In some jurisdictions, there are three distinct grounds according to which an oil and gas lessee may lose his/her interest in a lease. One of the grounds is forfeiture and the ground of forfeiture is the breach of an express or implied covenant, condition, or obligation of the lease[i]. However, as a general rule, forfeiture of oil and gas leases for breach of an implied covenant is disfavored. Forfeiture must be granted only if a remedy of damages is inadequate[ii].
However, a provision of an oil and gas lease stating that the lessor will not bear costs of gas treatment, dehydration, compression, transportation, or water hauling charged to the lease by the lessee in its operations is a condition precedent. Therefore, if the lessee does not charge such costs to the lease, then the lessee would not become contractually liable for those costs.
It is to be noted that a lessee has a duty to provide a marketable product available to market at the wellhead or leased premises. Generally, custom and usage in the industry are used in determining the scope of duties created by the lease. When discussing a lessee’s duty to provide a marketable product at the leased premises the implied duty to market means a duty to get the product to the place of sale in marketable form[iii]. Ordinarily, the interests of the lessor and lessee will coincide; the lessee will have everything to gain and nothing to lose by selling the product[iv].
If there is no oil and gas lease, the landowner has a right to explore and drill for oil on his/her land and any such oil produced are reduced to his/her personal property. It is to be noted that the lease creates an exclusive right to explore and reduce the oil to lessee’s possession, at which time it becomes his/her personal property and the lessor retains only a royalty interest[v]
Under a lease, the lessee has sole discretion to drill wells at any point on the leased premises to operate the field in the most productive and efficient manner. The lessor retains the right to the surface, subject to the lessee’s right of ingress to and egress from the sub surface. Each of these interests may be independently conveyed or assigned by the lessor[vi].
It is to be noted that mineral interest owners and lessees are entitled to conduct exploration. The authority to explore for oil and gas extends to the mineral interest owner’s lessee. A mineral owner may sever and assign a surface easement for the limited purpose of conducting geophysical exploration[vii].
In order to recover for breach of the duty to protect from drainage, a lessor must present proof[viii]:
- of substantial drainage of the lessor’s land, and
- that a reasonably prudent operator would have acted to prevent the drainage.
With an entirety clause, when the lessor conveys a fee simple portion of the leased premises the grantee has an immediate right only to his/her percentage of the royalties from the entire leasehold. The grantee is not entitled to develop the oil under his/her tract and may not claim the sole right to royalties on oil drilled by the lessee. However, even if an entirety clause is absent, basic contract law prohibits the lessor from unilaterally increasing the burden on and duties of the lessee to develop a leasehold by subsequently transferring and subdividing the land under the lease[ix].
[i] Holly Creek Prod. Corp. v. Rose, 284 S.W.3d 542 (Ky. Ct. App. 2009).
[ii] Robbins v. Chevron U.S.A., Inc., 246 Kan. 125 (Kan. 1990).
[iii] Mittelstaedt v. Santa Fe Minerals, 1998 OK 7 (Okla. 1998).
[iv] Robbins v. Chevron U.S.A., Inc., 246 Kan. 125 (Kan. 1990).
[v].Foertsch v. Schaus, 477 N.E.2d 566 (Ind. Ct. App. 1985).
[vii] Enron Oil & Gas Co. V. Worth, 1997 Ok Civ App 60 (Okla. Civ. App. 1997).
[ix] Foertsch v. Schaus, 477 N.E.2d 566 (Ind. Ct. App. 1985).