On March 26, 2012, the Pennsylvania Supreme Court issued its long-awaited decision in T.W. Phillips Gas & Oil Co. v. Jedlicka, ___ A.3d ___, Docket No. 19 WAP 2009 (Pa. March 26, 2012). In a major victory for Pennsylvania’s oil and gas producers and K&L Gates, the Court held that, under standard oil and gas lease language requiring that oil or gas be “produced in paying quantities,” any operational profit suffices to hold the lease, and even if a well experiences periods of unprofitability, the producer’s subjective good faith in continuing to operate suffices to hold the lease. The decision thus affirms the validity of many older leases that have been held by continuous, albeit low-level, production for decades in regions that are now experiencing a new wave of development.

The dispute arose out of a 1928 lease of oil and gas rights in a 163-acre tract in North Mahoning Township, Indiana County, Pennsylvania, under which defendant T.W. Phillips Gas & Oil Co. was lessee. The lease would last “for the term of two years, and as long thereafter as oil or gas is produced in paying quantities.” The tract was subsequently subdivided. Plaintiff Ann Jedlicka came to own 70 acres, on which lay one of the four wells originally drilled in 1929. In 2004, T.W. Phillips assigned the leasehold to codefendant PC Exploration, Inc., who promptly drilled four further wells on Jedlicka’s property and planned to drill four more.