statement to the effect that the lessor acknowledges that his use of gas pursuant to the lease is potentially dangerous or deadly. There may be reasons that an attorney will recommend that the indemnification by the lessor survive termination of the lease. An Ohio court has pointed out that when the well providing free gas is on someone else’s land that is part of the leasehold, if the indemnification part of the free gas clause is broad enough, the lessor’s indemnification can also indemnify the surface owner where the well is located in the event an accident occurs.99
►Injunctions – A lessor whose supply of free gas is threatened to be cut off by the lessee due to a dispute over unauthorized use, excess consumption, or some other matter might seek an injunction in order to have the court order the lessee/operator to continue supplying gas to the lessor, thus preserving the status quo until the rights of the parties can be finally determined.100 The court will determine if there is any “harm” in granting or denying the temporary relief.101
94 Harbert v. Hope Natural Gas Co., 76 W.Va. 207, 84 S.E. 770 (W.Va. 1915)
95 Petty v. Equitable Prod. & E. States Oil & Gas, Inc., 2006 WL 459267 (Ohio. App. 7 Dist.)
96 D. R. Lauck Oil Company, Inc. v. Breitenbach, 20 Kan App. 2d 877, 893 P.2d 286 (1995)
97 As cited in Mitchell Energy v. Stagl, 27 Pa. D. & C. 3d 132, 1983 WL 204 (Pa. 1983), a lessee cannot impose an indemnification requirement if the lease’s free gas provision does not cite one.
98 For example, see Weiss v. Thomas & Thomas Development Company, 680 N.E.2d 1239 (Ohio 1997)
99 Pritchard v. Jacobs , 2007- Ohio-6699, 2007 WL 4374289 (Ohio Ct. App. 7th Dist. Harrison Co. 2007)
100 For example, see Harbert v. Hope Natural Gas Co., 76 W.Va. 207, 84 S.E. 770 (W.Va. 1915) wherein the lessor sought an injunction against its lessee to enjoin it from disconnecting its connection to a pipeline for access to gas.
101 An interesting case to read in regard to injunctions in this regard is Scurry Area Canyon Reef Operations Corp. v. Popnoe, 283 S.W.2d 819 (Tex. Civ. App. 1955)
21 Likewise, a lessee might seek an injunction to stop its lessor from using gas in a wasteful manner, or due to threats made by the lessor against the lessee and its employees if the lessee proposes to install equipment on the service line at a location closer to the well that the lessor believes is unreasonable or an inconvenience.102 There is no such thing as a “perfect” free gas clause. A great deal of thought must be given to a wide range of issues that might come up in the geographic area (or specific location) where the gas will be consumed in order to reduce the possibility of conflicts that may give rise to a party seeking injunctive relief. There are certain prerequisites that must be met in order for a court to grant a party injunctive relief. It is beyond the scope of this paper to go into that, but a court will determine privity of contract in regard to the relationship between the parties named in the suit.103 A party that opposed the injunction might later seek modification or dissolution of it. The court will rely heavily on the evidence presented in the initial proceedings to determine what has changed that would justify changing the injunctive relieve.104
►In-Kind Gas – It is beyond the scope of this paper to address similar issues that can come up when a lessor has the right to take its royalty in kind, but some discussion is appropriate. A lessor taking gas in kind is not the same thing as a lessor taking “free gas.” The term “in-kind gas” is typically associated with a lessor taking its royalty share of production in kind whereby it markets its share of the gas separate from what the lessee is doing. Depending on how the provision is styled, the lessor usually takes its production in kind at a pipeline that is capable of either purchasing the gas at that location, or transporting it elsewhere to a place of sale. As a general rule, a lessor that takes its gas in kind does so after the lessee has incurred the cost of getting that gas from the well head to a purchasing pipeline so that the lessor can make its own marketing arrangements. Under that scenario, the producer (lessee) has sole possession of the gas up to a certain point and it will have exercised due care in the transportation of the gas to a certain point. However, the lessor might take the gas at the well or at some point along a gathering pipeline for its personal use (domestic heating, running a generator, fuel for irrigation pumps, drying crops, etc.), and problems for the lessee can follow.105 The same issues associated with “free gas” provisions as discussed in this paper will be applicable if the lessor intends to take its production in kind at the well or somewhere along the gathering line and consume that gas. A lessor taking gas in kind can have the same issues as a lessor having free gas, such as how the connection to the well(s) or pipeline(s) is made, safety issues along the pipeline and at the point of use, measurement of gas taken, etc. Committing a lease to a unit via execution of certain paperwork can result in the taking in-kind provision being invalidated.106 To avoid any surprises that will cause public relations problems with the lessor, the landman should consult with his attorney as to the consequences of a lessor taking gas in kind before agreeing to accept a
102 United Carbon Co. v. Ramsey, 350 S.W.2d 454 (Ky. 1961)
103 Deynzer v. Columbia Gas of Pennsylvania, Inc., 2005 PA Super 122, 875 A.2d 298 ((PA. 2005) is an interesting case to read as to the various issues that a court has to take into account when considering granting injunctive relief
104 Ridley v. Phillips Petroleum Co., 427 F.2d 19 (10th Cir. 1970)
105 See Magnolia Petroleum Co. V. Stroud, 3 S.W. 2d 462 (Tex. Civ. App. 1927) as a case that illustrates the problems that a lessee had in collecting the agreed upon value of gas taken in excess of the lessor’s 1/8th royalty share.
106 See Phillips Petroleum Company v. Ham, 228 F.2d 217 (Ct. App. 5th Cir. 1956)
22 lease with such a provision. That issue includes some of the situations discussed herein, but involves other matters (such as gas balancing) that get into complicated and lengthy discussion. It is mentioned here as a reminder to the landman to be cognizant of issues related to a lessor taking its royalty gas in kind. Consultation with the marketing department of the landman’s employer is warranted if a mineral owner wants this type of provision in a lease. Royalty clauses in gas leases that include the right of the lessor to take its royalty in kind could be construed as being equivalent to the lessor taking its gas at the well (or elsewhere) and using the royalty share of gas at his dwelling, or in other buildings, or for agricultural purposes. If the lease is styled to give the lessor the right to take gas in kind, it might be advisable to include a gas balancing agreement to the lease since the lessor may not be able to take its full share of gas one month, but might take in excess of his share another month. And, from the liability aspect of the lessor connecting to the well or pipeline and using the gas elsewhere, a Gas Use Agreement or “application form” might be advisable for the lessor to execute, somewhat like a division order, to address issues not addressed in the lease (such as installation of meters, inspection of lines and equipment, etc.). Also see IRRIGATION GAS CLAUSE; GAS USE AGREEMENTS.
►Insurance – The lessee may want the lessor to not only indemnify the lessee against any and all injury or damage that occurs as the result of the lessor's taking of gas, but it may also be appropriate for the lessee to require the lessor to maintain liability insurance in a designated minimum amount (e.g., $1,000,000) due to potential damage to the well, equipment, etc., as well as possibly impairing future production from that well depending on the extent of damage done to the well. The lessee will find itself in a better position when the lease’s free gas provision requires the lessor to secure liability insurance before gas will be provided, compared to trying to impose that requirement later as part of a Gas Use Agreement.107 The lessee will probably want to be an additional insured to such policy in the event the lessor exercises its right to take gas (or option to take production in kind if that is the situation). The lessee will want evidence of such insurance prior to supplying the gas, and will want to be notified if that insurance lapses. If the lessor will not agree to this condition, it would seem all the more important that the lessee emphasize the dangerous nature of the gas and have periodic discussions with the lessor after the free gas right is exercised. Safety issues should periodically be emphasized to the lessor regardless of the lessor’s indemnification to the lessee.
►Interference with Operation of the Well – Free gas clauses sometimes make it clear that the right of the lessee to operate the well is superior to the right of the lessor to take free gas. The lessor is typically prohibited from doing anything to the well or its equipment that adversely affects the operations of the lessee.108 The operator of the well where a tap is proposed should contact the State inspector responsible for that area and inform the inspector of the proposed tap. There might be special monitoring required by the state regulatory agency. See also ABANDONMENT.
►Interruptible Gas Supply – The lessor should acknowledge that the supply of gas will be subject to being interrupted from time to time, and sometimes without notice (such as when a
107 EOG Resources, Inc. v. Wall, 160 S.W.3d 130 (Tex. App. Tyler 2005)
108 For example, see Pittsburgh & West Virginia Gas Co. v. Nicholson, 87 W. Va. 540, 105 S.E. 784, 12 A.L.R. (W. Va. 1921)
23 pipeline breaks, etc.). One way to accomplish that is to have the free gas clause clearly cite the possibility for interruptible service as part of the lessor’s assumption of liability if it takes gas.109 Examples of a well being shut down are: equipment failure, testing, re-working operations, and pipeline repair/maintenance, replacing with different size pipe, etc. In Appalachia, common causes for loss of domestic gas deliverability are cold weather conditions that affect gas pressure at the wellhead. Impurities in the gas can cause pipelines to freeze and break in both cold and warm weather. Gas wells may not produce a steady stream of gas, especially coalbed methane wells that are subject to shutting down when the hydrostatic pressure of the water builds up in the well and prevents gas from coming off the coal. That will result the well shutting down if the pumping unit is fueled from gas produced from the well. The shutting in of a well for some other reason, such as operating costs exceeding gas sales revenue, is another issue that could cause the operator of the well to shut the well down, but not notify the lessor in advance. A work-over of a well that provides free gas should be scheduled to allow advance notice to the gas user of the upcoming shut down of gas so that the user can switch to an alternate source of gas. Poor communication between field personnel conducting unscheduled work on the well and not communicating with office personnel responsible for notifying the lessor of such interruptions in the gas supply can create problems for the gas user. Care should be taken to make sure that the lease does not require the lessee/operator to provide gas from elsewhere regardless of whether a well is drilled on the lease.110
►Irrigation Gas Clause – This term (not to be confused with a “free gas clause”) is typically associated with the right of a lessor to take its royalty share of gas in kind for the purpose of running irrigation pumps (pumping water from wells, irrigation ditches, or streams) to transfer water into sprinkling lines, irrigation ditches, tanks, ponds, etc.111 The lessee should consider placing a limit on the amount of gas to be used, and a limit on where the gas will be consumed. Problems can arise when those details are left out of the free gas clause.112 Also see IN-KIND GAS.
►Letter Agreements – When a lessee is agreeable to accepting a free gas clause, the lessee may not want to go into a lot of detail in the lease (or, as the case may be, a surface use agreement or a pipeline right-of-way agreement) as to all of the terms and conditions related to that right. In that case, the lease can be worded so that the clause makes reference to a side agreement that goes into more detail and that is not recorded. Part of the process of considering using a letter agreement that is not recorded is the importance of that side agreement being cited in the [lease] provision in such a way that it provides notice to a party to inquire about that agreement prior to acquiring an interest in the subject land (“inquiry notice”).113
109 South Penn Oil Co. v. Edgell, 48 W. Va. 348, 7 S.E. 596 (W. Va. 1900) – the free gas provision stated that the gas to be provided might be of uneven or variable pressure, and that the use thereof would be dangerous.
110 For example, see Indiana Natural Gas & Oil Co. v. Ganiard, 45 Ind. App. 613, 91 N.E. 362 (Ind. 1910).
111 See North Dakota Oil & Gas Leasing Considerations by the Cooperative Extension Service of the North Dakota State University
112 For example, see D. R. Lauck Oil Co., v. Breitenbach, 20 Kan.App.2d 877, 893 P.2d 286 (Kan.App. 1995)
24 ►Liability – Courts look at exculpatory clauses in contracts and generally take a position that a party that acquires an interest in real property, or an assignment of some right related to a real property right, is deemed as having “stepped into the shoes” of the predecessor in title with full knowledge of the consequences of such act. With that in mind, if an accident occurs that is related to free gas usage, if the predecessor of the gas user had waived rights regarding recourse against the party providing the gas, the court could deem that waiver binding on the successor to the beneficiary of the free gas right.114 A paper written in 1983 raised the issue of the reliability of exculpatory provisions in free gas provisions if an accident occurred and caused damages and personal injury. That paper predicted that a court might take a different view of liability when personal injury was involved.115 Litigation over damage claims usually do not rise to the level of reported cases.116 On March 21, 1991, escaping “free gas” filled the residence of a home in Ohio, the escaping gas was ignited by a pilot light, and the resulting explosion killed the resident and destroyed his home. Litigation was filed by the heirs of the deceased homeowner. On July 23, 1997, the Supreme Court of Ohio rendered its decision in Weiss v. Thomas & Thomas Development Company, 680 N.E.2d 1239 (Ohio 1997). The Weiss case was a “wake up call” for the gas industry to re-assess its procedures in providing gas under free gas clauses. For an excellent overview of liability associated with free gas, see Richard L. Gottlieb, “Free Gas Lease and Exculpatory Clauses: An Analysis of Weiss v. Thomas & Thomas”, 24 Energy & Min. L. Fdn. 271 (2003) that is cited elsewhere in this paper. From a landman’s perspective, a landman should treat a party that wants a free gas provision the same way that he would treat a minor that is being asked to sign a document. A minor’s execution does not necessarily make that agreement invalid, but it could be avoidable by the minor. In view of the Weiss case, a court in a jurisdiction such as Alabama might take an updated position on the exculpatory nature of waivers of liability when personal injury is involved vs. damage to real estate or improvements thereon.117 Also note that public utilities are be held to a higher duty of care with regard to accidents related to consumer use of natural gas delivered to a place of consumption or use by such utilities.118
►Limit on Quantity of Free Gas119 - When the term “domestic purposes” is part of the free gas provision, use in the principal dwelling does not allow unlimited use of gas that would impose an 113 Alabama cases citing inquiry notice are Jefferson County v. Moseley, 226 So.2d 652 (Ala. 1969); Gamble v. Black Warrior Coal Co., 55 Do. 190 (Ala. 1911).
114 Continental Insurance Company v. M. B. Operating Co., Inc., 1987 WL 17633 (Ohio App. 5 Dist. 1987)
115 Jordan & Kahn, Current Royalty Owner Issues, Page 19-34, 4 Eastern Min. L. Inst. (1983)
116 For example, see Stone v. United Fuel Gas Co., 111 W. Va. 569, 163 S.E. 48 (W. Va. 1932) wherein the issue of a home being destroyed due to an explosion of domestic gas was to be addressed in other court proceedings.
117 Eastwood Lands, Inc. v. United States Steel Corporation, 417 So.2d 164 (Ala. 1982) dealt with property damage only – neither death nor personal injury was involved in that case.
118 For example, see Northwestern Ohio Natural Gas Co. v. First Congregational Church of Toledo, 126 Ohio St. 140, 184 N.E. 512 (Ohio 1933) that is cited in Weiss v. Thomas & Thomas Development Company, 680 N.E.2d 1239 (Ohio 1997)
119 A good paper on this aspect of free gas use is Parrish, Limiting a Lessor’s Free Gas Usage When the Lease Does Not Provide a Numeric Limitation, 15 Eastern Min. L. Inst., Ch. 13 (1995)
25 economically unfeasible situation to the party providing the gas.120 Neither the lessor nor lessee can arbitrarily set a limit on gas use when the covenant does not provide one.121 A court will typically rely on the “reasonably necessary rule” as to setting a limit on the amount of gas that can be used based on what is ordinarily used and considered reasonably necessary for such domestic use under similar circumstances in an area – it is not an unlimited consumption right.122 A lessee will want to keep references to principal dwelling or meter in the singular, because treating either of those terms in the plural could infer that more than one dwelling is entitled to the free gas.123 A savvy landowner that owns a large tract of land and envisions use of free gas as a key part of the consideration in signing a lease may tell the landman that he will lease his lands, but instead of all the acreage being in one lease, separate leases on smaller tracts of acreage will be required and the free gas provision must allow use of gas on or off the lease. This is one way for a lessor to secure a potentially higher volume of free gas rights if wells are successfully drilled on some or all of his leases. Also see WASTE; OVERBURN.
►Limit on Taps – Envision a lessee that is putting together a prospect with a lease form that has a free gas clause in it. The area is approved for 160-acre gas spacing units and the lessee has a specific location in mind for its first well (a well in the “NE1/4”). The NE1/4 of NE1/4 is land owned by a timber company. The NW1/4 of NE1/4 and the S1/2 of NE1/4 is a 120-acre subdivision in the rural part of the county with fifty (50) 2-acre “estate” size lots where each owner also owns the mineral rights to his property. Assume that the County owns the mineral under the strips of land identified as streets and adjacent land due to the way the subdivision was created with the streets dedicated for public use. Leases are secured from all owners in the unit (52 leases). A well is drilled in the NE1/4 of NE1/4 on the timber company land. The well is completed and goes into production. The lessee/operator is then contacted by its lessors that live in the subdivision (50 of them). Each one wants a connection for free gas. The free gas clause used in each lease entitles the lessor to 250,000 cubic feet of gas a year from any well drilled on the lease or from a well that is on land pooled with their lease. The free gas clause stipulated that the lessee would be responsible for laying pipeline to the lessor’s house in the event the lessor exercised its right for free gas. In retrospect, the lessee may wish that it had styled the free gas provision in the lease to not only put the burden on the lessor to make his own connection for the gas, but to also limit the free gas to only one dwelling house on the tract of mineral where the well is actually located.124 Also see POOLING.
120 Rinehart v. Northern Natural Gas Co., 25 Kan. App. 2d 649, 967 P2d 1090 (Kan. Ct. App. 1998)
121 Pittsburgh & West Virginia Gas Co. v. Richardson, 84 W. Va. 413, 100 S.E. 220, (W. Va. 1919); this case also cited the need for the lessee to have a meter placed on the service line in order to measure and monitor gas being consumed in accordance with state law as to Public Service Commission requirements; also see Warfield Natural Gas Co. v. Jude, 261 Ky. 113, 87 S.W.2d 108 (Ky. 1935)
122 Casebolt v. Kentucky West Virginia Gas Co., 293 Ky. 178, 168 S.W.2d 773 (Ky. 1943); also see Sanford v. Witherspoon, 142 Pa. Super. 71, 15 A.2d 496, (Pa. 1940); Harbert v. Hope Natural Gas Co., 76 W.Va. 207, 84 S.E. 770 (W.Va. 1915); Warfield Natural Gas Co. v. Moore, 281 Ky. 689, 136 S.W.2d 1086 (Ky. 1940)
123 Richardson v. Northwest Central Pipeline Corp., 241 Kan. 752, 740 P.2d 1083 (Kan. 1987)
124 For an example of such a clause, see Schetroma, 30 Energy & Min. L. Inst. 14 (2009), P. 496.
26 ►Location of Tap – For safety purposes, the lessee will want to be the party that designates where the gas tap will be. The tap’s location will have to be in compliance with State reporting requirements (e.g., reporting all gas produced, not gas produced after free gas is diverted). And, as cited elsewhere in this paper, a lessor with a free gas right can be limited to taking gas only from a well drilled on the surface where the gas use is contemplated, and not from some other source, such as a gathering line or a third-party pipeline that might be transporting gas from the well on the lease.125
►Messuage – Black’s Law Dictionary, Sixth Edition defines this term as a “dwelling-house with the adjacent buildings and curtilage…The term formerly had a more extended signification.” Messuage is also defined as “a dwelling house, with the adjacent buildings and curtilage, and the adjoining lands appropriated to the use of the household.”126 This word is found in early cases when the court considered the intent of the extent of free gas use in relation to local custom and usage in an area. In areas like Appalachia where production still holds older leases, terms such as this are still relevant. Also see DWELLING; DOMESTIC; CURTILAGE.
►Meters - An operator will want a meter installed to monitor how much gas is being taken, especially in view of the likelihood of excessive use taking place. The current trend in free gas provisions is for the lessee to be the party with the right or responsibility of installing, maintaining, replacing or making repairs to the meter that will measure the amount of gas taken by the lessor. The lessee should be the one that has the right to determine where the meter should be located. The lessee may want it close to the well, but the lessor may want it closer to his house, especially if a regulator is part of the installation and the lessor is responsible for the regulator.127 It might be advisable for the lessee/operator to utilize software that can generate reports as to gas being delivered to the user.128 A report such as that may be required as documentation when a state requires such reporting for tax purposes or some other reason.129 Also, it might be advisable to send the lessor/user quarterly reports of gas usage in the event such use indicates that the user is likely to consume its limit prior to the end of the year. A Gas Use Agreement can address the issue of allowing a third party, at the expense of the lessor, to inspect the meter if the lessor/user has a concern over the accuracy of the meter measurements.
►Minimum Gas Production – Some free gas clauses establish a threshold of a minimum amount of gas that a well has to be produce before the lessor can take free gas. Conflicts can arise when a lessee does not provide gas to its lessor due to low production. The lessee expects to make a reasonable profit from the well in view of its monetary investment and should take into account how much gas must be produced to “break even” or make a “reasonable profit” (and
125 For example, see B & H Gas, Inc. v. Kendrick, 2010 WL 3360166 (Ky. App.)
126 Hall v. Philadelphia Co., 72 W.Va. 573, 78 S.E. 755 (W.Va. 1913)
127 For example, see United Carbon Co. v. Ramsey, 350 S.W.2d 454 (Ky. 1961)
128 An example of such software is WolfPaks’s House Meter System. Information on this product can be found at www.wolfepak.com/products/house.
129 Pittsburgh & West Virginia Gas Co. v. Richardson, 84 W. Va. 413, 100 S.E. 220 (W. Va. 1919) cited the lessee’s right to have a meter installed on the service line in order to report the consumption to the Public Service Commission.
27 how much gas is needed in operations) before being subjected to the obligation to provide free gas. Likewise, a court will take those same issues into consideration if a dispute arises. 130 See also PAYING QUANTITIES.
►Mining Plans131 – A gas well drilled before a mining lease is executed may be the source of gas for the lessor’s domestic use, and later deemed to be in conflict with a plan to mine the coal or other solid mineral (such as potash). Assume that the gas lease was executed and recorded before a mining lease was executed, and the gas lease does not have a provision making it subject to any current or future coal leases, thus it is dominant over a subsequent mining lease.132 One way for the mining company to address the conflict is to review the oil and gas/CBM lease(s) affecting its mining plan and determine if the lease allows for abandonment of operations “at any time”, with no limitation as to whether or not the contemplated abandonment pertains to a well that may or may not be “profitable”, and with no obligation to offer the well to the lessor.133 Depending on the language in the lease, the mining company might consider acquiring an assignment of the gas lease from the lessee, and upon securing that ownership, proceed with plugging and abandonment plans for the well(s) if its attorney concurs that such action can be taken.
►Mortgages - When a mortgage is executed after an oil and gas lease with a free gas provision has been executed and recorded, the earlier contract will typically put the mortgagee subject to the terms of the lease, and thus any successor that acquires the property via a foreclosure proceeding will be subject to that lease. However, if the mortgage pre-dates the oil and gas lease, and that lease contains a free gas provision, it may be advisable to include language in a proposed Subordination for the mortgagee to execute whereby it either waives the free gas right, or it agrees to accept the waiver of liability regarding the use of gas in the event of foreclosure. However, the holder of that lien may want the free gas to be a covenant running with the land without any strings attached since it can add value to the property.
►Non-Waiver – Once a free gas connection is made, it might be forgotten about for a long time by the operator of the well if the gas being taken is not being measured. If the lease or well is taken over by a subsequent lessee/operator, the existence of a tap (especially if along a gathering line) might go undetected for a long time. Field personnel might not be trained or required to report “odd” things in the field. Therefore, it is possible that violations of a free gas provision might go undetected for a long time. The lessee will want to rely on a provision in the free gas clause or Gas Use Agreement to the effect that failure of the lessee to enforce any provision of the free gas right for any length of time and for any cause will not act as a waiver of such right of enforcement.
130 For example, see Fanker v. Anderson, 173 Pa. St. 86, 34 A. 434 (Pa. 1896)
131 For further reading on this subject, see Cramer, Plugging Oil and Gas Wells: Who’s in Control – Lessor or Lessee? Are Some Pennsylvania Courts Changing the Rules?, 14 Eastern Min. L. Inst., Ch. 22 (1993)
132 The custom and practice in the Appalachian coal region is for oil and gas/CBM leases to contain a provision making it clear that coal is dominant and that any conflict in operations between coal and oil and gas/CBM will be resolved to the satisfaction of the coal lessee, including well abandonment if necessary.
133 Willison v. Consolidation Coal Co., 536 Pa. 49, 637 A.2d 979 (Pa. 1994) is an interesting case to read on this subject, and the dissent part of the opinion is particularly interesting with regard to the issue of “plain meaning.”
28 ►Notice – It should be made very clear in the process of providing the gas that the lessor should notify the lessee immediately of any known or suspected problems with its use of gas, and the lessee should likewise notify its lessor of any problems, such as discovery of leaks or appliances that are wasteful in the burning of such gas.134 And, it might be determined that the gas user is exceeding the gas volume limitation he is entitled to use, or he may be allowing another party to connect to his pipe, etc. This can be a key aspect of the agreement if the lessee has cause, and the right, to terminate the free gas right. The parties will want to agree on a realistic method of notice, such as U.S. mail service, return receipt requested, or by hand delivery, of the notice at the address provided in the agreement. However, if the notice is relevant to a safety issue, immediate personal communication via phone or personal meeting should be the norm. Another aspect of notice is making sure that a party considering acquiring a real property right is put on notice regarding the existence (and obligations) of a free gas clause. For example, a lease amendment that is not recorded that adds a free gas clause to the lease can lead to a dispute when the lessor (or his successor) exercises its right to take free gas and the lessee or its agents disconnects the service line without communicating with the lessor first, perhaps because the lessee’s files do not contain that amendment.135 Or, a lessor and lessee might enter into an agreement after the oil and gas lease is signed and recorded that is styled to terminate the free gas right in the event the lessor sells the land at a later date. That subsequent agreement may not be binding on the lessee if it is not recorded and the only instrument of record regarding the free gas right is the oil and gas lease that has the free gas covenant in it.136
►Obligation to Provide Gas on Non-Producing Lease – Typically, free gas clauses are written so that the lessor is only entitled to free gas when a well is drilled on the lease. However, the free gas clause might be styled so that free gas is required regardless of when, or if, a well is drilled on the lease, and failure to provide gas (even from some other source) can result in lease termination.137 In that situation, a lessee can find itself in a bad position if it wants to continue owning the lease with hopes of future exploration when production has not been established on the lease, or production has ceased during the term of the lease via shut-in or abandonment of a well and operations elsewhere on the lease have not resulted in gas being produced. The lessee may have to provide gas to the lessee from some other source. And, a free gas covenant might be styled so that there are two conditions cited that could entitle the lessor to free gas, such as citing that the lessor is entitled to free gas from a gas well, or if gas is found in the
134 Warfield Natural Gas Co. v. Jude, 261 Ky. 113, 87 S.W.2d 108 (Ky. 1935) cites how the court found the lessee’s notice to its lessor of wasteful use as “considerate” with regard to giving the lessor the opportunity to correct the problem before it disconnected the gas supply.
135 For example, see WV 1900 case of South Penn Oil Co. v. Edgell, 48 W. Va. 348, 7 S.E. 596 (W. Va. 1900) that dealt with a lessor seeking termination of a lease due to the supply of free gas being cut off for one week.
136 Lesnick v. Chartiers Natural Gas Company, 889 A.2d 1282 (PA Super 2005)
137 Indiana Natural Gas & Oil Co. v. Ganiard, 45 Ind. App. 613, 91 N.E. 362 (Ind. 1910) dealt with a free gas provision that was deemed to be an independent agreement not dependent on the timing of the drilling of a well on the lease.
29 “neighborhood”, the lessee might be required to provide access to such off-lease gas by laying pipeline a reasonable distance to the lessor’s house.138
►Odorizing - In Texas, gas delivered under a “free gas” lease provision is required to be odorized (with an additive such as mercaptan) before it can be used.139 Different types of odorizing may be applicable depending on the amount of gas used per day. The consumer in Texas that has a farm tap for the “free gas” is considered a “Lease user.” If gas is not odorized prior to delivery, the Gas Use Agreement might require that gas detectors be installed and maintained by the user and be subject to inspection by the lessee/provider of the gas.
►Outside Lighting – Unless the free gas clause allows it, a free gas provision styled for domestic use can include the right to use the gas in an outside light connected to the house, but not for gas lighting beyond the house.140 And when use of gas in an outside light fixture is allowed, the courts will look to whether or not the light fixture efficiently burns gas so as not to be wasteful.141 One thing that brought outside wasteful burning of gas to the public’s attention was the burning of gas in the Trenton Gas Field of Indiana. Beginning in the 1880’s, once a gas well was placed into production, a small pipe was added to the producing pipeline and it was lit (this was called a “flambeau”) to show that the well was producing gas. Unfortunately, it was determined too late that this area-wide practice was wasteful, and attempts to regulate that waste were unsuccessful leading to a premature depletion of the field. It is estimated that 90% of the gas produced in that field was wasted due to this practice.142 Also see WASTE.
►Overburn – See EXCESS USE.
►Paying Quantities – A lessee may find it useful for the free gas clause to state that the well must be capable of producing gas in paying quantities (with a definition of that term in relation to commercial quantities and the lessee’s expectations) before a lessor can have free gas. However, as pointed out by Williams and Meyers, the term “paying quantities” can have different meanings and thus different impacts on other provisions (habendum clause and duties of the lessee) of the oil and gas lease. If a lessee decides to include the term “paying quantities” in a free gas clause, consultation with legal counsel as to how to phrase that in relation to the other clauses of the lease is recommended to ensure that another lease provision is not compromised due to the use of the term “paying quantities” in the free gas clause.
►Personal Right – Depending on how the free gas covenant is written, citing the names of the people that can exercise and enjoy the free gas right can result in the covenant being a personal one and not one that runs with the land.143 A deed that conveys the mineral rights to another party can be styled whereby the grantor reserves a free gas right that becomes a personal right to
138 Weaver v. Graham, 109 Kan. 450, 199 P. 924 (Kan. 1921)
139 Texas Administrative Code, Title 16, Part 1, Chapter 8, Subchapter A, Rule §8.5 Definitions
140 Gillespie v. Iseman, 210 Pa. 1, 59 A. 266 (Pa. 1904)
141 Hall v. Philadelphia Co., 72 W.Va. 573, 78 S.E. 755 (W.Va. 1913)
142 “Indiana Gas Boom”, Wikipedia
30 the grantor and certain members of his family.144 When a mineral owner sells the surface and later executes a lease with a free gas provision in it, the free gas provision has no effect since the lessor did not own a house on the lease for the free gas right to attach to. Therefore, a party that acquires surface rights before the seller executes a lease cannot expect to get free gas via the mineral owner’s execution of a lease with a free gas provision in it unless there is special language in the lease whereby the mineral owner specifies that the gas right can be used by the surface owner.145 There are advantages to the lessee in making the free gas provision a personal right of the lessor instead of it being a convent that will run with the land. There can be language that confirms that the right is personal and that the lessor acknowledges that his right to take gas is personal and such right will not inure to his successors or assigns unless consented to by the lessee (perhaps a condition of such consent being that the successor owner will be required to execute a Gas Use Agreement that will go into detail as to the safe use of the gas. One of the things that a court will look at is whether the agreement that has the free gas clause states that covenants will “run with the land” or otherwise be binding on the successors and assigns of the parties to the contract. Without that language, the free gas right might be deemed to be a personal right.146 Verbal agreements that are deemed by a court to be binding may also be a personal right rather than one that runs with the land.147 Also see COVENANT RUNNING WITH THE LAND.
►Pipeline Installation – As a general rule, it is the lessor that is required to incur the cost and expense of laying a pipeline to the well that will provide gas.148 It’s a matter of negotiation as to which party pays for the pipe and installation and connection between the source of the gas and the place of consumption. The free gas provision should explicitly state the responsibility. However, contrary to custom, a lessee may be the party responsible for providing and installing pipe from a well to a place of consumption. If the lessee fails to do so, and defers to the lessor to incur that cost, if the pipeline is installed and the well is deemed unproductive and is plugged, the lessor may have recourse against its lessee for reimbursement of the pipeline installation cost.149 Therefore, a prudent operator will want to make sure that a well is producing sufficient gas to meet its “free gas” obligation before either party incurs the expense of laying pipe from the well to a house, etc. Free gas provisions should put the burden on the lessor to incur the expense of connecting the gas from the well to the place where gas consumption will take place elsewhere on the lease. Otherwise, if that burden is placed on the lessee, a lot of expense could
143 Lyons v. Gambill, 242 Ky. 696, 47 S.W.2d 532 (Ky. 1932)
144 Howell v. Kentucky-West Virginia Gas Co., 275 S.W.2d 429 (Ky. 1955)
145 Coleman v. Lindsey, 314 Ky. 273, 234 S.W.2d 950 (Ky. 1950)
146 For example, see Smith Gas Smith Gas Co. v. Gean, 186 Ark. 573, 55 S.W.2d 63 (Ark. 1932) that determined that a free gas provision in a pipeline right-of-way agreement was a personal right.
147 Ridley v. Phillips Petroleum Co., 427 F.2d 19 (10th Cir. 1970)
148 Cline v. Southern Star Cent. Gas Pipeline, Inc., 356 F. Supp. 2d 1203, 162 O.G.R. 244 (D. Kan. 2005); this case has some good quotes from Williams and Meyers and W. L. Summers regarding the burden of the lessor to lay pipe and make connection.
149 For example, see Howard v. Hoffeld, 221 N.Y. 546, 116 N.E. 1052 (N.Y. 1917)
31 be incurred in laying a pipeline from a well drilled on one tract of mineral subject to the lease to a house a great distance away that is located on another tract of mineral subject to the lease. And, the lessee may have to incur excessive costs to acquire right-of-way from various surface owners along that pipeline route in order to fulfill its contractual obligation to provide free gas. The Gas Use Agreement may need to address reasonable depth of burial of the pipeline used for supplying the free gas (and burial of marker tape and above ground pipeline markers for safety). Pipelines laid on top of the ground could be more prone to breakage or damage caused by people not paying attention to what they are doing on the surface (driving vehicles or equipment across the line, cutting timber down onto the line, skidding logs over it, etc.). One aspect of pipeline installation is a firm understanding of who will be the designated owner of the service pipeline after it is installed. This may have relevance to a state’s “One Call Act” that might burden the owner of the service pipeline (the “facility owner”) to report its location to the State so that the State can contact that owner in advance of proposed construction in the area so that the pipeline owner can mark its pipeline in advance of the construction work.150 Above-ground markers have a tendency to fall over or become damaged or missing over time. If vegetation over a pipeline is not cut periodically, the vegetation may hide the existence of an underlying pipeline. Service pipelines for free gas are not typically something that a person conducting a records search at the courthouse will find. Envision a service line connected to a well that crosses several tracts of land owned by different people before it reaches the place of use. The gas user, or his predecessor, may have had a “handshake” arrangement with the neighbors many years ago to allow the pipeline to cross their land. If the pipeline corridor is overgrown with vegetation and there are no markers to show its location, and the adjacent lands have changed ownership over the years, a construction crew that turned in a “work order” with the State may have no idea that its plan will intercept an active domestic gas pipeline. If an accident occurs, the injured party will probably be looking for “deep pockets” to offset losses incurred due to downtime of personnel and equipment, not to mention the impact of possible personal injury or death caused by a gas explosion.
►Pipeline Inspection, Maintenance, and Repair – The issue of who should make repairs to a pipeline supplying the gas to the residence or other place of use should be addressed in the free gas provision. It is typically the lessor’s responsibility to make pipeline repairs, or the lessee may assume that task in order to fix leaks that are wasting gas in the delivery of the gas to the lessor. When the lessee knows that there are leaks in the delivery system, it may not be able to recover the value of such wasted gas from the lessor that was responsible for maintaining the pipeline if it allows such waste to continue.151 Once the party responsible for making repairs is notified that a problem exists, it may be advisable for the free gas provision to state that the supply of gas will be shut off until such repairs are made to the satisfaction of the lessee. Metal pipelines weaken in weld areas, become pitted as the result of environmental influences that can form pinholes, and in general corrode over time.152 Polyvinyl chloride (PVC) plastic
150 While not a “free gas” case, Excavation Technologies v. Columbia Gas Co., 936 A.2d 111 (Pa. Super 2007) touches on the responsibility of marking pipelines under “One Call Acts.”
151 Casebolt v. Kentucky West Virginia Gas Co., 293 Ky. 178, 168 S.W.2d 773 (Ky. 1943)
152 Warfield Natural Gas Co. v. Jude, 261 Ky. 113, 87 S.W.2d 108 (Ky. 1935) cites a situation where a metal service pipeline corroded and rusted and after seven (7) years of its installation, with its regulators likewise becoming worn out.
32 pipe can separate over time when installed in segments. High density polyethylene (HDPE) will eventually crack or become brittle over time. Since the pipe is delivering a small amount of gas, seamless plastic “flex-line” might be the best choice. The lessee will want to have the right, at its option and from time to time, to inspect the connecting line of the lessor to ensure that the tap for that service pipeline is at the location where it is supposed to be. Also, routine inspection of gathering pipelines might reveal unauthorized taps onto a gathering or transportation system by parties that do not have a lease relationship with the lessee/operator.153 An inspection of a service line to a house might reveal that more than one dwelling on the lease is taking gas.154 The lessee's right to inspect the hook-up and other aspects of the gas supply should not be considered as an assumption of liability by the lessee for the lessor's hook-up or use of gas. The free gas provision should make that clear. In the event such connection or line has not been properly installed or is leaking gas, the lessee will want to have the ability to suspend the lessor's taking of gas until such time as repairs are made. Specifying which party pays those costs should be clearly stated in the Gas Use Agreement. If the burden of inspection is placed on the lessor, the lessee will want to make it clear that inspections are to be done periodically and that that the lessor must provide the lessee with timely written proof of such periodic inspections. Since this is a key safety factor, it should be understood from the beginning with clear language that the failure of the lessor to provide the lessee with proof of the inspections can result in the loss of the lessor's right to take gas. Preferably, it should be clear that the lessor can lose the right to take gas if, in the sole judgment of the lessee, the lessor is not strictly complying with safety standards. The lessee might consider providing its gas users with gas detectors to assist them in regularly checking their appliances and gas line connections for leaks to supplement inspections done by the lessee.155 As an added safety precaution, it might be advisable to have a shut-off valve installed on the pipeline near the location of consumption, especially if there is a long distance between the well and the location of consumption. A serious accident could be avoided if a gas user has the ability to quickly shut off the supply of gas after a leak is detected.
►Pipeline Relocation – The typical oil and gas lease grants the lessee the right to construct pipelines on the lease. A lease with a free gas provision will typically infer that a “service” pipeline will be installed on the lease to connect a house to a source of gas. It might be overkill, but the parties may want to have a clear understanding of whose responsibility it is to relocate one party’s installed pipeline if it interferes with the installation of another pipeline that is authorized in the lease (e.g., service pipeline to a house interferes with a pipeline needed by the lessee in order to further develop the lease).
►Pooling & Unitization – Pooling and unitization of leases can result in a well being drilled on one lease with production shared by other leases in that pooled and/or unitized area.
153 Hall v. Spencer, 15 La. App. 128, 131 So. 518 (2d Cir. 1930)
154 Universal Resources Corp. v. Ledford, 961 P2d 593 (Colo. App. 1998) described a situation where two houses had been taking gas from a tap at the principal dwelling on the lease for more than 35 years. The unauthorized gas users argued that the lessee was barred via estoppel from disconnecting them. The lessee did not know about the taps for that period of time, and upon discovering them, took immediate action to have the court declare that they had no right to the gas and the court granted the lessee the relief it sought.
155 Easy to use hand-held gas detectors (aka, “gas sniffers”) are fairly inexpensive ($20) and available from catalogs such as Make Life Easier and Sporty’s. An operator could probably get a cheaper price by buying in bulk.
33 Notwithstanding a provision to the contrary in the lease, a lessor with a free gas provision in his lease can be entitled to free gas from any well drilled in that unit where his lease is pooled.156 It then becomes an issue of whose responsibility it is to secure surface use rights to run the service pipeline from the well across other surface owners’ land in the unit to the lessor’s home that has requested the free gas. One way to address this issue is to make sure that the pooling provision in the lease states that only the owner of the lands on which the well is located may take gas for domestic use in accordance with the provisions of the lease.157 For example, one court cited the pooling clause as including the following language: “…Lessor further agrees that only the owner of the lands on which the development unit well is located may take gas for use in one dwelling house as hereinbefore provided.”158 Or, some leases state that when pooling occurs, the quantity of the lessor’s free gas will be apportioned to the lessor as his interest or acreage bears to the total pooled acreage (e.g., if the lessor is entitled to 200,000 cubic feet gas/year, and his acreage is 50% of the unit, his pro rata share of the free gas is 100,000 cubic feet of gas/year). When a lessor to a lease has a well drilled offsetting his lease, and then acquires the land where the offsetting well is located, unless the lease governing that offsetting well tract allows for pooling with the offsetting non-producing tract, or otherwise allows gas from that well to be used off the lease, the new owner cannot divert gas from that well to a place of consumption off the lease. In other words, the lessor cannot “pool” the leases that he is subject to in order to be in a position to take free gas from a well drilled on one lease for use on an offsetting tract.159 If the lessee has drilled an offset well and wants to pool leases to form a unit around that well, the lessee can find itself at odds with a lessor whose lease has a free gas clause and a pooling provision that treats a well drilled on another lease as if operations had been conducted on the lease itself.160 The lessee of the undrilled tract may want to take a new lease from that mineral owner, with the new lease not having a free gas provision and then release the older lease. Or, the lessee can try and revise the existing lease so that only the lessors of the tract where the well is actually drilled are entitled to free gas. Perhaps the owners of the land where the well has been drilled do not want another lessor to tap into that well for free gas. The lessee might be able to release the undrilled lease with the free gas provision and go forward with putting the offset well into production. In the Croston case, the lessee avoided liability for drainage because it proved to the court that it made a good faith effort to secure a replacement lease and the lessor declined to accept that offer. When conducting operations subject to the 1989 A.A.P.L. Form 610 Operating Agreement, an operator of a unit where another party has contributed a lease with a free gas provision will want to identify each such lease as having a “free gas burden on production” on it in Exhibit “A” of the operating agreement (the A.A.P.L. 1982 form operating agreement does not require identification of “burdens on production”). It might be appropriate to have a special provision in the operating agreement to address the indemnification to the operator by the owner of that lease(s) in the event a lessor exercises its right to free gas and has the ability to lay pipeline to the
156 For example, see Post v. Tenneco Oil Co., 278 Ark. 527, 648 S.W.2d 42 (Ark. 1983)
157 See Schetroma, 30 Energy & Min. L. Inst. 14 (2009), P. 496
158 Alicia v. Welch, 2004 WL 1619385 (Ohio App. 5 Dist.)
159 Winnon v. Davis, 759 So.2d 321 (La. App. 2d Cir. 2000)
160 Croston v. Emax Oil Company, 195 W. Va. 86, 464 S.E.2d 728 (W. Va. App.Ct. 1995). This case also touched on the issue of securing rights to lay pipeline from the non-drilled tract to the drilled tract in the unit.
34 well. Complications can also arise when more than one lease in the unit is entitled to free gas and multiple lessors are requesting free gas.161 A lessee could find itself diverting a large volume of gas from the well to meet the free gas obligations, resulting in reduced volume of gas available to the operator and lessees of the unit to sell in order to offset operating expenses. And on an ending note, a lessee may want to consult with its attorney when a lease with a free gas clause is under consideration for inclusion in a unit with the lessor (or the lessee if authorized to do so under the terms of the lease) signing a Communitization Agreement committing that lease to the unit. Would the free gas provision be treated like an “in-kind” royalty provision whereby the lessor may have revoked its right to receive free gas by committing (or having its lessee commit) all of his gas to the unit?162
►Principal Dwelling – Black’s Law Dictionary, Sixth Edition, defines principal as “…primary; original.” The right to free gas is typically limited to one house, often referred to as the “principal dwelling” on the leased premises.163 A “principle dwelling” on the lease need not be in existence when the lease is executed. It can be subsequently built on the leased premises and entitled to the benefit of free gas with a superior right to free gas over houses built after it on the lease.164 When a specific structure is cited in the free gas clause, such as “in the mansion house”, such a description will typically be viewed as limiting the free gas to the one house.165 There can be more than one dwelling located on the surface that is entitled to free gas when the surface above the mineral has been divided into different tracts and the underlying mineral that has not been divided is subject to different leases with depth or horizon limitations.166Also see DWELLING.
►Purpose/Location of Gas Use – One of the common issues litigated in free gas cases is whether or not the gas is being used for the purpose contemplated in the contract (lights and heating of a home and operating stoves, fuel for irrigation pumps, fuel for electric generators, drying seed, etc.). In recent years, free gas provisions are specific as to the type of use the gas will be used. Clauses might specify that the use of gas is limited to certain appliances, such as stoves, and lights (located either inside and/or outside). The location of illuminating lights can be a factor in relation to whether or not it is part of the domestic structure or not. The free gas clause can also be specific as to where the gas will be used (typically used on the leased premises
161 Jackson v. Farmer, 225 Kan. 732, 594 P.2d 177 (Kan. 1979) demonstrates that there might be more than one lessor in the unit entitled to take gas from the unit well.
162 See Phillips Petroleum Co. v. W. H. Ham, 228 F.2d 217 (C.A.5. Tex. 1956) – the author does not know the answer to the question posed in this narrative.
163 Hall v. Spencer, 15 La. App. 128, 131 So. 518 (2d Cir. 1930)
164 Jackson v. Farmer, 225 Kan. 732, 594 P.2d 177 (Kan. 1979) confirms a priority system in which the first house built on the lease and occupied will be entitled to use gas. Also see Thomas v. Thomas, 767 S.W.2d 507 (Tex. App. Amarillo, 1989) that cites non-use by the principal dwelling does not entitle another house on the lease to use gas in its place.
165 Stapleton v. Columbia Gas Transmission Corp., 2 Ohio App.3d 15, 440 N.E.2d 575 (Ohio App. 1981)
166 Flanagan v. Stalnaker, 216 W.Va. 436, 607 S.E.2d 765 (W. Va. 2004)
35 vs. somewhere off the lease). Being specific as to the type and location of use can be a factor when a limit on gas use does not exist. Some clauses cite that the user will utilize the gas only for the purposes stated in the provision and will not make a different or varying use other than for the stated purposes. Also see DOMESTIC USE.
►Quantity of Gas – The typical amount of gas stated in free gas clauses is from 150,000 to 250,000 cubic feet of gas annually (referencing a “calendar year”). Some provisions condition the taking of gas on the requirement that the well produce gas in paying quantities.167 Some provisions will address excess use of gas, and if they don’t, a court may have to set such limits and also set a value on excess gas that might be used.168 Also see OVERBURN, PAYING QUANTITIES.
►Regulation of Free Gas – An operator should make inquiry of possible oversight by a state agency if free gas rights are contemplated in a development area. At the present time, the State of Alabama Oil and Gas Board (the “Board”) is not aware of any operators that are providing free gas to their lessors. A mineral owner can take over a well as operator if that mineral owner wants to consume gas produced from the well for his personal use. In that event, since the distribution of gas to homes is beyond the Board’s jurisdiction, the Board’s staff will contact the Pipeline Safety Section of the Public Service Commission so that safety issues can be addressed prior to such use. All gas produced in Alabama must be accurately metered and accounted for. Thus “free gas” taps in Alabama would have to be downstream of a properly calibrated meter for the accounting of such produced gas.169 As a general rule, a dispute between a lessor and lessee over a free gas issue (such as the gas supply being discontinued) will be viewed as a private contractual matter that a court will have to resolve as opposed to a state regulatory agency such as a public utility commission.170 The issue of interference with interstate commerce can come into play when a state attempts to impose obligations on a gas company that can result in withdrawal of a large volume of gas from interstate commerce to benefit a few individuals resulting in private interests subverting public welfare.171 A state (such as Texas with its Tex. Util. Code § 121.003) might have a statute on the books to make it clear that if a lessee provides gas to a lessor, such action does not cause the lessee to be regulated as a public utility. However, the November 2010 newsletter of the Independent Oil and Gas Association of West Virginia, Inc. reported new safety rules of the Federal Pipeline and Hazardous Materials Safety Administration in regard to “farm taps”. Farm taps are connections to gathering and transmission lines made by landowners. Such taps fit within the definition of a “distribution line” since they are neither a gathering line nor a transmission line. The article reported that some states require the operator to maintain certain portions of pipelines owned by the gas user that provide the free gas for consumption. The article is a good example of the complex nature
167 See PAYING QUANTITIES for Williams & Meyers definition of that term.
168 Casebolt v. Kentucky West Virginia Gas Co., 293 Ky. 178, 168 S.W.2d 773 (Ky. 1943)
169 February 15, 2011 telephone conversation with Dave Bolin of the State of Alabama Oil and Gas Board.
170 Adams v. Public Utility Commission, 819 A.2d 631 (Pa. 2003)
171 Backus v. Panhandle Eastern Pipe Line Co., 558 F.2d 1373 (10th Cir. 1977) ruled a 1971 Oklahoma statute that required gas pipeline companies to provide gas to land owners to operate irrigation pumps as unconstitutional.
36 of federal regulations that might govern the delivery of free gas to a lessor or other user. And, while not a “free gas” issue in the context of this paper, Oklahoma enacted legislation in the past (later deemed unconstitutional) requiring gas producers to make gas they produced available for use in pumping water for irrigation where such gas was produced.172
►Regulators – A regulator may be required to reduce the pressure of gas taken at the well head connection or to ensure that any unexpected surges in gas can be controlled. The matter of which party would bear all or part of the expense in the installation and maintenance of the regulator(s) can be negotiated. However, since this can be a “weak link” in the safe delivery of gas, it might be best for the lessee to install and maintain it since it has the professional expertise to do so. The free gas clause might be styled so that the lessee can be compensated for such work. It might be best for the regulator to be located at the well because if the service line is damaged between the well and the delivery point (house, barn, etc.), the escaping gas would be at a lower pressure rather than an unrestricted rate of flow. When a free gas clause requires the lessor to install and monitor or otherwise keep in good repair the facilities necessary for delivery of gas, and the lessee insists on the regulator being installed close to the well rather than close to the home, if the distance between the regulator and home poses an access problem for the lessor, the lessee may be required to upgrade the access to the regulator at its expense so that the lessor has reasonable access.173
►Reliance on Lessor’s Use of Free Gas to Retain a Lease - A free gas provision in an older lease might be written so that the lessor is entitled to free gas when a well is drilled on the lease, and a rental is required if the well produces gas at a certain pressure. In that situation, the act of providing free gas to the lessor may be deemed as sufficient consideration for the lessee to hold the lease in view of the lessee operating a well that does not produce gas at a pressure to trigger the rental payment.174 A proceeding in bankruptcy has addressed the assertion by a lessee that production of gas used solely by the lessor for household purposes was sufficient to prevent lease termination when royalty had not been paid. The court pointed out that production, as defined under the terms of the lease, did not include production for household purposes. The court cited the requirement for payment of royalty from production in profitable quantities by the lessee was an inducement for the lessor to enter into the contract. The lessee’s efforts to retain the lease failed since royalty had not been paid.175 In other words, a lessor can pursue lease termination even if it has been using free gas when there is no sale of the gas resulting in royalty not being paid to the lessor.176 A court will take into account whether the lease contains other provisions whereby the lessee might conduct some type of operation or tender a payment that would be sufficient to hold the lease (e.g., rental, shut-in, or operations intended to pursue further development of the lease). For example, if the lease has a clause allowing the lease to be
172 Phillips Petroleum Co. v. Corporation Commission of Oklahoma, 312 P.2d 916 (Okla. 1956)
173 Stone v. United Fuel Gas Co., 111 W. Va. 569, 163 S.E. 48 (W. Va. 1932)
174 The Oak Harbor Gas Co. v. Murphy, 18 Ohio C.C. 662, 7 Ohio C.D. 700, 18 C.C. 662, 1897 WL 1399 (Ohio Int. App. Ct. 1897)
175 Delta Gas Corp. v. Thompson, 951 F.2d 348, 1991 WL 256568 (C.A.6 Ky. 1991) – Unpublished Disposition
176 Metz v. Doss, 114 Ill.App.2d 195, 252 N.E.2d 410 (Ill.App. Ct. 1969); also see Plymouth Fertilizer Co. v. Balmer, 488 N.E.2d 1129 (Ind. Ct. App. 1986)
37 extended beyond its expiration date if production and operations are conducted on the lease, and there is a cessation of production after the expiration date of the lease, the lessor’s use of gas will typically not be sufficient to keep the lease in full force and effect.177 The use of free oil or gas for domestic purposes does not, in itself, constitute production that will keep a lease in effect after the primary term.178 The West Virginia court went on to say that production under the terms of a lease is generally deemed to be production in paying quantities by the lessee because the objective of the lease is not merely to have oil or gas flow from the ground but to obtain production that is commercially profitable to both parties (citing Williams on Oil and Gas Law). A state such as West Virginia may have a statute to the effect that a well will be presumed abandoned if it does not produce for the lessee’s purpose. Therefore, a lessor’s act of stepping in and operating a well and taking domestic gas and even selling oil does not preclude the lessor from seeking lease termination if a shut-in payment or other form of rental is not paid by the lessee in order to keep the lease alive.179 However, if a lease is styled so that the lease can be held by either production or providing free gas, and there have been no operations conducted on the lease, if the lessee wants to retain its ownership of the lease, it must provide free gas even if such gas has to come from a source off-lease.180
►Rental in Lieu of Providing Free Gas – The ability of a landowner to have access to “free” gas is a matter of value to that landowner and is considered part of the consideration in granting the oil and gas lease.181 In the early days of leasing for oil and gas, such leases would have a free gas clause and a rental (instead of a royalty) provision so that the lessor would be assured of getting either free gas or a guaranteed yearly rental. The lessee could not hold the lease after the first year (or some other stated period) if it did not provide free gas or pay rental.182 However, one court has made it clear that providing free gas in lieu of paying a rental or otherwise conducting operations on the lease will not hold the lease forever, since the law does not favor parties holding leases indefinitely for speculative purposes.183 For a lessee to assert that it owned the lease, but did not provide free gas or make rental, a court might deem that the lease had terminated, but award the lessor damages in the amount of what the lessee would have owed in
177 Anderson v. Schaffner, 90 W.Va. 225, 110 S.E. 566 (W. Va. 1922)
178 Goodwin v. Wright, 163 W. Va. 264, 255 S.E.2d 924 (W. Va. 1979); also see Tisdale v. Walla, 1994 WL 73844 (Ohio App. 11 Dist. 1994) – Not reported in N.W.2d; Babb v. Clemensen,455 Pa. Super. 181, 687 A.2d 1120 (Pa. 1996) that relied on the Tisdale case; also see Jolynne Corporation v. Michels, 191 W. Va. 406, 446 S.E.2d 494 (W. Va. 1994); but note effect of paying rentals on a shut-in well (that is also providing free gas to the lessor) that has effect of holding a lease beyond primary term as cited in McCutcheon v. Enon Oil & Gas Co., 102 W.Va. 345, 135 S.E. 238 (W. Va. 1926) in view of investment made by the lessee in drilling the well that was capable of producing a high volume of gas, but was a wildcat and isolated from pipelines when drilled.
179 Currey v. TNG Inc., 186 W.Va. 56, 410 S.E.2d 415 (W. Va. 1991) , citing West Virginia Code 36-4-9a
180 Kimble v. Wetzel Natural Gas Co., 134 W. Va. 761, 61 S.E.2d 728 (W.Va. 1950)
181 Indiana Natural Gas & Oil Co. v. Leer, 34 Ind. App. 61, 72 N.E. 283 (Ind. 1904); South Penn Oil Co. v. Edgell, 48 W. Va. 348, 7 S.E. 596 (W. Va. 1900)
182 For example, see Evans v. Consumers’ Gas Trust Co., 31 L.R.A. 673, 29 N.E. 398 (Ind. 1891)
183 Indiana Natural Gas & Oil Co. v. Leer, 34 Ind. App. 61, 72 N.E. 283 (Ind. 1904).
38 rental if the lease had been active during the period of asserted ownership.184 Even if a house did not exist on the lease that would be where free gas would be consumed, if the lease was styled as either providing gas or paying a rental, failure to pay rental when a well was not drilled could result in termination of the lease by the lessor.185 Today, if a landowner is adamant in wanting a free gas provision, it might be better to negotiate a yearly payment to the lessor for the estimated value of gas that the clause would entitle the lessor to (in addition to the payment of royalty if a well is drilled and placed into production). Payment of an annual “rental” of this nature would eliminate the liability issues associated with furnishing the raw gas and the problems that might arise with gas connections, especially in areas where gas is being produced at high pressure and may not be conducive to traditional free gas delivery of low pressure gas produced from shallower wells. A lessee should be cognizant of how its lease is styled with regard to rental payments. If gas is produced that the lessor is not entitled to under the free gas provision, and royalty is not required to be paid on that gas, if the lessee uses that gas for a purpose not related to lease development, the rental provision in the lease might require payment to the lessor.186 See also, Buy-Out Provision.
►Residue Gas – When casinghead gas from an oil well is refined to remove gasoline, residue gas is what is left behind. It is not the same as “dry gas” (gas produced from a gas well that produces gas only). When the free gas clause limits the lessor’s right to gas from “gas wells” or wells that produce gas only, the lessor will not be entitled to tap into a residue gas pipeline as part of its free gas right, and, the “in-kind” language in the royalty clause may not be applicable to the residue gas.187 See also CASINGHEAD GAS.
►Riders and Hand-Written Changes to Free Gas Clauses – Great care should be taken in modifying a free gas clause in a lease or adding additional language to the lease in an addendum since courts generally rule that such changes prevail over the pre-printed language.188 In a Kansas case, a free gas clause entitled the lessor to free gas from any well drilled on the lease, and a handwritten note on the lease stated that the lessee was to provide gas to within a certain distance of the house. The wells on the lease ceased to produce enough gas in excess of the lessee’s needs so that domestic gas could no longer be provided to the lessee from those wells. The lessee provided gas to the lessor from a non-lease source as a courtesy. When that “courtesy” gas was disconnected, the lessor argued that the rider to the lease, coupled with the past practice of the lessee providing domestic gas from other sources obligated the lessee to continue providing such non-lease gas for domestic use. The court ruled that the printed and written provisions of the lease were properly construed together by the lessee in not being required to continue furnishing gas from off-lease sources (the printed clause was not struck
184 Indiana Natural Gas & Oil Co. v. Harper, 50 Ind. A. 555, 98 N.E. 743 (Ind. 1912)
185 Indiana Natural Gas & Oil Co. v. Stewart, 45 Ind. App. 554, 90 N.E. 384 (Ind. App. 1910)
186 Mathes v. Shaw Oil Co., 80 Kan. 181, 101 P. 998 (Kan. 1909)
187 Tidewater Associated Oil Co. v. Clemens, 123 S.W. 2d 780 (Tex. Civ. App. 1938)
188 For example, see Warfield Natural Gas Co. v. Moore, 281 Ky. 689, 136 S.W.2d 1086 (Ky. 1940) where the court had to determine intention of the parties as to a hand-written note added to the margin of a printed lease form.
39 through or otherwise marked through).189 A free gas clause might be modified by hand-written language to the effect of requiring free gas to be delivered, or payment for the value of gas not delivered regardless of whether a well is drilled on the lease or not, when the pre-printed language limited free gas to only being supplied if a well was drilled on the lease that produced in paying quantities.190 A free gas clause might be modified by the lessor and returned to the lessee with the modification stating that an additional dwelling house will be entitled to free gas. If such a change is not specific as to the location of that second house, the vague language might not be favored by a court and a court may rule that the covenant is applicable only to two houses on the lease, but not one house on the lease and a second house located somewhere else. 191 The Doolittle case is a good example of why a landman and/or lease analyst must inspect every new lease to ensure that any mark-up by the lessor is an acceptable modification of the lease prior to accepting it. Another pitfall to adding a rider to a lease regarding free gas use is that such rider might create a separate and independent gas use right (e.g., right to use gas for agricultural purposes in addition to using gas for domestic use), and depending on how the rider is styled, while the domestic use might be limited to one house on the lease for specific use, the second use authorized might not have a geographic limit or limit the amount of gas to be used.192
►Right-of-Way Acquisition – The free gas provision may need to address the issue that has come up with regard to who is responsible for acquiring right-of-way or consent for surface use when the well that will supply the gas is at a location where the pipeline that will connect it to the lessor’s home or other place of use will require crossing someone else’s land. If the surface of the leasehold is subdivided and the principal dwelling is not located on the same tract where the well is, an Ohio court cited the principal of an easement by implication as being applicable to the principal dwelling having the right to lay a service line to the well on that other tract.193 It is easy to see how this aspect of getting the gas from one point to another is often overlooked. This can be an especially troublesome issue in the western U.S. where the pipeline may have to cross land managed by the Bureau of Land Management ("BLM"). Even though the lessee may be conducting extensive operations in the area, it will want to state that it makes no representation that it has the authority to allow the lessor to install its connecting pipeline to said well for the purpose of taking free gas since the well and its facilities is, or may be, located on land managed by the BLM. In the event BLM approval is needed in order for the lessor to install a service pipeline to the well, it should be the lessor's responsibility to secure such surface use approval. It should be made clear to the lessor that in the event the BLM requests the lessee to agree to a burdensome condition, it should be the lessee's right to refuse to agree to such new condition if it is deemed unreasonable in the lessee's sole judgment.
189Caylor v. Mendenhall, 127 Kan. 290, 273 P.172 (Kan. 1929)
190 Kokomo Natural Gas & Oil Co. v. Albright, 18 Ind. App. 151, 47 N.E. 682 (Ind. 1897)
191 Doolittle v. Wilson, 116 Kan. 576, 227 P. 345 (Kan. 1924)
192 D. R. Lauck Oil Co., v. Breitenbach, 20 Kan.App.2d 877, 893 P.2d 286 (Kan.App. 1995); the court pointed out to the lessee that if it had wanted to limit the use of the gas, it should have negotiated that rather than accepting the rider.
193 Sethi v. Antonucci, 126 Ohio App. 3d 382, 710 N.E.2d 719 (7th Dist. Mahoning County 1998)
40 ►Risks of Gas Use – Most free gas clauses contain an exculpatory provision that may be as simple as “…at lessor’s sole risk…” and some may go into detail stating that the lessor has been advised of the risks inherent in taking gas for domestic use and that the lessor agrees to assume all risks and liability related to the service line or equipment and that it will hold the lessee (and others such as the well operator and all parties in interest in any well on the leasehold premises) harmless from any claims of any nature that might arise by the usage of gas by lessor, his heirs, executors, administrators and assigns. It may be advisable to send the gas user periodic reminders as to the safe use of the gas being provided with an emphasis on the explosive nature of gas if used improperly. In addition to the explosive nature of the gas, there should be emphasis on the high pressure of the gas, lack of odor, interruptible nature of the supply, etc. The point to be made very clear to the lessor is that gas coming directly from a well might not be conditioned to a quality that is typically considered as “pipeline quality.” Also see INDEMNIFICATION; LIABILITY.
►Rules and Regulations of the Lessee – Some free gas clauses contain a requirement that the lessor subscribe to and be bound by the reasonable rules and regulations of the lessee relating to the use of domestic-use gas.194 The lessee may want the gas user to agree to comply with all Federal, State and local laws and regulations in the exercise of the use of gas. The lessee may also want to make it clear that the lessor is responsible, at its expense, to obtain and maintain all licenses, permits, and other permissions or approvals required by any governmental authority applicable to the user’s use of the gas and the operation of the facilities associated with delivering the gas to the user. Also see GAS USE AGREEMENT; REGULATION OF FREE GAS.
►Safety – While safety issues are not usually addressed in the free gas provision, Gas Use Agreements often go into detail as to safety procedures that must be followed in making connection to the source of gas and in the use of that gas. The lessee should insist on safe use of the gas, especially if delivered in its raw condition. The lessee will want procedures in place, agreed to by the lessor that will allow suspension or termination of the gas supply if the user is ignoring safety procedures that could result in an accident. In the absence of language to address safety, when the burden is on the lessor to make his own connection to the well that is to provide free gas, the lessee can be within his right to deny connection if the lessor is not willing to put in the proper equipment at the connection, the lack of which could lead to an explosion or fire due to high gas pressure or undesirable elements/contaminants that are part of the gas.195 See also INDEMNIFICATION.
►Sharing of Free Gas Benefit – While not an “assignment of rights” per se, the free gas provision (or use agreement) may need to make it clear that additional parties will not be entitled
194 For example, see Pittsburgh & West Virginia Gas Co. v. Nicholson, 87 W. Va. 540, 105 S.E. 784, 12 A.L.R. (W. Va. 1921)
195 Risinger v. Arkansas-Louisiana Gas Co., 198 La. 101, 3 So.2d 289 (La. 1941); also see Mitchell Energy v. Stagl, 27 Pa. D. & C. 3d 132, 1983 WL 204 (Pa. 1983) that cites the court’s ruling that “a gas well operator lessee may make reasonable rules and regulations for the removal of gas by a landowner lessor based solely on safety factors but cannot require indemnification clauses other than those contained in the lease or in any other way attempt to impose other collateral burdens on the landowners’ right to take free gas.”
41 to receive any benefit from the free gas covenant. From a safety and inspection perspective, the lessee may not want taps being made into the lessors’ line, even if the total gas use does not exceed the limit in the free gas covenant.
►Source of Gas (“Gas” Well vs. Oil Well) – Some clauses will restrict the taking of gas to only one well on the leased premises, and it is not unusual for the clause to specify that the free gas can only be taken from a well producing “gas only”. Care must be exercised to also ensure that the provision makes reference to the well being drilled on the leased premises. Otherwise the lessee may have to provide free gas to its lessor from some other source of gas off-lease. See also CASINGHEAD GAS.
►Successors and Assigns – Some free gas provisions contain language stating that if the lessor sells its interest to a party that succeeds to the right to use free gas, the supply of gas will be suspended until the new owner executes a ratification of the lease with regard to the terms of the free gas provision.196 Language in oil and gas leases that make those contracts binding on successors and assigns is language that a court will take into account when determining if the free gas right is a covenant running with the land as opposed to a personal right.197 See also COVENANT RUNNING WITH THE LAND; PERSONAL RIGHT.
►Surplus Gas – Free gas clauses will often limit the gas user to only gas that is produced in excess of what the lessee needs to operate the well or for the lessee to conduct operations on the lease. Examples of gas use by the lessee are: operating a compressor, light factory, electric generator, etc. The lessee may want to go into detail as to the meaning of the term “surplus gas” so that a court does not have to come up with a definition of that term if the lessee and lessor disagree as to its meaning.198 An example of how this is addressed in the free gas clause is: “Lessor, at Lessor’s sole cost, risk and expense shall have the right to take out of any surplus gas, i.e., gas not needed for operations, free gas for Lessor’s principal use on the herein above land…”199 Another factor that the courts have taken into account is that the lessee should also be allowed to produce and sell sufficient gas to recover its operating expenses for the well. Some free gas clauses are written so that gas has to be marketed off the lease in order for the lessor to have free gas.200
►Suspension of Service – The lessee will want recourse against the lessor if the lessor does not comply with the lessee’s safety and operational procedures associated with the taking of free gas. While this issue can be addressed in the free gas clause, the lessee’s form “Gas Use Agreement” or “application for service” that goes into more detail on aspects of gas delivery and use might be
196 Pritchard v. Jacobs , 2007- Ohio-6699, 2007 WL 4374289 (Ohio Ct. App. 7th Dist. Harrison Co. 2007) cites a free gas clause with this type of language in it.
197 For example, see Stapleton v. Columbia Gas Transmission Corp., 2 Ohio App.3d 15, 440 N.E.2d 575 (Ohio App. 1981)
198 EOG Resources, Inc. v. Wall, 160 S.W.3d 130 (Tex. App. Tyler 2005)
199 Lease form on file with author.
200 Justice v. Brunson, 240 Ky. 428, 42 S.W.2d 542 (Ky. 1931)
42 the better way to address this issue. The lessee should bear in mind that while a Gas Use Agreement/application can be deemed as a binding contract that supplements the free gas clause in the lease, a forfeiture of the lessor’s rights under the free gas clause in the lease may not be allowed by a court since the lease governs as to the free gas right.201
►Taxation of Free Gas Consumed by the Lessor – In Alabama, Ala. Code § 40-20-1, et seq. does not exempt from taxation gas used by a lessor for domestic use after its severance from the earth. This part of the Alabama Code addresses taxation of gas severed from beneath the soil and requires not only taxation on the gas that is produced and sold, but also on gas that is used (by whomever). The State of Alabama Department of Revenue takes the position that such “free gas” or “domestic gas” used by a lessor is subject to taxation.202 The Department of Revenue does not have any guidelines as to how to report the value of such gas used in order to tax it since this type of gas use does not appear to be taking place in Alabama. In the event a lessee/producer in Alabama finds itself faced with a prospective lessor that wants a free gas provision in an oil and gas lease, the matter of which party (lessor or lessee) is to pay the taxes on such use should be taken into account. Looking beyond Alabama, free gas delivered to a lessor has taxable value.203 Therefore, lessees in some states might send 1099s to their lessors for the value of the gas consumed.204 The author has read where the Internal Revenue Service (“IRS”) was reported as making a ruling in September 2010 that free gas used by surface owners is not taxable income (as to Federal taxes). West Virginia imposes a tax on the mineral owner that has a free gas right contained in an oil and gas lease.205
►Third Party Gas Usage – A surface owner might want “free gas” as consideration in granting a surface use agreement or pipeline right-of-way that an operator/lessee needs. If such an arrangement is contemplated, the lessee must keep in mind that it will owe royalty to its lessor for gas diverted from a well on the lessor’s mineral to the surface owner as if it were a sale of that gas.206 A meter to measure gas delivered and consumed by the surface owner will be needed. There could be situations where a lessor may not mind part of his gas being diverted for consumption by a surface owner. If that is the case, it would be advisable to have the mineral owner/lessor ratify the free gas agreement with the surface owner and acknowledge that the lessor does not expect payment for the value of the gas being consumed by the surface owner. A
201 Warfield Natural Gas Co. v. Small, 282 Ky. 347, 138 S.W.2d 488 (Ky. 1940)
202 February 3, 2011 telephone conversation with Anita Gregory, Alabama Department of Revenue.
203 Envirogas, Inc. v. Chu, 497 N.Y.S.2d 503, 114 A.D.2d 38 (N.Y. Int. App. Ct. 1986)
204 For an example of how a state views the issue of taxing gas furnished to a lessor, see United Fuel Gas Co. v. Battle, 153 W.Va. 222, 167 S.E.2d 890, rehearing denied, appeal dismissed, certiorari denied 90 S.Ct. 398, 396 U.S. 116, 24 L.ed.2d 309 (W.Va. 1969)
205 Per author’s contact with Dana Burns with the State of West Virginia Tax Division, that department sends two employees to all courthouses in the state for the purpose of reviewing courthouse records as to oil and gas leases that have been recorded that have free gas provisions in them; the free gas right is appraised at $500 per year, resulting in a yearly tax assessment of $10 to $15 against the mineral owner/lessor.
206 Hiroc Programs, Inc. v. Robertson, 40 S.W.3d 373 (Ky. Ct. App. 2000)
43 lessor will probably expect to be indemnified by the lessee and gas user for diversion and consumption of gas in such situations.
►Transfer of Free Gas Right – Free gas rights are transferrable, and the right can be transferred for use from one dwelling on the lease to another dwelling on the lease, even if the surface to the original leasehold has been divided into smaller tracts, but still subject to the same lease.207 The McMasters court cited that once the right was transferred by deed, the gas use right vested solely with the dwelling on the surface it was transferred to. And as pointed out in an Ohio case, if the lessor sells the land where the primary dwelling is located that is using gas, notwithstanding an exception of the free gas right in the deed to the contrary, the free gas right passes to the purchaser of the tract where the primary dwelling is located and the lessor/mineral owner is not entitled thereafter to use the free gas elsewhere on the lease.208 A deed conveying surface rights only while reserving the mineral rights can be styled to convey the surface owner a right to use gas for domestic purposes if gas is ever developed on the land.209 A Will that is admitted to probate that bequeaths different tracts of land to different beneficiaries can serve to either confirm that a tract of land with a house will continue to have use of free gas, or the Will could provide for a transfer of that right to another tract on the estate that is subject to the same oil and gas lease. Sometimes a “contract” is entered into that recites the conditions for which real property will be sold, such as stating that Party B will be furnished gas from a well on land not being conveyed in the deed (and retained by Party A). If the deed from Party A to Party B is recorded but does not recite that free gas covenant, if Party A later sells to Party C, and Party C has no knowledge of that private agreement, or Party C has no notice of that arrangement when acquiring the land where the well is located, Party C (now owner of the tract where the well is located) may not have to honor it.210 And, in a case that addressed surface access via dominance of the mineral estate, a fee owner (Robertson) executed an oil and gas lease to Pennzoil’s predecessor in interest with a free gas clause in the lease.211 When Robertson sold the land to another party in 1920, the deed contained the following reservation: “…the Parties of the first part [being Robertson] does hereby reserve the Oil & Gass & right to operate same except Gass for domestic use as is set forth in the leese.” The effect of that provision made it clear that Robertson retained ownership of the oil and gas, but the right to domestic gas as provided in the oil and gas lease was conveyed to the grantee who acquired title to the surface. Depending on the language in the instrument that transfers a free gas right, it might be deemed as an agreement that supersedes the lease and negates the requirement of the lessee to tender a payment to its lessor who is claiming that the gas being provided to the new user of the domestic gas constitutes
207 Harmon v. McMasters, 57 S.W.3d 850 (Ky. Ct. App. 2001) ; Salisbury v. Columbian Fuel Corp., 387 S.W.2d 864 (Ky. 1965)
208 Stapleton v. Columbia Gas Transmission Corp., 2 Ohio App.3d 15, 440 N.E.2d 575 (Ohio App. 1981)
209 Gibson v. Central Ky. Natural Gas Co., 321 S.W.2d 256 (Ky. 1958)
210 Schlup v. Bourdon, 33 Kan.App. 2d 564, 105 P.3d 720, (Kan.App. 2005); also see Untied v. J.J. Detweiler, 2009 WL 2457824 (Ohio App. 5 Dist.) as to a deed that had an alleged free gas agreement attached as an addendum that the court ruled as lacking sufficient information to constitute an enforceable written contract; also see Sethi v. Antonucci, 126 Ohio App. 3d 382, 710 N.E.2d 719 (7th Dist. Mahoning County 1998)
211 Justice v. Pennzoil, 598 F.2d 1339 (U.S. Ct. App. 4th Dist. 1979)
44 “marketed gas” when the new user of the free gas acquired that right from the lessor (with the consent of the lessee).212 A free gas right can also be extinguished as the result of a transfer of ownership when merger of title is applicable.213 A party acquiring an interest in real property is typically charged with notice of everything in the chain of title to the property. Any time that a Memorandum of Lease is of record, an interested party should confirm the free gas right by inspecting the oil and gas lease. Or perhaps the free gas right is subject to an unrecorded letter agreement that is not cited in the public record. In any event, some free gas provisions stipulate that if there is a sale or transfer of the property that has the free gas right, the seller (lessor) is required to have the new owner execute an agreement whereby he acknowledges the manner in which gas is to be taken, and the timing of that transfer of ownership also gives the producer a chance to have an updated Gas Use Agreement signed, because a Gas Use Agreement executed a few years ago may have outdated safety procedures cited in it. The provision can also be styled so that all successors and assigns of the free gas user must be subject to this provision. This aspect of a free gas provision is also a good time to include a statement to the effect that if a new owner of the land/right refuses to execute an agreement of reasonable use stipulations (a “Gas Use Agreement”), then the free gas right will terminate. If a lessee does not have notice of a change in ownership, such as a deed whereby the land subject to the lease is conveyed, a court may not find the lessee in default of the lease for failure to tender payment to the new owner, or for not supplying domestic gas to that new owner.214 Also see ASSIGNMENT.
►Verbal Agreements – Courts will look at the authority, if any, an employer has vested an employee with in regard to acting on its behalf in modifying contracts when a dispute arises due to a verbal agreement.215 In one case, a lessor claimed that an Area Superintendent for a company in Texas agreed to allow the lessor to have free gas to operate irrigation pumps when the lease stated that the gas was for domestic use. 216 Based on that oral agreement, the lessor laid additional pipe to connect his irrigation pump to the gas well (in addition to the lessor using gas for domestic purposes). There was no evidence that the lessee ever ratified the action of its superintendent. In this case, the court ruled that the superintendent had no authority to modify the lease, and the court ordered a cessation of the free gas to operate irrigation pumps. However, in other cases, an Area Superintendent for a company in Oklahoma represented, promised and agreed to provide a group of ranchers with a reasonable supply of gas to run water wells during irrigation season in the event they drilled such water wells in accordance with local custom and practice.217 The manner in which the employer held its Area Supervisor out as its agent with
212 Weger v. Western Supply & Wrecking Company, 199 Ill App. 34, 1916 WL 2012 (Ill. 4th Dist. 1916)
213 Patrick v. Allen, 350 S.W.2d 481 (Ky. 1961) is a case that illustrates such a loss via merger of title.
214 Indiana Natural Gas & Oil Co. v. Lee, 34 Ind. App. 119, 72 N.E. 492 (Ind. 1904) is a case that addresses the notice issue, but it is somewhat vague in details as to why the lessee discontinued providing gas and whether rentals continued to be paid to the original lessor
215 For example, see Gillespie v. Iseman, 210 Pa. 1, 59 A. 266 (Pa. 1904). An Alabama surface use case that addressed validity of verbal agreements is Moore v. Pennsylvania Castle Energy Corp., 89 F.3d 791 (C.A. Ala. 1996).
216 Hale v. Cotton Petroleum Corp., 796 F.2d 74 (5th Cir. 1986)
45 authority to act on its behalf resulted in the court deeming the verbal agreement binding on the Area Superintendent’s employer in view of Oklahoma law.
►Waste – Before states adopted laws to address waste and the promotion of orderly development of resources, it was often difficult to get industry and the state to agree on what was wasteful practice and what was not. For example, the history of the Trenton Gas Field in Indiana or the Fayette Gas Field in Alabama serves as prime examples of waste prior to regulation. Some free gas provisions give the lessee the right to approve the types of appliances that will be connected to the gas to ensure that they are not only safe, but also economical in the manner in which they burn the gas. Gas Use Agreements (aka “applications to use gas”) can modify a lease’s free gas clause to authorize the lessee to inspect service lines and appliances to ensure that waste is not taking place, and if waste is discovered, the lessee can be given the right to disconnect the delivery of gas until such time that the problem is corrected.218 While the right to use free gas can be ruled to include an outside light, the courts have frowned upon use of free gas for outdoor lighting in burners that were wasteful.219 Provisions will address keeping pipelines and equipment in good repair so as to prevent leaks that would result in waste. Another issue regarding waste might come up in relation to oil wells that are flaring casinghead gas when the lessor (that only has the right to have gas from “gas wells”) wants to have use of that flared gas instead of it being wasted.220 In the Hein case, the lessor made connection to the well before the gas was put into the discharge pipe used in flaring the gas, claiming that the gas was being abandoned. The court said that the location of the tap was at a location where such gas was still in the possession of the lessee and that it was the lessee’s right under the doctrine of quiet enjoyment of the lease to flare the gas if it wanted to. It would be interesting to see how that court might have ruled if the lessor had connected to the discharge pipe instead so that “flared gas” was actually being diverted and used for domestic purposes in an effort to prevent waste of that resource that was otherwise being “abandoned” by the lessee. Also see OUTSIDE LIGHTING.
►Well Take-Over – A lessee may want to plug and abandon an uneconomical well that has been producing gas used by the lessor for domestic purposes. The lessor may want to take that well over in lieu of it being plugged.221 The lessee, as operator of the well, has a responsibility to ultimately plug and abandon the well in accordance with state law. In a situation such as this, the lessee will want its lessor to formally assume the regulatory obligations of operating the well in
217 Buster v. Phillips Petroleum Co., 133 F. Supp. 594 (W. D. Okla. 1955); Phillips Petroleum Company v. Buster, 241 F.2d 178, cert. denied 355 U.S. 816, (C.A.10th 1957)
218 Warfield Natural Gas Co. v. Jude, 261 Ky. 113, 87 S.W.2d 108 (Ky. 1935)
219 For example, see Hall v. Philadelphia Co., 72 W.Va. 573, 78 S.E. 755 (W.Va. 1913).
220 Hein v. Shell Oil Co., 315 Ill.App. 297, 42 N.E.2d 949 (Ill.App. 4 Dist. 1942)
221 See Pages 19-46/19-47, 14 Eastern Min. L. Inst., Ch. 19 (1993), Orphans, Foundlings and Wards of the State: Plugging Liability for Orphan and Abandoned Wells in the Eastern States by R. Neal Pierce and Sharon Flanery that touches on regulatory responsibility and liability if a landowner/lessor contemplated taking over a well in Alabama, Illinois, Kentucky, New York, Ohio, Pennsylvania, or West Virginia when that paper was written.
46 order to be relieved of its plugging and abandonment liability.222 The disposition (and value) of casing and equipment at the well site that might otherwise be removed upon abandonment by the lessee can be addressed in the take-over agreement. In states such as West Virginia, there is a history of landowners taking over depleted gas wells thinking that they will have a supply of domestic gas for many years to come. They can do so by posting a $5,000 bond with the State. But, some people find out that keeping a well in working order is more than they had anticipated. And, since the well is permitted with the state, it is not a good situation when the State sends the landowner a notice to show cause as to why the well should not be plugged (plugging typically running about $15,000).
CONCLUSION
Operators would prefer not to be subject to free gas obligations. Such obligations, if contained in numerous leases, could create additional work for the lessee and affect the profitability of conducting operations on the leases and/or impair the sale of the wells in the future. A landman must do his best in talking a prospective lessor out of wanting a free gas clause. It may be in the lessee’s best interest to offer the lessor a lump sum payment in lieu of having the provision in the lease. Or, the lessor might be willing to accept a yearly payment in lieu of free gas so that such payment can offset the cost of buying heating oil, propane, or connecting to a utility natural gas line for residential service. If the lessor is adamant in wanting the free gas provision, and the lessee wants or needs that lease, some of the issues presented in this paper can be addressed in the free gas provision or Gas Use Agreement. I have intentionally not included a “modern” free gas clause. If a free gas clause is necessary in order to secure the lease, there are good examples of such clauses in papers and resource materials that can be found in most law school libraries.223
Based on the landman’s discussions with the mineral owner, and his knowledge of how operations are conducted in the field, the landman can draft the free gas provision and submit that draft provision to his attorney for review and probable revision. That way, the attorney gets the benefit of having insight into the issues that the landman is aware of and the attorney can expand on the landman’s draft provision so that the final version of the free gas clause is one that takes into account various aspects of the law that the landman is not qualified to address. Of all the clauses that can be part of an oil and gas lease, a free gas clause exposes the lessee/operator to such a high level of exposure for liability for property damage and/or liability for personal injury or death that consultation with legal counsel prior to use of a free gas provision is of the utmost importance.
Recommended reading on free gas clauses (in chronological order):
222 For example, see Eastern Carbon Black Co. v. Stone, 229 Ky. 68, 16 S.W. 2d 492 (Ky. 1929)
223 Examples of free gas clauses can be found in: American Jurisprudence Legal Forms, Second Edition, Sections 129:139 to 144; see also John H. Heyer, II, Liability Risks of Free Gas Clauses, 8 Eastern Min. L. Inst., Ch. 15 (1987); H. L. Snyder, Esq., An Eccentric’s Guide to Drafting Problems in Oil and Gas Leases, 21 Energy & Min. L. Inst., Ch. 9 (2001), Pages 348-354Russell L. Schetroma, General Reflections Upon the Evolving Eastern Oil and Gas Lease, 30 Energy & Min. L. Inst., Ch. 14, Pages 494-496 (2009);
47 William Roy Rice, Esq., Operation of the Free Gas Clause in the Oil and Gas Lease, 4 E. Min. L. Inst. Ch. 16 (1983) John H. Heyer, II, Esq., Liability Risks of Free Gas Clauses, 8 E. Min. L. Inst. Ch. 15 (1987) Wesley A. Cramer, Esq., Plugging Oil and Gas Wells: Who’s in Control – Lessor or Lessee? Are Some Pennsylvania Courts Changing the Rules?, 14 E. Min. L. Inst. Ch. 22 (1993) Nicholas J. Parrish, Esq., Limiting a Lessor’s Free Gas Usage When the Lease Does Not Provide a Numeric Limitation, 15 E. Min. L. Inst., Ch. 13-1 (1995) John E. Sullivan, III, Esq., Free Gas Clauses in Oil & Gas Leases – Basic Legal Issues, AAPL meeting in Pittsburgh, PA (1998) Nicholas J. Parrish, Esq., The Duties of a Well Owner to a Free Gas Consumer, 19 E. Min. L. Inst. Ch. 4 (1999) John E. Sullivan, III, Esq., Free Gas Clauses in Oil & Gas Leases – Basic Legal Issues, 44 Landman, Jan./Feb. (1999) Richard L. Gottlieb, Esq., Free Gas Leases and Exculpatory Clauses: An Analysis of Weiss v. Thomas & Thomas Development Co., 24 E. Min. L. Inst. Ch. 10 (2004) Thomas P. Dugan, Esq. and James A. Gillespie, Esq., In-Kind Gas Rights of Landowners – The Tap May Be “Free, But It Is Not Free From Issues, 51 Rocky Mountain Min. L. Fnd. Ch. 14-1 (2005)
**END OF NARRATIVE - APPENDIX FOLLOWS***
48 APPENDIX
COURT CASES RELEVANT TO FREE GAS COVENANTS224 (Oil and Gas Leases and Right-of-Way Agreements)
U. S. (FEDERAL) COURT
Phillips Petroleum Co. v. Ham, 228 F.2d 217 (C.A.5. Tex. 1956) Buster v. Phillips Petroleum Co., 133 F. Supp. 594 (W. D. Okla. 1955) Phillips Petroleum Company v. Buster, 241 F.2d 178, cert. denied 355 U.S. 816, (C.A.10th 1957) Ridley v. Phillips Petroleum Co., 427 F.2d 19 (10th Cir. 1970) Backus v. Panhandle Eastern Pipe Line Co., 558 F.2d 1373 (10th Cir. 1977) Hale v. Cotton Petroleum Corp., 796 F.2d 74 (5th Cir. 1986) Delta Gas Corp. v. Thompson, 951 F.2d 348, 1991 WL 256568 (C.A.6 Ky. 1991) – Unpublished opinion/disposition Cline v. Southern Star Cent. Gas Pipeline, Inc., 356 F. Supp. 2d 1203, 162 O.G.R. 244 (D. Kan. 2005) Schell v. Oxy USA, Slip Copy, 2009 WL 2355792 (Tenth Cir. D.Kan. 2009)
ARKANSAS:
Smith Gas Co. v. Gean, 186 Ark. 573, 55 S.W.2d 63 (Ark. 1932) McLeon v. Wells, 207 Ark. 303, 180 S.W.2d 325 (Ark. 1944) Sheridan Oil Co. v. Miller, 208 Ark. 156, 185 S.W.2d 920 (Ark. 1945) Cranston v. Miller, 208 Ark. 156, 185 S.W.2d 920 (Ark. 1945) Post v. Tenneco Oil Co., 278 Ark. 527, 648 S.W.2d 42 (Ark. 1983)
COLORADO:
Universal Resources Corp. v. Ledford, 961 P2d 593 (Colo. App. 1998)
ILLINOIS:
Weger v. Western Supply & Wrecking Company, 199 Ill App. 34, 1916 WL 2012 (Ill. 4th Dist. 1916) Hein v. Shell Oil Co., 315 Ill.App. 297, 42 N.E.2d 949 (Ill.App. 4 Dist. 1942) Metz v. Doss, 114 Ill.App.2d 195, 252 N.E.2d 410 (Ill.App. Ct. 1969)
INDIANA:
Evans v. Consumers’ Gas Trust Co., 31 L.R.A. 673, 29 N.E. 398 (Ind. 1891) Ohio Oil Co. v. Griest, 30 Ind.App. 84, 65 N.E. 534 (Ind. Int. App. Ct. 1902) Indiana Natural Gas & Oil Co. v. Hinton, 159 Ind. 398, 64 N.E. 224 (Ind. App. 1902) Indiana Natural Gas & Oil Co. v. Leer, 34 Ind. App. 61, 72 N.E. 283 (Ind. 1904) Indiana Natural Gas & Oil Co. v. Lee, 34 Ind. App. 119, 72 N.E. 492 (Ind. 1904) Indiana Natural Gas & Oil Co. v. Ganiard, 45 Ind. App. 613, 91 N.E. 362 (Ind. 1910) Indiana Natural Gas & Oil Co. v. Stewart, 45 Ind. App. 554, 90 N.E. 384 (Ind. App. 1910) Indiana Natural Gas & Oil Co. v. Harper, 50 Ind. A. 555, 98 N.E. 743 (Ind. 1912) Plymouth Fertilizer Co. v. Balmer, 488 N.E.2d 1129 (Ind. Ct. App. 1986)
KANSAS:
Bellevue Gas & Oil Co. v. Pennell, 76 Kan. 785, 92 P. 1101 (Kan. 1907) Mathes v. Shaw Oil Co., 80 Kan. 181, 101 P. 998 (Kan. 1909) Weaver v. Graham, 109 Kan. 450, 199 P. 924 (Kan. 1921)
224 Last review of WestLaw database 260k79.5 (free gas) was on April 17, 2012; this list should not be considered as a complete list of all reported cases relevant to “free gas.”
49 Doolittle v. Wilson, 116 Kan. 576, 227 P. 345 (Kan. 1924) Alderson v. Empire Natural Gas Co., 116 Kan. 501, 227 P.347 (Kan. 1924) Caylor v. Mendenhall, 127 Kan. 290, 273 P.172 (Kan. 1929) Jackson v. Farmer, 225 Kan. 732, 594 P.2d 177 (Kan. 1979) Richardson v. Northwest Central Pipeline Corp., 241 Kan. 752, 740 P.2d 1083 (Kan. 1987) D. R. Lauck Oil Co., v. Breitenbach, 20 Kan.App.2d 877, 893 P.2d 286 (Kan.App. 1995) Rinehart v. Northern Natural Gas Co., 25 Kan. App. 2d 649, 967 P2d 1090 (Kan. Ct. App. 1998) Schlup v. Bourdon, 33 Kan.App. 2d 564, 105 P.3d 720, (Kan.App. 2005)
KENTUCKY:
Eastern Carbon Black Co. v. Stone, 229 Ky. 68, 16 S.W. 2d 492 (Ky. 1929) Justice v. Brunson, 240 Ky. 428, 42 S.W.2d 542 (Ky. 1931) Riggsby v. Swiss Oil Corp., 240 Ky. 543, 42 S.W.2d 732 (Ky. 1931) Mid-South Oil Co. v. Cochran, 238 Ky. 737, 38 S.W.2d 687 (Ky. 1931) Lyons v. Gambill, 242 Ky. 696, 47 S.W.2d 532 (Ky. 1932) Warfield Natural Gas Co. v. Jude, 261 Ky. 113, 87 S.W.2d 108 (Ky. 1935) Warfield Natural Gas Co. v. Moore, 281 Ky. 689, 136 S.W.2d 1086 (Ky. 1940) Warfield Natural Gas Co. v. Small, 282 Ky. 347, 138 S.W.2d 488 (Ky. 1940) Casebolt v. Kentucky West Virginia Gas Co., 293 Ky. 178, 168 S.W.2d 773 (Ky. 1943) Wagner v. Hamilton, 303 Ky. 120, 196 S.W.2d 973 (Ky. 1946) Hammons v. Pure Oil Co., 309 Ky. 495, 218 S.W.2d 22 (Ky. 1949) Blair v. Sturgill, 311 Ky. 622, 224 S.W.2d 928 (Ky.1949) Coleman v. Lindsey, 314 Ky. 273, 234 S.W.2d 950 (Ky. 1950) Howell v. Kentucky-West Virginia Gas Co., 275 S.W.2d 429 (Ky. 1955) Blankenship v. United Fuel Gas Co., 307 S.W.2d 928 (Ky. 1957) United Fuel Gas Co. v. McCoy, 307 S.W.2d 176 (Ky. 1957) Gibson v. Central Ky. Natural Gas Co., 321 S.W.2d 256 (Ky. 1958) United Carbon Co. v. Ramsey, 350 S.W.2d 454 (Ky. 1961) Patrick v. Allen, 350 S.W.2d 481 (Ky. 1961) United Carbon Company v. Conn, 351 S.W.2d 189 (Ky. 1961) Salisbury v. Columbian Fuel Corp., 387 S.W.2d 864 (Ky. 1965) Kentucky-West Virginia Gas Company v. Martin, 744 S.W.2d 745 (Ky. Ct. App. 1987) Hiroc Programs, Inc. v. Robertson, 40 S.W.3d 373 (Ky. Ct. App. 2000) Harmon v. McMasters, 57 S.W.3d 850 (Ky. Ct. App. 2001) B & H Gas, Inc. v. Kendrick, 2010 WL 3360166 (Ky. App.)
LOUISIANA:
Hall v. Spencer, 15 La. App. 128, 131 So. 518 (2d Cir. 1930) Risinger v. Arkansas-Louisiana Gas Co., 198 La. 101, 3 So.2d 289 (La. 1941) Winnon v. Davis, 759 So.2d 321 (La. App. 2d Cir. 2000)
MICHIGAN:
Blanzy v. Delta Oil Co., Inc., 2008 WL 3851578 (Mich. App. 2008)
NEW YORK:
Howard v. Hoffeld, 221 N.Y. 546, 116 N.E. 1052 (N.Y. 1917) Envirogas, Inc. v. Chu, 497 N.Y.S.2d 503, 114 A.D.2d 38 (N.Y. Int. App. Ct. 1986)
OHIO:
The Oak Harbor Gas Co. v. Murphy, 18 Ohio C.C. 662, 7 Ohio C.D. 700, 18 C.C. 662, 1897 WL 1399 (Ohio Int. App. Ct. 1897)
50 Bucher v. Plymouth Oil & Gas Co., 140 N.E. 940 (Ohio 1923) Ludolph v. Tuel and Thoemen, Inc., 6 Ohio Misc. 117, 214 N.E.2d 696 (Ohio Com.Pl. 1965) Slife v. Kundtz Properties, Inc., 40 Ohio App. 2d 179, 318 N.E.2d 557, 69 O.O.2d 178 (Ohio 1974) Stapleton v. Columbia Gas Transmission Corp., 2 Ohio App.3d 15, 440 N.E.2d 575 (Ohio App. 1981) Continental Insurance Company v. M. B. Operating Co., Inc., 1987 WL 17633 (Ohio App. 5 Dist. 1987) Tisdale v. Walla, 1994 WL 73844 (Ohio App. 11 Dist. 1994) – Not reported in N.W.2d Weiss v. Thomas & Thomas Development Company, 680 N.E.2d 1239 (Ohio 1997) Sethi v. Antonucci, 126 Ohio App. 3d 382, 710 N.E.2d 719 (7th Dist. Mahoning County 1998) Sutherland v. Fox, 2005 WL 877935 (Ohio.App.5.Dist.Ashland.Co., 2005) Petty v. Equitable Prod. & E. States Oil & Gas, Inc., 2006 WL 459267 (Ohio. App. 7 Dist.); 169 Oil & Gas Rep. 585 Pritchard v. Jacobs , 2007- Ohio-6699, 2007 WL 4374289 (Ohio Ct. App. 7th Dist. Harrison Co. 2007) Untied v. J.J. Detweiler, 2008 WL 555619 (Ohio App. 5 Dist.) Untied v. J.J. Detweiler, 2009 WL 2457824 (Ohio App. 5 Dist.)
OKLAHOMA:
Sheridan Oil Co. v. Cunningham, 186 Okla. 618, 99 P.2d 497 (Okla. 1940) Wade v. Lillard, 201 Okla. 520, 207 P.2d 771 (Okla. 1949) Phillips Petroleum Co. v. Corporation Commission of Oklahoma, 312 P.2d 916 (Okla. 1956) Sinclair Oil & Gas Co. v. Huffman, 376 P.2d 599 (Okla. 1962) Richardson v. Mustang Fuel Corp., 1989 Ok 53, 772 P.2d 1324 (Okla. 1989)
PENNSYLVANIA:
Fanker v. Anderson, 173 Pa. St. 86, 34 A. 434 (Pa. 1896) Boal v. Citizens’ Natural Gas Company, 23 Pa.Super.339, 1901 WL 3207 (Pa. Super. 1903) Gillespie v. Iseman, 210 Pa. 1, 59 A. 266 (Pa. 1904) Lewis v. United Gas Co., 75 Pa. Super. 44, 1920 WL 1594 (Pa. Super. 1920) Sanford v. Witherspoon, 142 Pa. Super. 71, 15 A.2d 496, (Pa. 1940) Mitchell Energy v. Stagl, 27 Pa. D. & C. 3d 132, 1983 WL 204 (Pa. 1983) Hetrick v. Apollo Gas Co., 415 Pa. Super. 189, 608 A.2d 1074 (Pa. 1992) Willison v. Consolidation Coal Co., 536 Pa. 49, 637 A.2d 979 (Pa. 1994) Babb v. Clemensen,455 Pa. Super. 181, 687 A.2d 1120 (Pa. 1996) Adams v. Public Utility Commission, 819 A.2d 631 (Pa.2003) Deynzer v. Columbia Gas of Pennsylvania, Inc., 2005 PA Super 122, 875 A.2d 298 ((PA. 2005) Lesnick v. Chartiers Natural Gas Company, 889 A.2d 1282 (PA Super 2005)
TEXAS:
Tidewater Associated Oil Co. v. Clemens, 123 S.W. 2d 780 (Tex. Civ. App. 1938) Scurry Area Canyon Reef Operations Corp. v. Popnoe, 283 S.W.2d 819 (Tex. Civ. App. 1955) Chevron U.S.A., Inc. [as SACROC, Unit Operator] v. Stoker, 666 S.W.2d 379 (Tex. App. Eastland 1984) Thomas v. Thomas, 767 S.W.2d 507 (Tex. App. Amarillo, 1989) EOG Resources, Inc. v. Wall, 160 S.W.3d 130 (Tex. App. Tyler 2005)
WEST VIRGINIA:
South Penn Oil Co. v. Edgell, 48 W. Va. 348, 7 S.E. 596 (W. Va. 1900) Hall v. Philadelphia Co., 72 W.Va. 573, 78 S.E. 755 (W.Va. 1913) Harbert v. Hope Natural Gas Co., 76 W.Va. 207, 84 S.E. 770 (W.Va. 1915) Pittsburgh & West Virginia Gas Co. v. Richardson, 84 W. Va. 413, 100 S.E. 220, (W. Va. 1919) Bassell v. West Virginia Central Gas Co., 86 W. Va. 198, 103 S.E. 116, 12 A.L.R. 1398 (W. Va. 1920) Pittsburgh & West Virginia Gas Co. v. Nicholson, 87 W. Va. 540, 105 S.E. 784, 12 A.L.R. (W. Va. 1921) Anderson v. Schaffner, 90 W.Va. 225, 110 S.E. 566 (W. Va. 1922) McCutcheon v. Enon Oil & Gas Co., 102 W.Va. 345, 135 S.E. 238 (W. Va. 1926) Stone v. United Fuel Gas Co., 111 W. Va. 569, 163 S.E. 48 (W. Va. 1932)
51 Ketchum v. Chartiers Oil Co., 121 W.Va. 503, 5 S.E.2d 414, (W. Va. 1939) United Fuel Gas Co. v. Moles, 122 W.Va. 577, 11 S.E.2d 369 (W.Va. 1940) Kimble v. Wetzel Natural Gas Co., 134 W. Va. 761, 61 S.E.2d 728 (W.Va. 1950) United Fuel Gas Co. v. Battle, 153 W.Va. 222, 167 S.E.2d 890, rehearing denied, appeal dismissed, certiorari denied 90 S.Ct. 398, 396 U.S. 116, 24 L.ed.2d 309 (W.Va. 1969) Goodwin v. Wright, 163 W. Va. 264, 255 S.E.2d 924 (W. Va. 1979) Breedlove v. Pennzoil Co., 184 W. Va. 44, 399 S.E.2d 187 (W. Va. 1990) Currey v. TNG Inc., 186 W.Va. 56, 410 S.E.2d 415 (W. Va. 1991) Jolynne Corporation v. Michels, 191 W. Va. 406, 446 S.E.2d 494 (W. Va. 1994) Croston v. Emax Oil Company, 195 W. Va. 86, 464 S.E.2d 728 (W. Va. App.Ct. 1995) Flanagan v. Stalnaker, 216 W.Va. 436, 607 S.E.2d 765 (W. Va. 2004)
52