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

OPINION

CERCONE, District Judge.

Plaintiffs commenced this action in the Court of Common Pleas of Armstrong County, Pennsylvania, on January 19, 1996, by filing a complaint in equity seeking (1) an accounting of natural gas extracted, withdrawn, or produced on certain property located in Armstrong County, Pennsylvania, (2) a finding that an oil and gas lease entered by plaintiffs’ and defendant’s predecessors has terminated and (3) a declaration quieting title to the oil and gas interests underlying the property in plaintiffs. Defendant removed the action to this court based upon diversity of citizenship. The litigation has become protracted, involving proceedings before the United States Court of Appeals for the Third Circuit and the Supreme Court of Pennsylvania. Presently before the court are cross motions for summary judgment following a remand from the Third Circuit. For the reasons set forth below, plaintiffs’ motion will be granted in part and defendant’s motion will be denied.

Federal Rule of Civil Procedure 56(c) provides that summary judgment may be granted if, drawing all inferences in favor of the non-moving party, “the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law.” Summary judgment may be granted against a party who fails to adduce facts sufficient to establish the existence of any element essential to that party’s claim, and upon which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d. 265 (1986). The moving party bears the initial burden of identifying evidence which demonstrates the absence of a genuine issue of material fact. When the movant does not bear the burden of proof on the claim, the movant’s initial burden may be met by demonstrating the lack of record evidence to support the opponent’s claim. National State Bank v. Federal Reserve Bank, 979 F.2d 1579, 1582 (3d Cir.1992). Once that burden has been met, the non-moving party must set forth “specific facts showing that there is a genuine issue for trial,” or the factual record will be taken as presented by the moving party and judgment will be entered as a matter of law. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting Fed.R.Civ.P. 56(a), (e)) (emphasis in Mat-, sushita). An issue is genuine only if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc.,. 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

In meeting its burden of proof,' the “opponent must do more than simply show that there is some metaphysical doubt as to the material facts.” Matsushita, 475. U.S. at 586, 106 S.Ct. 1348. The hon-moving party “must present affirmative evidence in order to defeat a properly supported motion” and cannot “simply reassert factually unsupported allegations.” Williams v. Borough of West Chester, 891 F.2d 458, 460 (3d Cir.1989). Nor can the opponent “merely rely upon conclusory allegations in [its] pleadings or in memoranda and briefs.” Harter v. GAF Corp.,-967 F.2d 846 (3d Cir.1992). Likewise, mere conjecture or speculation by the party resisting summary judgment will not provide a basis upon which to deny the motion. Robertson v. Allied-Signal, Inc., 914 F.2d 360, 382-83 n. 12 (3d Cir.1990). If the non-moving party’s evidence merely is colorable or lacks sufficient probative force summary judgment must be granted. Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505; see also Big Apple BMW, Inc. v. BMW of North America, 974 F.2d 1358, 1362 (3d Cir.1992), cert, denied, 507 U.S. 912, 113 S.Ct. 1262,122 L.Ed.2d 659 (1993) (although the court is not permitted to weigh facts or competing inferences, it is no longer required to “turn a blind eye” to the weight of the evidence).

The historical facts underlying the parties’ respective positions are not in dispute. Plaintiff purchased 120 acres of real estate in South Bend Township, Armstrong County, Pennsylvania, on December 7, 1994 (“the property”). The deed to the property was encumbered by and transferred “UNDER AND SUBJECT” to a certain oil and gas lease given by Frank F. George and Sarah T. George, his wife, to New York State Natural Gas Corporation, dated February 21, 1956 (“the lease”). Plaintiffs were aware of the encumbrance and had an opportunity to review the lease before purchasing the property. Plaintiffs also were aware that defendant was operating an underground natural gas storage pool at what is known as the “Hundred Foot” sand formation, which is located fewer than 2000 feet below the surface of the property. Defendant has operated a natural gas storage field under the property in conjunction with other surrounding property since the 1950’s. The collective natural gas storage field is known as the South Bend Natural Gas Reservoir.

The original oil and gas lease on the property dates back to August 17, 1907, when landowners named McKalips entered into an oil and gas lease with a predecessor to New York State Gas Corporation. The oil and gas lease periodically was renewed by successive lessees over the years until it was substantially overhauled in 1956. The 1956 lease permitted New York State Natural Gas Corporation to drill and operate wells for the production of oil and gas and also to use the property for the pooling or storage of gas. Plaintiffs are the successors in interest to the McKalips’ and Georges’ interests as a result of their 1994 purchase of the property. Defendant is the successor in interest to New York State Natural Gas Corporation. The parties’ respective rights under the lease are at the heart of the instant litigation.

The parties’ disagreements concerning their respective contractual and property rights under the lease place at issue the import of various terms and phrases contained therein. Instruments conveying property rights in minerals such as oil and gas are executed in the context of an industry that is highly technical in nature and employs district terminology used by those involved in the business. Daset Mining Corp. v. Industrial Fuels Corp., 326 Pa.Super. 14, 473 A.2d 584, 592 (1984). An understanding of the historical development of the industry is essential in making an informed assessment concerning the intent of the parties in employing the language utilized in a particular instrument. Id.; accord Venture Oil Co. v. Fretts, 152 Pa. 451, 25 A. 732 (1893) (an agreement for the production of oil and gas must be construed both with reference to the known practices within the industry and the evident intention of the parties).

The modern oil and gas lease is the evolutionary product of years of conflicts between landowners and lessee/operators acquiring an interest in the mineral. See 3 Howard R. Williams & Charles J. Meyers, oil AND gas law (2003 ed.) § 601. Many of the basic contractual concepts and correlating principles of law governing such leases were established between the 1880’s and the 1940’s. Id. at § 601.1. It is universally recognized within the field that oil and gas leases commonly contain several key provisions, including the “granting clause,” the “habendum clause,” the “royalty clause,” and the terms of surrender. See id. at § 603 (habendum clause); § 605 (granting clause); § 641 (royalty clause); and § 611 (dry whole cessation and drilling provisions); see also 2 W.L. Summers, THE LAW OF OIL AND GAS (Perm. ed.1959) at Chapter 7 (granting clause); Chapter 10 (habendum clause) and Chapter 11 (drilling, rental and surrender clauses).

Here, the dual purpose of the lease is set out in paragraph one, designated as the “Leasing Clause” (i.e., the granting-clause), which provides in pertinent, part:

That the Lessor, for and in consideration of the sum of One ($1.00) Dollar in hand well and truly paid by the Lessee, the receipt whereof is hereby acknowledged, and, of the covenants and agreements hereinafter contained on the part of the Lessee to be paid, kept and performed, has leased and let and by these presents does lease and let unto the Lessee for the purpose of drilling and operating for and producing oil and gas, and for the further purpose and with the exclusive right in the Lessee, as it may see fit to store any kind of gas therein by pumping or otherwise introducing the same into any sand or sands, substrata or horizon in and under said land, and the right to remove the same by pumping or otherwise through any well or wells on said land or other lands with the right to open, repair, maintain and use a roadway or roadways'to wells or well locations on this or other lands and the right to construct, lay, maintain, operate, change and remove pipe lines, telephone and telegraph lines and all other appliances and structures on, over and through said lands, and with all other rights and privileges, including free oil, gas, gasoline and water from the land, necessary or convenient for the operation of this land alone or conjointly with other lands for the transportation of oil and gas produced from said land or other lands or for introducing, storage or withdrawing of gas from this land or other lands....

Lease at ¶ 1. The granting clause thus initially conveys to the lessee the right to drill for and produce oil and gas from the property and the right to use various portions of the property for the storage of gas, with the concomitant right to use the surface of the property in any manner necessary to effectuate either or both purposes.

Pursuant to the “habendum clause”, the lease is to remain in effect for a term of ten years from June 16, 1956, “and as long thereafter as [the property], or any portion thereof, or any other land pooled or utilized therewith as provided in paragraph 4 hereof, is operated by [the defendant] in search for or production of oil or gas or as long as gas is being stored, held in storage, or withdrawn'from the premises by [defendant].” Id. at ¶ 3.

Defendant also was “granted the right to pool and utilize the Onondaga, Oriskany or deeper formulations under all or any part of the [property] with any other lease, or leases, or land or lands, mineral estates, or any of them whether owned by the [plaintiffs] or others, so as to create one or more drilling or production units.” Lease at ¶ 4. In conjuncture with this right, defendant was given the authority to designate a portion of the acreage covered by any drilling or production unit, subject to the payment of royalties as provided in the lease. It was agreed that if a production unit was created pursuant to this right, then that unit would “have the same effect upon the terms of this lease as if a well were commenced, drilled, completed or producing on the [property].” Id.

The lease segregates payment to the lessor into separate forms. First, the lessor is to receive royalties in the form of (1) one-eighth of the value of all oil produced from the property, (2) $50 every three months for each shallow gas-producing well and (3) one-eighth of the value of all gas produced from each deep gas-producing well. Second, the lessor is to receive from any gas-producing well up to 200,000 cubic feet of gas per year for personal use for heating or lighting in one dwelling house situated on the property. Id. at ¶ 6.

Third, in addition to royalties and free gas, the lease provides for the payment of delay rental and storage privileges. The “delay rental” clause provides:

Lessee covenants and agrees to pay a rental at the rate of thirty ($30.00) dollars quarterly in advance, beginning June 16, 1956, until a well yielding royalty to the lessor is drilled on the premises, or until any sand or sands under the leased premises is utilized for the storage of gas and rental for said storage becomes payable as hereinafter provided, any rental paid for time beyond the date of completion of a well yielding royalty shall be credited upon the first royalty due upon the same. It is agreed that lessee may drill or not drill on the leased premises, as it may elect, and that the consideration and rental paid and to be paid constitute adequate compensation for such privilege.

Id. at ¶ 5. The “payment for storage privileges” clause provides:

In full compensation for the storage rights herein granted and in lieu of all delay rentals or royalty due or to become due for the right to produce or for the production of oil or gas from the Sands, Strata, or Horizons where gas may be stored as herein provided, lessee covenants and agrees to pay lessor when no wells on the leased premises are utilized for the storage of gas, an annual storage rental of one hundred twenty ($120.00) dollars, at a rate of one ($1.00) dollars, per acre, per annum, payable quarterly in.advance, beginning at the next payment date after gas shall have been stored under the terms of this agreement and continuing until the leased premises shall no longer be used for storage purposes, or until wells .on the leased premises are utilized for the storage of gas, in which event lessee shall cease paying storage rental to lessor and pay in lieu thereof, a storage well rental or royalty of fifty ($50.00) dollars, per well quarterly in advance, as long as such wells shall be so utilized; subject to the right of cancellation or surrender hereinafter provided.

Id. The lease specifies how the payment of any royalties or rentals is to be made. Id. at ¶ 7.

Finally, the.lessee may surrender all or any portion of the lease. The surrender provision provides in pertinent part:

It is agreed that said Lessee may at any time remove all machinery and fixtures placed on said premises; and further, upon the payment of one (1.00) dollar and all amounts due hereunder Lessee shall have the right to surrender this lease at any time as to all or any part or parts of the land covered by the same and thereupon shall be released and discharged from all payments, obligations, covenants and conditions herein contained whereupon this lease shall be null and void as to the land in respect to which a surrender is made ....

Lease at ¶ 8.

The lease in question thus may be generally characterized as a “drill or pay” type of a “modern” short definite term lease with a “thereafter clause” that preserves the lease for an indefinite secondary term based on a number of various potential operations that the parties contemplated could occur on the premises. The lease does not contain a forfeiture clause, but does contain a provision permitting a complete or proportional surrender.

At some point during the initial ten years of the lease defendant utilized the property for the storage of “non-native” gas, that is gas produced from other property not pooled or utilized with the property. Shortly before the expiration of the ten year term, defendant sent written notice to plaintiffs’ predecessor indicating it was utilizing the property for the storage of gas as part of the South Bend Natural Gas Reservoir. Defendant has stored nonnative natural gas at the hundred foot sand formation since that time and has tendered payment for storage privileges at the set annual rate of one dollar per acre during all relevant times.

No oil or gas wells have ever been drilled on the property by defendant or any of its predecessors. Defendant has never submitted an application for a drilling permit for the property. The property has never been pooled or utilized with adjacent property for the purpose of production. Defendant ceased its drilling business many years ago and has not drilled any wells in over fifteen years. Defendant no longer owns any drilling rigs or equipment.

Information available to the parties has led to the belief that the property contains valuable deposits of natural gas at formations substantially below the hundred foot sands. Defendant has acknowledged that the natural gas bearing sand formations below the hundred foot sands are likely to contain commercially productive deposits of natural gas. Defendant also has acknowledged that the subsurface gas formations below the hundred foot sands are divisible from it, both conceptually and from an engineering perspective. Defendant concedes that as long as it is able to reserve its exclusive rights to store gas at the hundred foot sands, the deeper gas formations can be “severed” from that portion of the property. Defendant periodically authorizes operators to drill through gas storage zones in order to reach deeper horizons for the production of oil and gas, provided that safety features are observed and defendant’s storage of gas is not compromised. The Pennsylvania Department of Environmental Protection will issue permits authorizing the drilling of oil and gas wells through gas storage zones pursuant to various regulations pertaining to such operations.

Defendant has not paid any delay rentals specifically designated for the purpose of preserving the production rights granted in the lease after the expiration of its primary ten year term on June 15, 1966. No royalties have ever been paid under the lease due to defendant’s election not to explore or drill for oil or gas. No production wells have ever been established on the property.

After acquiring the property plaintiffs made a written demand on February 8, 1995, requesting defendant either drill and develop the property for the production of oil and gas or surrender its claim to the sub-surface gas formations below the hundred foot sand formation. Defendant refused to accede to either aspect of plaintiffs demand, but did offer to “sell” the drilling rights under the lease to plaintiffs. After receiving defendant’s refusal and offer to sell, plaintiffs notified defendant in writing that they were treating the lease as terminated.

On March 21, 1995, plaintiffs granted an oil and gas lease to Penneco Energy Corporation, which is a family-owned business. Penneco Energy is prepared to explore the property for the production of gas and to produce a series of wells if the results from an initial test well are favorable.

The parties’ dispute has centered around plaintiffs’ contentions that the production and storage provisions of the lease are contractually severable and that defendant has failed to comply with an implied covenant to develop the property for production. Following discovery defendant moved for partial summary judgment on several counts in plaintiffs’ complaint. Defendant attacked plaintiffs’ theory that the lease constitutes “a severable contract” as untenable under Pennsylvania law, arguing the cases referenced by plaintiffs consistently held that a contract cannot be found to be “severable” unless it is ambiguous on its face. Defendant further countered plaintiffs’ theories of recovery by arguing that (1) Pennsylvania law did not recognize an implied covenant of development and production in an oil and gas lease under the circumstances, (2) there had been no forfeiture of rights under the lease, (3) the lease was not unconscionable and (4) plaintiffs had failed to produce sufficient evidence to support their disparagement of title claim.

On September 22, 1997, the Honorable D. Brooks Smith, then United States District Judge for this Court, authored a “memorandum order” concluding that “the clear language of the Lease” precludes any contention that its provisions are severable and “the language of the Lease does not cabin the rights to production and storage into separate and distinct categories.” Memorandum Order of September 22, 1997 (Doc. No. 31) (“Memorandum Order”) at p. 12. Reasoning that defendant has the option to exercise its rights to produce or store either together, alone, or not at all, and the consideration defendant is to pay for such activities is dependent upon defendant’s election of one or more of the options, Judge Smith further concluded that “the consideration is not strictly apportioned to production and storage [and] without the apportionment of the consideration to be paid, the Lease cannot be deemed to be severable.” Id. at 13 (citations omitted).

Judge Smith also found that the clear language of the contract negated plaintiffs’ assertion that the lease was to be read as containing an implied covenant to develop and produce oil and gas. He reasoned the lessee was given the right not to develop and produce oil and gas, provided it tendered payment in the form of delay rentals or elected to store gas on the premises. Memorandum Opinion at 15. He opined: “[t]he delay rental or the payment for the storage privileges serve[s] to compensate the lessor for the encumbrance upon his property.” Id. at 15.

Based on the two holdings summarized above, Judge Smith concluded:

Consistent with my conclusions that the Lease remains in effect, that it encompasses the right to production and does not include an implied right to develop and produce the oil and gas thereunder, the [plaintiffs’] assertions that the Lease should be terminated due to [defendant’s] failure to drill and develop the leased premises for the production of oil and gas are not persuasive. Accordingly, Counts II through VII fail as a matter of law and summary judgment will be entered in defendant’s favor.

Memorandum Order at 15. The remaining counts of the complaint were resolved pursuant to defendant’s motion for partial summary judgment or by agreement of the parties, and plaintiff filed a timely notice of appeal to the United States Court of Appeals for the Third Circuit.

Pursuant to plaintiffs’ appeal, the Third Circuit certified the following questions to the Supreme Court of Pennsylvania:

Is a finding that the contract is ambiguous a prerequisite to applying the doctrine of severability announced by the Pennsylvania Supreme Court in Heilwood Fuel Company, Inc. v. Manor Real Estate Co., [405 Pa. 319,] 175 A.2d 880 (Pa.1961)?

Does Pennsylvania recognize an implied covenant to develop and produce oil and natural gas that would impose upon a lessee the obligation to produce oil and gas from the leased property?

The Supreme Court of Pennsylvania (“Supreme Court”) accepted the certified questions and authored an opinion in response, which appears at Jacobs v. CNG Transmission Corp., 565 Pa. 228, 772 A.2d 445 (2001). After considering the Supreme Court’s answers to the certified questions, the Third Circuit reversed the entry of summary judgment in this court “and remanded with directions to reconsider summary judgment in light of the Supreme Court of Pennsylvania’s answers to our certified questions.” Judgment Order of December 26, 2001 (Doc. No. 45), at 2.

In a memorandum issued in conjunction with the order of judgment, the Third Circuit summarized the Supreme Court’s analysis of when a contract is “severable,” as opposed to “entire,” and directed this court to revisit the issue — “paying particular attention to the issues we certified to the Supreme Court, and its answers.” Non-precedential Memorandum Opinion of December 26, 2001 (Doc. No. 45), at 4. With regard to the issues surrounding any implied covenant to develop and produce oil and gas under Pennsylvania law, the Third Circuit observed that the Supreme Court drew a distinction between instruments where the compensation to the lessor is a royalty payment resulting from the extraction of the underground resource and an instrument whereby the lessor receives compensation if the lessee does not actively extract the resource, with an implied covenant to develop being recognized where the consideration received is dependent on production. Id. at 4. The court further noted that the Supreme Court indicated that “what constitutes adequate compensation for this purpose obviously must be determined by taking into consideration the facts and circumstances of each individual case.” Id. at 4 (quoting Jacobs, 772 A.2d at 455 n. 5). The Third Circuit then further directed:

In reconsidering its summary judgment, the District Court must decide what, under the facts of this case, constitutes ‘adequate consideration,’ and whether, according to the Supreme Court, ‘the lessee [] has an affirmative obligation either to develop and produce the oil and gas or terminate the landowner’s contractual obligations.’

Id. at 4 (quoting Jacobs, 772 A.2d at 455.).

Following remand to this court plaintiffs sought leave to conduct further discovery based on the pronouncements of the Supreme Court. See Document No. 46. Defendant opposed the motion on the ground that “it is highly improbable that discoverable evidence by way of testimony, documents and other items exists beyond what has already been made available to date.” Defendant’s Response (Doc. No. 47) at 1. Judge Smith held a status conference on April 25, 2002, and thereafter denied plaintiffs motion without prejudice to refile it with an accompanying brief identifying “in detail what specific and limited areas of additional discovery the plaintiffis] seek [ ].” Order of April 25, 2002 (Doc. No. 49). Plaintiffs filed an amended motion in compliance with the April 25, 2002, order.' Through these requests plaintiffs sought to determine whether any ascertainable facts might be developed concerning the signing of the lease, the parties’ conduct subsequent to the execution of the agreement and whether the intent of the parties was to permit the storage of gas alone without the requirement that any productive oil and gas reserves be developed. Plaintiffs’ Brief in Support of Amended Motion for Leave to Conduct Further Discovery (Doc. No. 52) at 2-3. Defendant opposed plaintiffs amended motion on several grounds and asserted this court had already undertaken the precise analysis required by the Supreme Court’s decision. Defendant’s Brief in Response (Doc. No. 53) at 2-3. On August 8, 2002, Judge Smith denied plaintiffs’ amended motion to conduct further discovery and directed the parties to file the now-pending cross-motions for summary judgment. On October 9, 2002, this case was reassigned to this member of the court for all further proceedings.

Notwithstanding the protracted development of the case before two separate appellate tribunals, the parties continue to advance essentially the same legal arguments. Plaintiffs maintain that close and careful scrutiny of the lease in accordance with the principles expounded by the Supreme Court demonstrate that the contract is severable as to production and storage rights. They further assert that because the record unequivocally demonstrates that defendant did not perfect its rights to production during the primary term of the lease and/or failed to conduct exploration of the property to ascertain whether it contains commercially lucrative deposits of oil or gas for an inordinate number of years, defendant either breached an implied covenant to develop and produce oil and gas or abandoned its interests to do so.

Defendant maintains that the explicit language of the lease sufficiently undermines plaintiffs’ contentions and, when viewed in conjunction with the Supreme Court’s opinion, supports Judge Smith’s prior analysis. Defendant specifically argues that because the lease gave defendant the right to elect not to develop and produce oil and gas and further indicated that payments for delay or storage rentals were expressly designated as adequate compensation for the incumbrance on the property; the lease does not obligate it to both produce and store, but instead gives it an indivisible right to do either, and the election to do one is binding with regard to both rights. Defendant thus maintains that Judge Smith’s prior analysis “stands four square” with the analysis required on remand, “the facts have not changed since that decision” and the Supreme Court’s clarification of the law only serves to reinforce the original decision granting summary judgment in defendant’s favor. Memorandum of Defendant in Support of its Renewed Motion for Summary Judgment (Doc. No. 59) at 18.

Pursuant to the Third Circuit’s order of remand, this court is obligated to consider anew whether the lease is an entire or severable contract, whether “adequate consideration” was given under the lease to maintain a potentially perpetual vested interest in all production rights without having to develop the leaseholder for production, and, in light of these determinations, resolve the parties’ dispute concerning their respective rights under the lease. These inquiries require the court to take into account a number of background principles.

In the first instance, “[a] lease is in the nature of a contract and is controlled by principles of contract law.” J.K. Willison, Jr. v. Consolidation Coal Co., 536 Pa. 49, 637 A.2d 979, 982 (1994) {citing Amoco Oil Co. v. Snyder, 505 Pa. 214, 478 A.2d 795, 797 (1984)). And on this level an agreement embodied in a lease is to be construed in accordance with the terms manifestly expressed therein. Id. In this regard “[i]t is well established that the intent of the parties to a written contract is to be regarded as being embodied in the writing itself, and if the words are clear and unambiguous the intent is to be discovered only from the express language of the agreement.” Steuart v. McChesney, 498 Pa. 45, 444 A.2d 659, 661 (1982); Hutchison v. Sunbeam Coal Corp., 513 Pa. 192, 519 A.2d 385, 390 n. 5 (1986). Consistent with this principle it is the accepted and plain meaning of the language used by the parties that controls the construction to be given to the agreement. J.K. Willison, Jr., 637 A.2d at 982.

But where an ambiguity exists in a written contract, the court may resort to extrinsic or collateral circumstances to resolve that ambiguity, “irrespective of whether the ambiguity is created by the language of the instrument or by extrinsic or collateral circumstances.” Hutchison, 519 A.2d at 390. A contract is ambiguous if it is reasonably susceptible of different constructions and capable of being understood in more than one sense. Id. {citing Metzger v. Clifford Realty Corp., 327 Pa.Super. 377, 476 A.2d 1, 5 (1984)). It is the court’s obligation to determine whether an ambiguity exists, whereas the finder of fact resolves conflicts in parole or extrinsic evidence submitted to resolve a dispute. Id.

Of equal importance is the well understood recognition that the execution an oil and gas lease reflects a conveyance of property rights within a highly technical and well-developed industry, and thus certain aspects of property law as refined by and utilized within the industry are necessarily brought into play. Daset Mining Corp., 473 A.2d at 592. Hutchison, 519 A.2d at 387 n. 1 (using the term “lease” with regard to the conveyance of mineral rights “is in some respects a misnomer [because] [w]hat is really involved is a transfer of an interest in real estate, the mineral in place.”). The Supreme Court has aptly observed that “[t]he traditional oil and gas ‘lease’ is far from the simplest of property concepts.” Brown v. Haight, 435 Pa. 12, 255 A.2d 508, 510 (1969). In the context of oil and gas leases, the title conveyed is inchoate and initially for the purpose of exploration and development. Calhoon v. Neely, 201 Pa. 97, 50 A. 967, 968 (1902); accord Burgan v. South Penn Oil Co., 243 Pa. 128, 89 A. 823, 826 (1914) (“The title is inchoate, and for purposes of exploration only until oil is found.”). If development during the primary term is unsuccessful, no estate vests in the lessee. Id. If oil or gas is produced, the right to produce becomes vested and the lessee has a property right to extract the oil or gas. Calhoon, 50 A. at 968; Barnsdall v. Bradford Gas. Co., 225 Pa. 338, 74 A. 207, 208 (1909) (an oil and gas lease that results in production “creates a corporeal interest in the lessee in the demised premises, and is not merely a license to enter and operate for oil and gas.”). In such circumstances the lessee will be protected in accordance with the terms of the lease and. will be required to operate the leasehold for the benefit of both parties. Venture Oil Co., 25 A. at 734; Calhoon, 50 A. at 968; Bur-gan, 89 A. at 826.

Over the years leases that result in production generally have been characterized as transferring a fee interest in the oil and gas, but the extent of the fee interest has been the subject of much debate. While coal leases are generally understood to convey a fee simple in the coal subject to a right of re-entry, “oil and gas leases are traditionally interpreted differently because of the varied physical characteristics of the minerals involved.” Brown, 255 A.2d at 512. When production is obtained under an oil and gas lease the habendum clause creates a fee simple determinable in the lessee. Id. A fee simple determinable is an estate in fee that automatically reverts to the grantor upon an the occurrence of a special event. Id. at 511. The interest held by the grantor after such a conveyance is termed “a possibility of reverter.” Higbee Corporation v. Kennedy, 286 Pa.Super. 101, 428 A.2d 592, 595 (1981) (“words of indubitable limitation, such as ‘so long as,’ ‘during,’ ‘while’ and ‘until,’ are generally used to create the fee simple ' determinable.”) - (citing Henderson v. Hunter, 59 Pa. 335 (1868)). Such a fee is a fee simple, because it may last forever in the grantee and 'his heirs and assigns, “the duration depending on the concurrence of collateral circumstances’ which qualify and debase the purity of the grant.” Id. at 595 n. 4 (citing 2 Blackstone Commentaries, 109 and Siegel v. Lauer, 148 Pa. 236, 23 A. 996, 997 (1892)). The principal distinction between a fee simple determinable and a fee simplé subject to a condition subsequent is that a condition subsequent vests in the grantor a right of re-entry, which must be perfected following the occurrence of the condition. Id. (citations omitted). In contrast, a re-verter vests automatically in the grantor upon the occurrence of the collateral circumstances following the indubitable limitation. Id.

In light of the speculative nature of the property conveyed by an oil and gas lease and the traditional understanding that lessees are far better accustomed to dealing with such property, it is appropriate to construe any ambiguity in such instruments in favor of the lessor. Pomposini v. T.W. Phillips Gas and Oil Co., 397 Pa.Super. 564, 580 A.2d 776, 778 (1990). Oil and gas leases are executed for a discrete and well understood purpose and the severance of mineral rights is to be narrowly construed in light of these circumstances. Pomposini, 580 A.2d at 778. And given the nature of the property conveyed and the limited purpose for the conveyance, “[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.” Id. (quoting 38 Am. Jr.2d, Oil and Gas § 94 (1968) and citing Ray v. Western Pa. Natural Gas Co., 138 Pa. 576, 20 A. 1065 (1891)); see also Babb, 687 A.2d at 1121-22 (opportunity to remediate for failure to attain production as contemplated by lease was not within rights conveyed by expressed terms of the lease and therefore could not be asserted to avoid default).

Where the words of a deed are ambiguous, then all attending circumstances existing at the time of execution must be considered in determining the apparent object of the parties. Stewart, 266 A.2d at 263; see also Bums Manufacturing Co. v. Boehm, 467 Pa. 307, 356 A.2d 763, 766 n. 3 (1976) (Where a document is found to be ambiguous, inquiry is to be made into the circumstances surrounding its execution in an effort to clarify the meaning the parties sought to express by the language they chose)(citing New Charter Coal Co. v. McKee, 411 Pa. 307, 191 A.2d 830 (1963)). Only when this inquiry fails to clarify the ambiguity should the court resort to the rule of construction interpreting leases and grants most strongly against the drafter. Bums Manufacturing Co., 356 A.2d at 766 n. 3 If the parties have not expressly addressed a matter with particularity in the lease, then the intent of the parties must be inferred. Stewart, 266 A.2d at 263. And “where the language of the contract is contradictory, obscure or ambiguous, or where its meaning is doubtful, so that it is susceptible of two constructions, one of which makes it fair, customary, and such as prudent men would naturally execute, while the other makes it inequitable, unusual, or such as reasonable men would not be likely to enter into, the interpretation which makes a rational and probable agreement must be preferred.” Id. (quoting Wilkes-Barre Twp. School District v. Corgan, 403 Pa. 383,170 A.2d 97, 98 (1961)).

Although the rules of construction noted above are valuable aids of interpretation, they are not to be applied in a manner that creates a contract beyond the parties’ intent. Stewart, 266 A.2d at 264; Hutchison, 519 A.2d at 388 (“the law will not imply a different contract than that which the parties have expressly adopted”) and 390 n. 5 (rules of construction are not be applied as a substitute for ascertaining the intention of the parties). With these background facts, procedural developments and general principles in mind, we turn to the parties’ fundamental disputes.

THE SEVERABILITY/ENTIRETY ISSUE

Plaintiffs strenuously pursue a determination of severability in their quest for relief. This traditional legal doctrine of contract law recognizes that where the parties have intentionally apportioned the “consideration on either side [of a contract] to correspond to the unascertained consideration on the other side,” a divisible contract was within the objects of the parties. Producers’ Coke Co. v. Hillman, 243 Pa. 313, 90 A. 144, 145-46 (1914). The general approach to be employed in analyzing whether an agreement is “entire” or “severable” is straightforward but at times difficult to apply. The Jacobs court reiterated:

It is often most difficult to determine whether a contract is entire or severa-ble. The primary inquiry in resolving this question is whether the language employed in the contract clearly indicates the intention of the parties that the contract be considered entire or sev-erable (Easton v. Jones, 193 Pa. 147, 44 A. 264 [(1899)]); only in the absence of a clear indication of the parties’ intention from the language of the contract may resort be had to rules of construction (.Producers’ Coke v. Hillman, 243 Pa. 313, 90 A. 144 [(1914)]).

Jacobs, 772 A.2d at 450 (quoting Heilwood, 175 A.2d at 884). Thus, the inquiry is focused exclusively on ascertaining the parties’ intent.

The character of the consideration exchanged between the parties may in itself determine the severability of a contract. Heilwood, 175 A.2d at 884. It has been held that if the consideration cannot be apportioned, then the contract is entire as a matter of law. Canister Co. v. Wood & Selick, 73 F.2d at 312, 313 (3d Cir.1934); Lucesco Oil Co. v. Brewer, 66 Pa. 351 (1870). The apportionment of consideration to distinct and separate components of an agreement is in general an indication that the parties intended to create an agreement with severable provisions. Shields v. Hoffman, 416 Pa. 48, 204 A.2d 436, 438 (1964). In contrast, the divisibility of the subject(s) of the contract is not controlling. Id. For example, an agreement calling for installment payments in correlation to the specific stages of building a house will not render a contract to build the entire- home divisible. Producers’ Coke Co., 90 A. at 145-46 (citing Story on Contracts, § 24).

Where the parties have not directly addressed the issue of severability, merely identifying the consideration exchanged within the four corners of the written agreement is not sufficient. A much more searching inquiry is necessary. The Jacobs court reiterated that in such circumstances the court is to:

[L]ook at a contract as a whole, including the character of the consideration, ... [and] may also consider the circumstances surrounding the execution of the contract, the conduct of the parties and any other factor pertinent to ascertaining the parties’ intent.

Jacobs, 772 A.2d at 452. Thus, in such circumstances the inquiry is much broader in scope.

In sum, then, the central task in resolving the parties’ dispute concerning the issue of severability “is to ascertain the intent of the parties.” Id. at 452. “That intent may be apparent from the explicit language of the contract, or it may be obvious from a ‘construction’ of the agreement, including the nature of the consideration ....” Id. If the parties’ intent is not clearly expressed, then resort to the common aids of construction is appropriate.

The lease does not contain an express provision indicating the agreement is to be construed as entire or severable. Accordingly, it is necessary to consider the lease as a whole, the character of the consideration, the circumstances surrounding the execution of the contract, the conduct of the parties and any other pertinent factor bearing on the parties’ intent.

Defendant contends a review of the express provisions of the lease leads to the unmistakable conclusion that the parties intended the contract to be entire. Specifically, defendant emphasizes that the lease was entered for dual purposes: the production of oil and gas “and for the further purpose with the exclusive right in the lessee, as it may see fit to store any kind of gas therein ...” Lease at ¶ 1. Defendant interprets the lease as giving it the ability to extend the initial ten year period of the lease into the indefinite secondary term by (1) engaging in oil and gas production operations on the property; or (2) by doing so on other leased property pooled or utilized in conjunction therewith; or (3) by storing gas on the property. Defendant further asserts the lease gives it the unrestricted right to store gas even if production from the property or other lands utilized therewith ceases, and in such an event the lease purportedly remains in effect if the property is only used for the storage of gas. Defendant also notes that the lease provides for an annual storage rental that continues until the property is no longer used for that purpose, and this provision is only subject to a change in payment if the lessee stores gas in a well or wells developed on the property. Lease at ¶ 5. From defendant’s perspective these various provisions in the lease demonstrate that the rights of production and storage are expressly intertwined in a manner that prohibits their division into separate and distinct categories. Defendant consequently argues the agreement is entire and the provisions governing the consideration flowing to the lessor cannot be read to reflect a contrary intent.

Plaintiffs argue that the parties intended to enter into two separate transactions: one involving “drilling and production rights” and the other “natural gas storage rights.” Plaintiffs assert this “dual purpose” supports a determination of sever-ability because (1) the parties expressly provided defendant with the ability to delay production during the primary term through the payment of delay rentals but did not provide for any similar consideration after the expiration of the primary term; (2) the ability to provide defendant with the option to forego development of the leasehold easily could have been accomplished by expressly providing defendant with the right to hold the drilling and production rights through the exercise of defendant’s gas storage rights, but the parties failed to do so; (3) defendant’s ability to exercise “utilization” and use “deep” natural gas zones with similar zones in adjacent property are examples of expressed means by which defendant could avail itself of various strata under the provisions of the lease and thus reflect an understanding that such subsurface strata are often distinct and divisible; (4) defendant’s conduct is inconsistent with a retention of the drilling and production rights initially conveyed; and (5) the consideration for gas storage rights and drilling and production rights are distinctly and separately allocated in the royalties section of the lease. From these general premises plaintiffs thus conclude that the two identified purposes are addressed in a manner that makes the contract severable.

The lease does not expressly indicate that it contains entire or severable provisions. Accordingly, resort to the pertinent aids of construction is appropriate.

After considering the various aids to construction, it is clear that the parties did not enter into an agreement designed to accomplish two separate and distinct undertakings. To the contrary, consideration of (1) the contract as a whole, (2) the division of consideration and (3) the circumstances surrounding the execution of the lease indicate the parties intended it to be entire.

Consideration of the contract as a whole leads to the conclusion that the parties intended it to be entire. Like a contract to build a house, the parties intended to enter into an agreement designed to develop the property to the fullest extent possible for the mutual benefit of both parties. Several aspects of the agreement evidence this intent.

The leasing clause indicates the agreement is for the basic purpose of drilling and operating for and producing oil and gas, with a corresponding and “further” purpose of permitting the lessee to store gas “of any kind” (i.e., native or non-native gas) in any substrata or horizon in and under the property. The rights to construct, maintain and place necessary operational equipment on the property and to make any necessary use of the surface are given for and limited to operating the property in furtherance of either or both purposes. The habendum clause grants an inchoate fee simple determinable that vests and continues as long as the lessee “operate[s] the premises in search for or production of oil and gas” or as long as gas is being stored or withdrawn from the premises. The cessation of production from wells on the property after the expiration of the original term does not terminate the right to store gas provided any substrata have been put to such use when the wells are plugged and abandoned. These provisions indicate the parties recognized that production and storage were interrelated components of developing the leasehold. Thus, the leasing clause and the habendum clause do not address separate and distinct contractual undertakings, but rather identify a single .undertaking (i.e., the operation, of the property) that may ripen into either or both specified purposes.

Moreover, the division of the lessee’s duties of payment does not support plaintiffs’ argument that the lease is to be construed as severable. The parties agreed that delay rental payments would be made from the commencement of the lease until either a well yielding a royalty to the lessor was drilled on the property or any sands under the property were utilized for the storage of gas. Under the delay rental provision, the parties agreed that the lessee could elect to drill or not drill on the property, and that the initial dollar paid and the delay rental would “constitute adequate compensation for such privilege.” The delay rental' payment thus provided initial compensation for the privilege of foregoing development of the leasehold. And attaining either purpose identified in the granting clause was intended to relieve the lessee from any further obligation to make delay rental payments. Again, these provisions of the lease reflect an intent to enter an agreement with the single objective of operating the premises in a manner designed to achieve the fullest development of its dual purposes.

The lessee’s obligation to pay royalties and for the right of storage privileges reflect the same intent. The payment of royalties is contingent on the progression and success of the lessee’s operation of the premises. Once operations reach the point that the property is used for storage of native or non-native gas, the payment of storage privileges relieves the lessee of any further obligation to pay delay rental or royalty due for the right to produce oil or gas from the particular “sands, strata, or horizons where gas may be stored.... ” This release of the obligation to pay delay rental or royalty for the specific substrata utilized remains in place until wells on the leased premises are utilized for the storage of gas, in which event” the lessee becomes obligated to pay for storage rights pursuant to a per well formula. The parties contemplated that the payment for storage privileges would be credited toward any storage payment or royalty due after a well was developed on the property to the extent the storage rental payment overlapped with any payment due from operating a well for either storage or production. Thus, once again, the parties viewed the lease as an agreement to operate the premises in a manner designed to maximize the dual purposes of the lease.

The construction of the lease as effectuating an agreement to operate the premises in a manner designed to perfect the dual purposes of the lease to the fullest extent possible for the mutual benefit of both parties is further supported by the prevalent understanding in the industry at the time the lease was executed. When the lease was executed in 1956 the courts had adopted a central and unified understanding concerning the approach to be used in interpreting the particular sections of an oil and gas lease. This central understanding further demonstrates that the lease was intended to be an agreement that is entire.

When the lease was executed it was well-understood under Pennsylvania law that the standard oil and gas lease containing various royalty provisions would be interpreted as containing a covenant to develop the property in a proper manner and with reasonable diligence regardless of whether such an obligation was expressed in the instrument. Burgan, 89 A. at 825 (“the presumption is that a lease is made for the purpose of immediate development, unless the contrary appears in the contract of the parties.”). The implied covenant to develop the leasehold for mineral production with due diligence and for the mutual benefit of both parties grew out of “the public interest which is concerned with the development of the natural resources of the state.” Hummel, 150 A.2d at 861.

This construction was reflected in the early cases such as Ray v. Western Pennsylvania Natural Gas Co,, 138 Pa. 576, 20 A. 1065 (1891), where the court held that a lessor could sue for unpaid rent notwithstanding the lessee’s claim that his own default in developing the property created a forfeiture of the lease and provided the lessor with a complete remedy. Id. at 1066. The court opined:

No case has been brought to our attention in which the lessee was allowed to take advantage of his own wrong, or to set up his own default, to work a forfeiture of his own contract.... persons may perhaps contract expressly in this form, and to this effect. When they do, the transaction amounts to a mere option, and the lessee, in setting up his own default, simply avails himself of an elective right secured to him in his contract. We do not understand the contract in suit to be of this character. The clear purpose of the lessor was to have his land operated for oil and gas, and the condition was inserted for his benefit. While the obligation on the part of the lessee to operate is not expressed in so many words, it arises by necessary implication. The lease was for the expressed purpose of drilling and boring for oil and gas, the lessor, in a certain event, to receive a share of the productions as a royalty, or rent; and, in another event, to be paid $500 per annum for each gas-well, the production of which was conducted from the land for consumption. If a farm is leased for farming purposes, the lessee to deliver to the lessor a share of the crops, in the nature of rent, it would be absurd to say, because there was no expressed engagement to farm, that the lessee was under no obligation to cultivate the land. An engagement to farm in a proper manner, and to a reasonable extent, is necessarily implied. The clear purpose of the parties to this lease is to have the lands developed and the half-yearly payments and the other sums stipulated, were intended not only to spur the operator, but to compensate [the plaintiff] for the operator’s delay or default. The lessor’s hands have been tied for two years. We do not know that he lost anything in royalties, or that he suffered by drainage, for the territory might have proved unproductive; but, as the transaction was founded in the hope that either oil or gas, or both, might be found in paying quantities, it was competent for the parties to contract in advance for the amount of compensation to which, in the event of delay or default in development, the lessor would be entitled.

Id. at 1066-67. This view was reiterated in Hill v. Joy, 149 Pa. 243, 24 A. 293 (1892), where the court opined:

It is doubtless true that where a right to mine iron ore or other minerals is granted in consideration of the reservation of a certain portion of the product to the grantor, the law implies a covenant on the part of the grantee to work the mine in a proper manner and with reasonable diligence, so that the grantor may receive the compensation or income which both parties must have had in contemplation when the agreement was entered into.... this is an inference drawn from the manifest purpose of such a contract, and from the fact that the opposite conclusion would deprive the grantor of the consideration of his grant. It cannot be said to be a distinct contract, embraced in the same instrument with the one expressed. It is implied only because it is evidently a part of the contract expressed. The relation between it and the expressed covenant to pay a portion of the mineral produced is not similar to that between separate installments, successively falling due, under the same instrument. The implied covenant is rather a continuing, inseparable part of the expressed one, which it directly affects through the term of the grant. The relationship between them is that between good faith and all executory contracts.

Id. Thus, the implied covenant to develop and operate the leasehold for the mutual benefit of both parties was firmly entrenched in Pennsylvania law when the original lease was executed in 1907.

And the Pennsylvania courts have continued to recognize this firmly entrenched doctrine in royalty-based leases unless the specific agreement of the parties precludes its application. Jacobs, 772 A.2d at 455. Thus, the understanding that royalty-based mineral leases would be construed in a manner designed to promote the full and diligent development of the leasehold for the mutual benefit of both parties was settled under Pennsylvania law when the lease was executed in 1956.

Moreover, construction of the provisions an oil and gas lease in a manner designed to promote the basic objective of full development of the leasehold for the mutual benefit of both parties was the prevalent view commonly adopted throughout the industry in the years preceding the execution of the lease. In considering whether the term “produced” as used in a haben-dum clause should be understood as meaning production in “paying quantities,” the Supreme Court of Texas summarized the “modern” construction of oil and gas leases:

In order to understand and properly interpret the language used by the parties we must consider the objects and purposes intended to be accomplished by them in entering into the contract. The object of the contract was to secure development of the property for the mutual benefit of the parties. It was contemplated that this would be done during the primary period of the contract. So far as the lessees were concerned, the object in providing for a continuation of the lease for an indefinite time after the expiration of the primary term was to allow the lessees to reap the full fruits of the investments made by them in developing the property. Obviously, if the lease could no longer be operated at a profit, there were no fruits for them to reap. The lessors should not be required to suffer a continuation of the lease after the expiration of the primary period merely for speculation purposes on the part of the lessees. Since the lease was no longer yielding a profit to the lessees at the termination of the primary period, the object sought to be accomplished by the continuation thereof had ceased, and the lease had terminated.

Garcia v. King, 139 Tex. 578, 164 S.W.2d 509, 512-13 (1942). This view likewise was summarized in 1959 by a prominent commentator in the industry, who explained its historical development as follows:

In tracing the development of the drilling clauses of the oil and gas lease in a previous chapter it has been pointed out that in the earlier cases the courts had no hesitancy in enforcing forfeitures of oil and gas leases where that power was expressly reserved. It will likewise be seen in later chapters that the courts have freely implied covenants to test and develop the land for oil and gas, protect it from drainage, and to market the product where such covenants may not have been expressly created in the lease; and they have allowed a recovery of damages for the breach of these covenants, terminated the leases where the covenants have become conditioned by the virtue of express forfeiture clauses, or damages seem an inadequate remedy, or have terminated them on the theory of abandonment.

The foundations of this policy of the courts were in the main, first, that it was the plain intent and motive of these leases that there should be a prompt development of the land and the payment of royalties, which were the only substantial consideration coming to the lessor for the inconvenience of having his land burdened by them; second, that because of the peculiar physical characteristics of oil and gas, and the likelihood of their escape from ■ the land by drainage or from natural migration, early development and protection was essential to secure to the lessor and lessee alike the benefits of the contract; third, that in the event of failure by the lessee to develop the land within a reasonable time, both public and private interests demanded judicial termination of - the lease to make possible the use and alienation of the land for oil and gas or for other purposes. On these foundations was erected by the courts what may be termed the policy of development. At the time of its origin and for many years thereafter its soundness could not be questioned. There was in these earlier days nq problem of over-production with its resultant economic waste, nor had the courts become conscious of the fact that forced drilling and production might result in physical waste of these valuable minerals. It was through this formative period of oil and gas law when the policy of production was predominant, that certain so-called rules of construction of oil and gas leases were created. These rules have continued in the language of the decisions, although the policy upon which they were founded was greatly weakened by the counteracting policies, which may for convenience be termed the policy against overproduction, or economic waste, and the policy of conservation of natural resources.

2 Summers, The law of oil AND gas § 371. The view that a oil and gas lease is to be construed as containing a unified purpose of developing the property for the mutual benefit of both parties continues to prevail in the more recent case law. See Goodwin v. Wright, 163 W.Va. 264, 255 S.E.2d 924 (1979) (relying on policy of development for the mutual benefit of both parties in concluding “that the use of free oil and gas for domestic purposes does not, in itself, constitute production that wil