Third Circuit holds that Shut-In Royalty Provision maintains lease on non-producing wells

On July 17, 2014, the Third Circuit affirmed a grant of a motion to dismiss in connection with a claim that an oil and gas lease had expired (Messner v. SWEPI LP, No. 13-3813, slip op. (3d Cir. July 17, 2014)).

The lessor claimed that vertical wells drilled to the Marcellus Shale formation and then shut-in (but not fraced or producing or, allegedly, not capable of producing without further work) did not qualify for shut-in payments under the lease to perpetuate the lease beyond the primary term. SWEPI LP, the lessee, argued that based on the shut-in language of the lease (allowing shut-in payments if all wells were “shut-in, suspended or otherwise not producing for any reason whatsoever”) applied to the wells as they were “not producing” wells and, therefore, the lease was extended beyond the primary term.

Chief Magistrate Judge Martin C. Carlson of the Middle District of Pennsylvania issued a Report & Recommendation (Messner v. SWEPI LP, No. 4:13-cv-00014-MWB (M.D. Pa. July 26, 2013) (Carlson, M.J.)) adopting SWEPI’s interpretation of the lease, and the District Court adopted the Report & Recommendation in its entirety (Messner v. SWEPI LP, No. 4:13-cv-00014-MWB (M.D. Pa. Aug. 14, 2013) (Brann, J.)). The plaintiff lessor then appealed to the Third Circuit.

The Third Circuit affirmed the District Court on July 17, 2014. In reciting the facts and the decision from the court below, the Court said it was “in complete agreement with the Magistrate Judge’s careful and thorough analysis, and his well-reasoned conclusion that the complaint itself pleads facts that show that the Shut-In Royalty provision applies” (Messner v. SWEPI LP, No. 13-3813, slip op. at p. 4 (3d Cir. July 17, 2014)).

The Court went further and turned aside the appellant’s argument that the wells needed to be capable of producing in paying quantities without further work in order to trigger a shut-in royalty. “Despite Messner’s claims to the contrary, there is absolutely nothing in the language of the Shut-In Royalty provision that requires that wells in question must produce paying quantities of gas” (Id.). In the end, the Court “affirm[ed] without further elaboration” (Id. at p. 5).

SWEPI was represented by Jeremy A. Mercer and Michael P. Gaetani, in Norton Rose Fulbright’s Pittsburgh-Southpointe office.

This article was prepared by Jeremy Mercer ( or +1 724 416 0440) and Michael Gaetani ( or +1 724 416 0429) from Norton Rose Fulbright's Energy Practice.