September 10, 2012 Articles

Extending Oil and Gas Leases to Their Secondary Term

Recent activity in the Marcellus Shale has revived interest in this issue.

By Kevin K. Douglass and Christopher M. Buell – September 10, 2012

The continuation of oil and gas leases has been a subject of interest, a point of contention, and a basis for litigation for lessors and lessees practically from the time that such leases were first entered into. Perhaps one of the most litigated areas in this fertile ground is the issue of whether an oil and gas lease reaches its secondary term, terminates at the conclusion of the primary term, or terminates even sooner.

It is no surprise that this issue has received renewed interest in the Appalachian Basin as the amount of leasing activity, development, and investment has skyrocketed with the focus on newly accessible shale-gas resources in that region. This new set of circumstances raises the stakes for all parties involved and presents both new questions of law and questions that have not been addressed in decades or more by the courts in the region—in other words, the perfect recipe for litigation. These issues can only be expected to continue or increase as many leases from the initial wave of shale-gas activity in the Appalachian Basin reach the end of their primary term and as operators are forced to make decisions on how best to preserve their investments in these leases.

Although the law relating to these issues is settled in many gas-producing states in the western part of the country, courts in the Appalachian Basin have not considered these issues in decades or even a century. Therefore, the issues are new to many courts and practitioners confronting them in the region. This set of circumstances is also likely to repeat itself as shale-gas development moves into other regions across the country where the common law is antiquated or nonexistent.

The primary driver of lease preservation into the secondary term is production from the leasehold. Indeed, production of natural gas is the central purpose of the oil and gas leases. However, a number of related questions and common lease provisions can also affect whether a lease will reach its secondary term, or terminate at the end of the primary term or sooner. While there are a number of such related issues, this article will offer an overview of several common issues that arise for operators in the Appalachian Basin as leases progress through and approach the end of their primary terms.

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