## Facts

- A 1956 revision to an earlier oil and gas lease granted the lessee rights to produce oil and gas and to store natural gas in subsurface formations.
- Darryl and Suzanne Jacobs bought roughly 120 acres in Armstrong County, Pennsylvania in 1994, subject to the 1956 lease.
- CNG Transmission Corp. held the lease and operated an underground natural gas storage pool in the “Hundred Foot” sand formation; it had used the formation for storage since the 1950s.
- The lease had a 10-year primary term and then continued “as long thereafter” as CNG either (i) operated in search for/production of oil or gas or (ii) stored, held in storage, or withdrew gas from the premises.
- The lease provided for quarterly delay rentals “until” a royalty well was drilled or “any sands” were used for gas storage, and included a storage-compensation clause “in lieu of” delay rentals or royalty for production from the storage horizons.
- CNG never drilled a well on the property and never pooled the property for production, but continuously stored non-native gas and paid per-acre storage compensation.
- After disputes over development and rights to formations below the storage interval, the Jacobses treated the lease as terminated as to production and granted a new oil and gas lease to Penneco Energy Corp.
- Plaintiffs sued for, among other relief, an accounting, a declaration that the earlier lease had terminated (in whole or in part), and quiet title.

## Issues

1. Whether the lease’s production rights and storage rights were severable into separate agreements or constituted a single, indivisible leasehold estate.
2. Whether continued gas storage and payment of storage compensation, without drilling or pooling for production, preserved the lease beyond the primary term under the habendum clause.
3. Whether an implied covenant to reasonably develop could support forfeiture or termination (including partial termination) of production rights where the lessee elected storage operations permitted by the lease.
4. Whether and to what extent a later lease granted to a new lessee could take priority over the earlier lease.

## Decision

- On cross-motions for summary judgment, the court granted plaintiffs’ motion in part and denied CNG’s motion.
- The court held the lease was entire and nonseverable; it did not create separate, independently expiring production and storage agreements.
- The court held CNG’s continuous storage operations, coupled with required storage payments, satisfied the habendum clause and kept the lease in force beyond the primary term.
- The court declined to accept, as a matter of law, plaintiffs’ theory that nondevelopment alone terminated production rights despite ongoing storage authorized by the lease; limited aspects of plaintiffs’ requested relief were not fully resolved in CNG’s favor at summary judgment.

## Legal Principles

- A dual-purpose oil and gas lease granting both production and storage rights is construed as a single leasehold estate absent clear contractual language creating severable agreements.
- Where a habendum clause extends the lease so long as the lessee is producing/seeking production “or” storing/withdrawing gas, satisfaction of either alternative condition continues the lease beyond the primary term.
- Lease provisions converting delay rentals to storage compensation upon use of sands for storage support treating storage as a complete mode of performance that can maintain the lease.
- Forfeiture or termination based on implied development duties is disfavored where the lessee is acting within express contractual rights and tendering the compensation required by the lease.

## Conclusion

The court interpreted the parties’ dual-purpose lease as an indivisible agreement and enforced its habendum clause as written, holding that continuous storage operations and payment of storage compensation preserved the lease beyond the primary term and defeated an attempt to re-lease production rights on a severability or forfeiture theory.


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