The Barnett Shale is a geologic formation in North Texas which has abundant natural gas. When natural gas prices were high, everyone seemed to get along well. Now that prices have dropped, there has been an increase in lawsuits between mineral interest owners (lessors) and exploration/production companies (lessees). As with any contract, the express terms of the contract control the rights and obligations of the parties. However, Texas case law imposes certain implied duties which may impact the rights of the parties. I will cover each of the implied duties in a series of posts over the next week.
Generally speaking there are certain implied duties of the lessee in an oil and gas lease. These include the duty to (1) protect the leasehold; (2) develop the premises; and (3) manage and administer the lease. See Amoco Prod. Co. v. Alexander, 622 S.W. 2d 563 (Tex. 1981).
Protect the Leasehold: Lessees owe their lessors a duty to protect the leasehold from hydrocarbon drainage. To protect against drainage a lessee may be required to:
-drill offset wells;
-seek voluntary unitization;
-re-work existing wells;
-seek certain exceptions from the Texas Railroad Commission.
To prevail in a case involving a breach of the duty to protect against drainage a lessor must show that 1) the leasehold is being substantially drained; and 2) a reasonably prudent operator would have acted to prevent substantial drainage from the lessor’s land. The drilling of an offset well would only be reasonable if the operator could have a reasonable expectation of profit.
Up next: The duty to develop the premises.