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Hess plans challenge of ruling on leases

September 30, 2013
By LINDA HARRIS - Staff writer (lharris@heraldstaronline.com.) , The Herald-Star

STEUBENVILLE - Hess Corp. says it will vigorously challenge a federal court ruling that could allow several hundred property owners in Jefferson, Harrison and Belmont counties to renegotiate their oil and gas leases for higher up-front payments.

U.S. District Judge Algenon L. Marbley in Columbus ruled that a lease executed in 2007 on a 228-acre dairy farm in Jefferson County had effectively lapsed because there'd been no wells drilled or gas produced, leaving the property owners free to negotiate with other companies should they so choose.

A statement from Hess issued late Friday said only that company officials were "surprised by the court's decision and intend to challenge it vigorously through the appropriate court procedures."

Bellaire attorney Christopher Gagin, though, called it a "big win" for landowners Stephen and Melissa Griffiths of Mount Pleasant, who had received roughly $6,500 in upfront payments when their oil and gas lease was executed in 2007. That same 228-acre property could bring them as much as $1.5 million or more at today's rates.

But the bigger picture, Gagin said, is how the summary judgment could impact 300-plus other leases executed from 2006-08 in Jefferson, Harrison and Belmont counties.

"This should help an awful lot of landowners," Gagin said. "To put it simply, I was thrilled when I read the decision."

According to the suit, filed in U.S. District Court for the Southern District of Ohio's Eastern Division, the Griffiths were approached by landsmen from Mason Dixon Energy in 2007 to sign over their oil and gas rights. The signed leases were then transferred to Marquette Exploration, which has since been acquired by Hess.

While the couple alleged the landsman for Mason Dixon had encouraged Mr. Griffith to sign his wife's name on the lease, it was the terms of the lease, not whose signature was actually on the document, that shaped Marbley's decision.

Court records indicate the primary lease for the Griffiths' mineral rights was to be in effect for five years, expiring on June 12, 2012. The company had the option of extending the lease an additional five years "or as long thereafter as oil or gas ... is produced" on the property, provided they paid the Griffiths twice the amount of their original lease payment.

A "delay rental" provision included in the contract, however, stipulated that if drilling didn't begin within 12 months of the date the lease was executed, the company could extend the duration, but only in 12-month increments and only during the primary lease term. The delay payments amounted to an additional $5 per acre, per year.

No oil or gas has been drawn from the Griffiths' farm.

Hess, though, sent the couple delay rental checks for $1,143 each annually from 2008 through 2011, as well as a $13,716 extension payment in May 2012.

The Griffiths didn't cash Hess's delay rental checks in 2010 and 2011 or the 2012 extension payment. Since there's been no drilling activity on the property, they'd argued that Hess couldn't use delay payments to postpone drilling during that secondary term and suggested the lease, in fact, had automatically terminated on June 13, 2012.

Hess countered by arguing the court should interpret the phrase "primary term" in the "delay rental" provision to mean the initial five-year primary term plus the additional five years. Under that scenario, because they had tendered all of the required payments Hess maintained the Griffiths' lease would have still been in effect, giving the company 10 full years to decide if and when to commence drilling.

"The plain language of the Griffiths lease does not support Hess's position that the phrase 'primary term' refers to both the initial five-year term and any subsequent extension," Marbley wrote. "Indeed, in authorizing the extension of the lease, the 'habendum clause' grants the lessee 'the option to extend this lease for an additional term of five years from the expiration of the primary term of this lease, and as long thereafter as oil or gas...or either of them, is produced from said land.'"

A 'habendum clause' defines the property and declares the extent of the interest conveyed.

Marbley said in leases where the language of a habendum clause creates two distinct terms, "this court cannot infer that conditions that expressly apply to the 'primary term' also automatically apply to the 'additional term,'" thus giving the company at most six years to commence drilling.

As such, the court found that the Griffiths' lease had automatically terminated as of June 2013.

Gagin said Hess has 30 days to appeal the decision; because the summary judgment was issued in federal court, any appeal would have to be filed with the Sixth Circuit Court of Appeals in Cincinnati.

"They could appeal it and tie it up for another year or so," he said. "They could decide to the decision stand unchallenged, and either negotiate for a new lease or decide they don't want property and let it go. If they let it go, if they don't want negotiate ... then we have the right to go out into the open market and see if they can secure a new lease. The legal ball is in Hess's court. They're going to have to make a business decision as to what they do."

Marbley declined to issue a summary judgment in a companion complaint filed by David Cameron challenging the validity of the lease Mason Dixon's landsmen had executed on his 166-acre farm, so that case will proceed to trial.

"The court finds that both Cameron and Hess have proffered reasonable interpretations that resolve in very different ways the apparent inconsistencies" in the lease, Marbley wrote. "Accordingly, the court finds that the Cameron lease and order of payment are ambiguous as a mater of law."

The Cameron case was set for trial in January.

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