Warner Valley Farm, LLC v. SWN Production Company, LLC

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

WARNER VALLEY FARM, LLC, No. 4:21-CV-01079

Plaintiff, (Chief Judge Brann)

v.

SWN PRODUCTION COMPANY,

LLC,

Defendant,

and

REPSOL OIL & GAS USA, LLC,

Intervenor-Defendant

MEMORANDUM OPINION

JANUARY 24, 2023

Plaintiff Warner Valley Farm, LLC, an oil and gas lessor, sues its two lessees,

Defendants SWN Production Company, LLC, and Repsol Oil & Gas USA, LLC, for

breach of the oil and gas lease between them (the “2006 Lease”) because Defendants

operated a cross-unit well, or a well with wellbores that extend beyond unit

boundaries. Warner Valley contends that the 2006 Lease does not allow Defendants

to drill cross-unit wells.

Warner Valley also seeks a declaratory judgment holding the Pennsylvania

Act 85 of 2019 unconstitutional under the Contracts Clause of both the Constitution

of the United States and the Constitution of the Commonwealth of Pennsylvania.

Act 85 authorized oil and gas lease operators to engage in cross-unit drilling if

permitted under the relevant lease by removing other regulatory obstacles.

Warner Valley and SWN both move for summary judgment on the Contracts

Clause issue. Repsol moves for summary judgment as well, seeking a declaration

that Act 85 is valid and that the 2006 Lease allows cross-unit drilling. For the

following reasons, Defendants’ motions will be granted, and Warner Valley’s

motion will be denied.

I. BACKGROUND

A. The 2006 Lease

The facts of this matter are largely undisputed. In April 2006, Wayne and

Reba Warner executed the 2006 Lease with Defendants’ predecessor-in-interest for

the production of oil and gas on an approximately 500-acre tract in Bradford County,

Pennsylvania (the “Leasehold”).1 Through several transactions, Warner Valley and

Defendants became the parties to the 2006 Lease.2 The Leasehold’s lands are divided

between two production units established by SWN.3 SWN operates the wells and

pays Warner Valley royalties pursuant to the 2006 Lease.4

1 Warner Valley Statement of Material Facts (“SOF”), Doc. 24 ¶¶ 1-2; SWN Response to

Statement of Material Facts (“RSOF”), Doc. 45 ¶¶ 1-2; 2006 Lease, Doc. 1-2; see also SWN

SOF, Doc. 37 ¶¶ 1-2; Warner Valley RSOF, Doc. 50 ¶¶ 1-2.

2 Warner Valley SOF, Doc. 24 ¶¶ 3-4; SWN RSOF, Doc. 45 ¶¶ 3-4; Repsol RSOF, Doc. 48 ¶ 4.

3 Warner Valley SOF, Doc. 24 ¶¶ 5-6; SWN RSOF, Doc. 45 ¶¶ 5-6; SWN SOF, Doc. 37 ¶¶

10-11; Warner Valley SOF, Doc. 50 ¶¶ 11-12.

The 2006 Lease contains several clauses relevant to this litigation. First, in the

2006 Lease’s granting clause, Warner Valley

grants and leases exclusively to [Defendants] all oil and gas and their

constituents . . . underlying the Leasehold, together with such exclusive

rights as may be necessary or convenient for [Defendants], at [their

respective] election, to explore for, develop, produce, measure and

market production from the Leasehold, using methods and techniques

which are not restricted to current technology . . . to drill, maintain,

operate, cease to operate, plug and abandon wells and remove casings

therefrom . . . .5

The 2006 Lease remains in effect as long as “a well capable of producing oil

and/or gas is located on the Leasehold, or on lands pooled, unitized or combined

with all or a portion of the Leasehold” or “operations,” as defined by the 2006 Lease,

“are being conducted on the Leasehold, or on lands pooled, unitized or combined

with all or a portion of the Leasehold.”6

In addition, the 2006 Lease contains a provision regarding pooling and

unitization.7 The 2006 Lease provides that Defendants have the right to, “in [their

sole discretion . . . pool, unitize or combine all or any portion of the Leasehold with

any other land or lands, whether contiguous or not contiguous . . . so as to create one

5 2006 Lease, Doc. 1-2 at 8 (¶ 1).

6 Id. (¶ 3).

7 Unitization is a common practice of the oil and gas industry that creates units, which are

consolidations of mineral or leasehold interests in oil or gas from a common source. Neuhard

v. Range Resources-Appalachia, LLC, 29 F. Supp. 3d 461, 470 (M.D. Pa. 2014) (quoting

(1) or more drilling or production units.”8 They also have the right “to change the

size, shape and conditions of any unit created.”9

B. Act 85 Allows Cross-Unit Drilling

In November 2019, Governor Tom Wolf signed into law Pennsylvania Act 85

of 2019,10 which amended the Pennsylvania Oil and Gas Lease Act, 58 P.S. § 33.1

et seq.11 Act 85 added section 34.2 to the Oil and Gas Lease Act, which provides

that “if an operator has the right to drill an oil or gas well on separate units, the

operator may drill and produce a well that traverses, by horizontal drilling, more

than one unit, if” it adheres to the following provisions:

1. The operator reasonably allocates production from the well to or

among each unit the operator reasonably determines to be

attributable to each unit. The operator may allocate production

on an acreage basis for multiple units provided the allocation has

a reasonable correlation to the portion of the horizontal well bore

in each unit.

2. The traversing well is not expressly prohibited by the terms of a

lease.12

Act 85 also provides that the 330-foot setback limitation contained in 58 P.S.

§ 406 does “not apply to unit lines traversed by a conservation well.”13 Put

differently, Act 85 allows a lease operator who has the right to produce oil from two

8 Id. at 10 (¶ 12).

9 Id.

10 P.L. 183, No. 60 (2019).

11 P.L 634, No. 85, codified at 58 P.S. § 34.2.

12 58 P.S. § 34.2(a). A “conservation well” is one that exceeds 3,800 feet in depth. See 58 P.S.

§ 406.

different units to use one well to produce oil or gas from both units (cross-unit

drilling), a practice that was generally prohibited due to statutory restrictions on well

placement and setback requirements. Legislative history explains that Act 85’s

purpose was to increase efficiency and reduce the environmental impact of oil and

gas drilling by decreasing the number of wells necessary, commensurately reducing

the need for additional appurtenant oil and gas production facilities.14

C. Procedural History

Warner Valley originally filed suit in the Court of Common Pleas of Bradford

County, Pennsylvania.15 In its Complaint, Warner Valley sues for breaches of the

2006 Lease (Counts I, II, IV, V, and VI), seeking compensatory damages.16 It also

requests a declaratory judgment declaring Act 85 unconstitutional under the

Contracts Clause of both the federal and state constitutions.17

SWN removed the action to this Court on the basis of diversity and federal

question jurisdiction.18 Repsol moved to intervene as of right under Federal Rule of

Civil Procedure 24(a)(2), which the Court granted.19 Each party has moved for

partial summary judgment on the Contracts Clause claim raised in Count III.20 The

Marcellus Shale Foundation moved to appear as amicus curiae on the constitutional

14 See Cosponsorship Memoranda, Doc. 39-1 at 2-3.

15 Compl., Doc. 1-1.

16 Id. ¶¶ 23-46, 56-105.

17 Id. ¶¶ 47-55.

18 See Notice of Removal, Doc. 1.

19 See Doc. 40.

20 See Warner Valley Partial MSJ, Doc. 23; SWN Count III MSJ, Doc. 25. Repsol does not frame

issue, which the Court also granted.21 All motions have been fully briefed and are

ripe for disposition.22

II. LAW

Under Federal Rule of Civil Procedure 56, summary judgment is appropriate

where “the movant shows that there is no genuine dispute as to any material fact and

the movant is entitled to judgment as a matter of law.”23 Material facts are those “that

could alter the outcome” of the litigation, “and disputes are ‘genuine’ if evidence

exists from which a rational person could conclude that the position of the person

with the burden of proof on the disputed issue is correct.”24 A defendant “meets this

standard when there is an absence of evidence that rationally supports the plaintiff’s

case.”25 Conversely, to survive summary judgment, a plaintiff must “point to

21 See Doc. 41; Marcellus Shale Amicus Br., Doc. 42. The Court thanks the Marcellus Shale

Foundation for its contribution to resolving this dispute.

22 Before the Court granted Repsol’s motion to intervene, the parties then in the case, Warner

Valley and SWN, agreed to only address the Contracts Clause issue contained in Count III in

their dispositive motions. See May 19, 2022 Order, Doc. 17. However, Repsol, which

intervened after the May 19, 2022 Order, moves for summary judgment on its counterclaim,

which, in addition to addressing the constitutionality of Act 85, seeks a declaratory judgment

that the 2006 Lease allows cross-unit drilling. See Repsol Ans. to Pet. for Removal, Doc. 43 at

20-25; Repsol Cross-MSJ, Doc. 47. Issuing such a declaration would necessarily dispose of

Count I, which alleges that SWN breached the 2006 Lease by drilling across units. See Compl.,

Doc. 1-1 ¶¶ 23-34. In response, the Court allowed all parties to submit supplemental briefing

on the issues raised in Count I of Warner Valley’s Complaint and in Repsol’s counterclaim so

it could address all motions together, which it now does in this memorandum opinion. See Dec.

23, 2022 Order, Doc. 62.

23 Fed. R. Civ. P. 56(a).

24 EBC, Inc. v. Clark Bldg. Sys., Inc., 618 F.3d 253, 262 (3d Cir. 2010) (quoting Clark v. Modern

Grp. Ltd., 9 F.3d 321, 326 (3d Cir. 1993)).

admissible evidence that would be sufficient to show all elements of a prima facie

case under applicable substantive law.”26

The party requesting summary judgment bears the initial burden of supporting

its motion with evidence from the record.27 When the movant properly supports its

motion, the nonmoving party must then show the need for a trial by setting forth

“genuine factual issues that properly can be resolved only by a finder of fact because

they may reasonably be resolved in favor of either party.”28 The United States Court

of Appeals for the Third Circuit explains that the nonmoving party will not withstand

summary judgment if all it has are “assertions, conclusory allegations, or mere

suspicions.”29 Instead, it must “identify those facts of record which would contradict

the facts identified by the movant.”30

In assessing “whether there is evidence upon which a jury can properly

proceed to find a verdict for the [nonmoving] party,”31 a court “must view the facts

and evidence presented on the motion in the light most favorable to the nonmoving

party.”32 Moreover, “[i]f a party fails to properly support an assertion of fact or fails

to properly address another party’s assertion of fact as required by Rule 56(c),” the

26 Id.

27 Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

28 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).

29 Betts v. New Castle Youth Development Center, 621 F.3d 249, 252 (3d Cir. 2010).

30 Port Authority of N.Y. and N.J. v. Affiliated FM Insurance Co., 311 F.3d 226, 233 (3d Cir.

2002) (quoting Childers v. Joseph, 842 F.2d 689, 694-95 (3d Cir. 1988)).

31 Liberty Lobby, 477 U.S. at 252 (quoting Schuylkill & Dauphin Imp. Co. v. Munson, 81 U.S.

442, 448 (1871)).

court may “consider the fact undisputed for purposes of the motion.”33 Finally,

although “the court need consider only the cited materials, . . . it may consider other

materials in the record.”34

III. ANALYSIS

A. Act 85 Does Not Violate the Contracts Clause

1. The Contracts Clause Analysis

“To decide whether legislation violates the Contract Clause, the court first

determines whether the legislation has substantially impaired the contractual

relationship.”35 Determining whether a law substantially impairs a contract depends

on “the extent to which the law undermines the contractual bargain, interferes with

a party’s reasonable expectations, and prevents the party from safeguarding or

reinstating his rights.”36

If the law is found to substantially impair a contractual relationship, “the court

then ‘turns to the means and ends of the legislation’ and evaluates whether the

legislation (1) has ‘a significant and legitimate public purpose,’ and (2) ‘is drawn in

an appropriate and reasonable way to advance’ that public purpose.”37 “[W]here the

33 Fed. R. Civ. P. 56(e)(2); see also Weitzner v. Sanofi Pasteur Inc., 909 F.3d 604, 613-14 (3d

Cir. 2018).

34 Fed. R. Civ. P. 56(c)(3).

35 Nekrilov v. City of Jersey City, 45 F.4th 662, 678 (3d Cir. 2022) (citing Sveen v. Melin, ___

U.S. ___, 138 S. Ct. 1815, 1821-22 (2018)). This analysis is the same under both the state and

federal constitutions. See South Union Twp. v. Cmwlth, Dep’t of Envtl. Prot., 839 A.2d 1179

(Pa. Cmwlth. 2003).

36 Sveen, 138 S. Ct. at 1822.

state is not itself a party to the affected contract, ‘the State is ordinarily entitled to

deference in its legislative judgment.’”38

Warner Valley argues both that Act 85 facially violates the Contracts Clause

and violates the Clause as applied to the 2006 Lease.39 To prevail on a facial attack,

a plaintiff must show “that no set of circumstances exists under which the [a]ct

would be valid.”40 By contrast, a plaintiff bringing an as-applied challenge to a law

need only show that the law is unconstitutional when applied to the particular facts

of the case before the court.41 Therefore, if a party cannot prevail on an as-applied

challenge, it cannot prevail on a facial challenge.42 Accordingly, the best practice is

for courts to address the as-applied challenge first, which is the procedure the Court

adopts to resolve the instant motions.43

2. Act 85 Does Not Substantially Impair the 2006 Lease

Warner Valley argues that Act 85 inserts several new terms that upset the

bargain underlying the 2006 Lease and frustrate its reasonable expectations.

Defendants counter that Act 85 does not impair the 2006 Lease or any oil and gas

lease because it only affects the permissible actions of lease operators.

38 Id. (quoting United Steel Paper & Forestry Rubber Mfg. Allied Indus. & Serv. Workers Int’l

Union AFL-CIO-CLC v. Gov’t of Virgin Islands, 842 F.3d 201, 212 (3d Cir. 2016)).

39 See Warner Valley Partial MSJ Reply, Doc. 56 at 2, 5.

40 United States v. Salerno, 481 U.S. 739, 745 (1987).

41 United States v. Marcavage, 609 F.3d 264, 273 (3d Cir. 2010).

42 United States v. Decastro, 682 F.3d 160, 163 (2d Cir. 2012) (quoting Diaz v. Paterson, 547

F.3d 88, 101 (2d Cir. 2008)).

Warner Valley first argues that Act 85 inserted new terms into the 2006 Lease

by authorizing cross-unit drilling.44 The Court disagrees with Warner Valley’s

interpretation of Act 85. The statute, by its language, does not affect leases that

already expressly prohibit cross-unit drilling.45 That alone shows that Act 85 does

not impair contracts that already prohibit cross-unit drilling.46

Act 85 replaces a restriction that prevented cross-unit drilling in the past—the

330-foot setback limit—with less burdensome restrictions, which only require a

lessee to have the right to drill on both units and reasonably allocate the royalties

among the respective lessors. Therefore, although Act 85 eases regulatory barrier to

cross-unit drilling, it leaves the issue of whether cross-unit drilling is permissible to

the parties. That does not insert new terms into or otherwise impair the 2006 Lease.

The parties were and are still free to include the 330-foot setback requirement in the

2006 Lease, which would prevent cross-unit drilling. The mere fact that laws change

does not frustrate Warner Valley’s reasonable expectations, especially in

Pennsylvania’s heavily regulated oil and gas industry.47

44 Warner Valley Partial MSJ Br., Doc. 39 at 10-13.

45 58 P.S. § 34.2(a)(2) (providing as a condition to cross-unit drilling that the cross-unit well “is

not expressly prohibited by the terms of a lease”).

46 Warner Valley argues that Act 85 does not explain what an express prohibition in this context.

See Warner Valley Partial MSJ Br., Doc. 39 at 15-16, 15 n.1. The Court interprets a statute as

it would a contract: determining the plain meaning of its language. An express prohibition is

one that is “[c]learly and unmistakably communicated.” EXPRESS, Black’s Law Dictionary

(11th ed. 2019). Therefore, any contractual prohibition that would prohibit cross-unit drilling

based on its language is an express prohibition.

47 See Sanitation & Recycling Indus., Inc. v. City of New York, 107 F.3d 985, 993 (2d Cir. 1997)

(“When an industry is heavily regulated, regulation of contracts may be foreseeable; thus, when

Warner Valley next argues that cross-unit drilling modifies the property

interest conveyed in the 2006 Lease because cross-unit drilling is a “a more

expansive use”48 of the fee simple determinable interest conveyed in oil and gas

leases.49 This argument fails as a matter of property law.

“A fee simple determinable is an estate in fee that automatically reverts to the

grantor upon the occurrence of a specific event.”50 Therefore, under the terms of the

2006 Lease, Defendants hold a fee simple estate in the Leasehold as long as oil and

gas are being produced under the terms of the Lease.51 With that estate comes the

privileges associated with an estate of fee simple absolute, subject only to a duty to

avoid waste and any other restrictions imposed by the grantor.52 Accordingly,

Defendants have the most expansive interest in the Leasehold they possibly could,

subject only to limitations included in the 2006 Lease and the duty to avoid waste.

Therefore, Act 85 cannot expand Defendants’ rights under the 2006 Lease as they

already have the most expansive property rights in the Leasehold.

he now objects,’ that party normally cannot prevail on a Contract Clause challenge.” (quoting

Veix v. Sixth Ward Bldg. & Loan Ass’n, 310 U.S. 32, 38 (1940)). Title 58 of the Pennsylvania

Code is a comprehensive statutory framework governing oil and gas production in

Pennsylvania. See generally 58 P.S. § 1-1308.

48 See Warner Valley Partial MSJ Br., Doc. 39 at 14.

49 T.W. Phillips Gas and Oil Co. v. Jedlicka, 42 A.3d 261, 267 (Pa. 2012)) (explaining that oil

and gas leases convey a fee simple determinable interest in mineral estates).

50 Id. (citing Brown v. Haight, 255 A.2d 508, 511 (Pa. 1969)); Restatement (First) of Property §

14 (1936).

51 See 2006 Lease, Doc. 1-2 at 8-9 (¶ 3).

Indeed, the above analysis also indicates that Act 85 does not impair the 2006

Lease. Warner Valley was free to restrict “more expansive uses” when negotiating

the 2006 Lease and it is free to do so today. It argues that it could not foresee

cross-unit drilling when it negotiated the 2006 Lease.53 Just like the risk that laws

may change, a party negotiating a contract also runs the risk that new technology

might affect its contract. The 2006 Lease explicitly acknowledges this.54 Act 85

merely acknowledges new technology by removing obstacles to its use but allows

the parties to retain those obstacles by contracting for them. Therefore, Act 85’s

provisions that allow cross-unit drilling do not impair the 2006 Lease.

Warner Valley next challenges Act 85’s allocation provision, which requires

that a lease operator “reasonably allocates production from the well to or among

each unit the operator reasonably determines to be attributable to each unit.” Act 85

provides that a lease operator may use acreage as a method for allocating royalties

provided that its allocation on an acreage basis “has a reasonable correlation to the

portion of the horizontal well bore in each unit.”55

Warner Valley argues that this provision of Act 85 inserts a new allocation

method for cross-unit wells that did not previously exist in the 2006 Lease.56 The

53 Warner Valley Partial MSJ Br., Doc. 39 at 15 n.1.

54 See 2006 Lease, Doc. 1-2 (“Lessor hereby grants . . . exclusive rights as may be necessary or

convenient for Lessee, at its election, to explore for, develop, produce, measure and market

production from the Leasehold, using methods and techniques which are not restricted to

current technology . . . .” (emphasis added)).

55 58 P.S. § 34.2.

Court again respectfully disagrees. Warner Valley’s argument relies on the same

misinterpretation of Act 85 that undermines its arguments referenced above. Act 85

provides a reasonableness standard for review of royalty allocation for cross-unit

wells. Just like the permissibility of cross-unit drilling, Act 85 leaves the allocation

of royalties to the parties, requiring only that they use reasonable terms.

Accordingly, the Court concludes that the royalty provision of Act 85 does not

substantially impair the 2006 Lease.

Warner Valley cites to Northern Natural Gas Company v. Munns in support,

but its reliance is misplaced.57 In Munns, the Iowa statute at issue imposed a

conditional reversionary interest on a certain type of easement.58 Before the statute

was enacted, the parties in Munns contracted for perpetual easements.59 The court

concluded that the statute altered the duration of the preexisting perpetual easements,

substantially impairing them.60 Unlike Act 85, the Munns statute precluded the

easement-holders from enjoying the perpetual easements they already had prior to

the statute’s enactment. If the 2006 Lease prohibited cross-unit drilling, Act 85

simply has no effect on it. Indeed, Warner Valley could negotiate a prohibition of

cross-unit drilling into the 2006 Lease today and not run afoul of the statute.

57 Warner Valley Partial MSJ Br., Doc. 39 at 14-15 (citing 525 F. Supp. 2d 1103 (S.D. Iowa

2003)).

58 Munns, 525 F. Supp. 2d at 1113.

59 Id. at 1114

Therefore, the Court concludes that Warner Valley has a way of safeguarding its

rights.

But even if Act 85 could be interpreted to grant new drilling or royalty

allocation rights, it does not frustrate the reasonable expectations of parties to oil and

gas leases. On a basic level, oil and gas leases like the 2006 Lease exchange a

determinable fee simple interest in the mineral estate for a share of the revenue from

the production of gas from said mineral estate.61 The lessee expects a property

interest, and the lessor expects money. Act 85 does not upset those expectations.

Cross-unit drilling involves the same bargain as before: property for money. And

Act 85 allows parties to leases to restrict cross-unit drilling as they wish. Therefore,

Act 85 does not undermine Warner Valley’s expectations and does not impair the

2006 Lease.

For the reasons stated above, Warner Valley fails to establish a dispute of

material fact that Act 85 does not substantially impair the 2006 Lease. Accordingly,

it cannot prevail on its facial challenge either, as the 2006 Lease already presents a

constitutional application of Act 85.

3. Even If Act 85 Substantially Impaired the 2006 Lease or Any

Oil and Gas Lease, It Is Justified

Although the Court has already determined that Act 85 does not impair the

2006 Lease, even if it did, the Court concludes that Act 85 was an “appropriate and

61 See Jacobs v. CNG Transmission Corp., 332 F. Supp. 2d 759, 773 (W.D. Pa. 2004) (citing

reasonable way to advance a significant and legitimate public purpose.”62 In cases

where the law only affects contracts between private parties, like Act 85 does,

deference to legislative judgment is generally appropriate.63

Warner Valley argues that the goals the Pennsylvania General Assembly

sought to achieve through Act 85 “justify a wide range of conduct.”64 It suggests that

all of those goals “could have been accomplished with this removal of governmental

‘red tape’ about well locations.”65 Once the “red tape” is removed, Warner Valley

further suggests that “oil and gas lessees could negotiate with lessors to modify

leases to allow for cross-unit laterals.”66

Warner Valley does not explain why any of the goals identified by the General

Assembly, which will ostensibly reduce the economic cost and environmental

impact of oil and gas drilling without imposing new costs on drillers, are not

significant or legitimate public interests.67 The Court finds that they are. It also finds

62 Sveen, 138 S. Ct. at 1822 (quoting Energy Reserves Group, Inc. v. Kansas Power & Light Co.,

459 U.S. 400, 411-12 (1983)) (internal quotation marks omitted).

63 Nekrilov, 45 F.4th at 678; see also Commonwealth v. McMullen, 961 A.2d 842, 846 (Pa. 2008)

(“The presumption that legislative enactments are constitutional is strong.”). Warner Valley

asks the Court to apply a stricter standard because it believes—without support—that Act 85

“severely” impairs oil and gas leases and must accordingly be justified by “the most urgent

public need.” Warner Valley Partial MSJ Br., Doc. 39 at 20. The Court has concluded that Act

85 does not impair oil and gas leases. But even if that conclusion was in error, it is highly

unlikely that Act 85 severely impairs oil and gas leases or the 2006 Lease for the same reasons

stated above. Therefore, the Court will apply the more deferential standard in the second step

of the Contracts Clause analysis.

64 Warner Valley Partial MSJ Br., Doc. 39 at 21.

65 Id.

66 Id.

67 SWN presents undisputed facts that it would not have been economically feasible to develop

that Act 85’s approach is narrowly tailored to that interest. Act 85 explicitly

preserves any standing restriction on cross-unit drilling and does not prevent any

party from including such a restriction in the future.

As for Warner Valley’s suggestion for a less burdensome legislative approach,

the Court finds it particularly unavailing because its suggestion about the way things

should be is exactly the way things are. Act 85 removed the 330-foot setback

limitation—what Warner Valley calls “red tape”—and then left the permissibility of

cross-unit drilling to the parties. Warner Valley had the opportunity to restrict

cross-unit drilling in 2006 when it executed the lease. By choosing not to do so, it

implicitly relied on regulatory restrictions that were always subject to change. And

they did change. Warner Valley’s remedy is with the General Assembly, not the

courts.

As it suggests, Warner Valley is free to negotiate with Defendants now and in

the future over cross-unit drilling rights. But it must live with the bargain it made in

2006. Instead, it seeks a second bite at the apple by way of a constitutional challenge.

It has failed to meet its heavy burden, and summary judgment is accordingly

appropriate in Defendants’ favor on Count III.

B. Defendants Did Not Breach the 2006 Lease Because It Allows Cross

Unit Drilling

Having determined that Act 85 did not impair the 2006 Lease because it

expressly preserves oil and gas lease parties’ rights to restrict cross-unit drilling, the

Court now turns to that very issue: whether the 2006 Lease allows Defendants to

drill cross-unit wells. For the following reasons, the Court concludes that it does.

Warner Valley submits that because SWN drafted it, the 2006 Lease is

construed in favor of the lessor such that “[a]ll rights claimed by the lessee that are

not conferred in direct terms or by fair implication . . . are to be considered as being

withheld by the lessor.”68 On that premise, it argues that the 2006 Lease does not

expressly or by implication authorize cross-unit drilling. Defendants argue that it

does because its language permits cross-unit drilling arrangements. The Court agrees

with Defendants.

At the outset, the 2006 Lease’s broad granting clause expressly allows

Defendants to use “methods and techniques which are not restricted to current

technology” to drill for oil and gas.69 But Warner Valley focuses on the word “on,”

as it is used in the 2006 Lease’s unitization and pooling provision.70 That provision

requires drilling operations to occur “on lands pooled, unitized or combined with all

or a portion of the Leasehold.”71 Warner Valley contends that use of the word “on”

indicates that the wellbore must be physically on the surface of lands pooled,

68 Warner Valley Partial MSJ Br., Doc. 39 at 11 (quoting Pomposini v. T. W. Phillips Gas and

Oil Co., 580 A.2d 776, 778 (Pa. Super. 1990)).

69 2006 Lease, Doc. 1-2 at 8 (¶ 1).

70 See Warner Valley Suppl. Br., Doc. 65 at 3-4.

unitized, or combined with the Leasehold.” It posits the following example

illustrated by two diagrams:

Leasehold Unit C

Unit B

UnitA

Surface borehole and

wellbore

Figure |

Warner Valley Suppl. Br., Doc. 65 at 3-5.

18

Leasehold Unit C

Surface borehole

and wellbore

Unit B

UnitA

Figure 2

Warner Valley contends that in Figure 2, the arrangement is proper under the

2006 Lease because the wellbore is physically on the surface of Unit A, which is

comprised of the Leasehold and other contiguous.’? However, in Figure 1, the

wellbore is on the surface of a unit that is not unitized with the Leasehold, as Unit B

sits between Unit A, which contains the Leasehold, and Unit C, upon which the

wellbore sits. As such, in Figure 1, the wellbore is not “on” lands unitized with the

Leasehold. At best, the well can be said to run “under” the Leasehold.”

Warner Valley’s interpretation of the 2006 Lease is too far a stretch. The 2006

Lease also allows Defendants, in their sole discretion, “to pool, unitize, or combine

all or any portion of the Leasehold with any other land or lands, whether contiguous

® See Warner Valley Suppl. Br., Doc. 65 at 7-8,

4 Id.

19

or not contiguous . . . so as to create one (1) or more drilling or production units”

and “to change the size, shape and conditions of any unit created.”75 It then specifies

that “[a]ny [o]perations conducted on the drilling or production unit . . . shall have

the same effect in continuing [the] [2006 Lease] . . . as if such [o]perations were

conducted upon the Leasehold.”76

The broad unitization provision undermines Warner Valley’s “on” argument

in two ways. First, it does not limit Defendants to only unitizing or pooling lands, it

also allows them to combine lands. “Pooling” and “unitization” are terms of art in

the oil and gas industry.77 “Combining” is not. Generally, to combine is “[t]o couple

or join two or more things together.”78 Second, the unitization provision

contemplates pooling, unitizing, or combining both non-contiguous and contiguous

lands.

As Defendants point out, combination follows pooling and unitization in the

2006 Lease, so it has a different meaning than the first two terms.79 Given the 2006

Lease’s reference to non-contiguous lands, the Court interprets “combining,” as used

in the 2006 Lease, to allow Defendants to couple or join the Leasehold with

75 2006 Lease, Doc. 1-2 at 10 (¶ 12) (emphasis added)

76 Id. at 8-9 (¶ 3).

77 See 3 KUNTZ, LAW OF OIL AND GAS § 42.5 (2022).

78 COMBINE, Oxford English Dictionary (online ed., 2022).

79 See Clarke v. MMG Ins. Co., 100 A.3d 271, 276 (Pa. Super. 2014) (“Our rules of construction

do not permit words in a contract to be treated as surplusage . . . if any reasonable meaning

consistent with the other parts can be given to it.” (quoting Tenos v. State Farm Ins. Co., 716

contiguous or non-contiguous lands beyond unit boundaries. If they choose to do so,

drilling on any parcel of land within that combination of parcels is as good as drilling

on the Leasehold. That’s cross-unit drilling.

Warner Valley chose to permit the inclusion of the term “combine” in the

2006 lease. Had it restricted the provision to unitizing or pooling or eliminated

noncontiguous lands from the provision, the provision might be susceptible to an

interpretation that bars cross-unit drilling. But it did not include such a restriction.

Therefore, the Court concludes that the 2006 Lease allows cross-unit drilling and

summary judgment is appropriate in favor of Defendants.

IV. CONCLUSION

The Court concludes that Act 85 did not impair the 2006 Lease. Act 85

removed a regulatory obstacle to cross-unit drilling that Warner Valley was free to

include when it negotiated the 2006 Lease. Its failure to do so does not transform

Act 85 into unconstitutional legislation. Therefore, there is no dispute of material

fact that Warner Valley cannot prevail on its as-applied or facial challenge to Act

85. The Court further concludes that the 2006 Lease allows cross-unit drilling

because its language allows such an arrangement of lands. Nothing in the 2006 Lease

can be read to prohibit such an arrangement. Therefore, Warner Valley’s motion is

denied, and Defendants’ motions are granted.

An appropriate Order follows.

BY THE COURT:

s/ Matthew W. Brann

Matthew W. Brann

Chief United States District Judge