Generally, an ordinary oil and gas lease contemplates the development of all parts of the leased property.  The development of every part of the lease is an implied condition.[i] However, there are gas and oil leases that include express provisions relating to development after discovery[ii].  For example, the lease may contain provisions specifying the time within which a second well must be drilled, after a first well is discovered and developed.

Unless otherwise provided, the lessee of each oil and gas lease agreement must do what a reasonably prudent operator would do under like conditions to discover and develop a leased premise[iii].  A prudent operator standard consists mainly of three elements[iv]:

• to act in good faith;
• to act with competence; and
• to act with due regard to the interest of the lessor as well as the lessee.

There are certain conditions that are taken into account to determine the reasonably prudent operator standard in cases involving the lessee’s duty to develop and mine.  Some of them are: the location of the leased premises such as whether the premises is a wildcat territory or a producing field, the probable quantity of oil and gas that can be produced from the leased premises, market conditions, transportation facilities, extent and result of operations on adjacent land, the extent of the area that is normally drained by a well in the field, the character and extent of the subsurface structure, the cost of possible offset wells, and whether the well to be offset is producing oil or gas in paying quantities[v].

The law also recognizes an implied covenant on the part of the lessee that after the production of oil and gas in paying quantities, the lessee will continue to work on development of production of oil and gas in the undeveloped portion of the leased land with reasonable diligence[vi].

The lessee of an oil and gas lease has an implied obligation to the lessor:

• to take steps for reasonable development of the leased property thereby securing profits that will commonly benefit both the lessor and the lessee; and
• to act as a reasonable and prudent operator in developing, operating, and protecting leased property with due regard for the interests of both the lessor and lessee.

Some measures adopted to determine whether an oil and gas operator acted reasonably are:

• determining if there is reasonable development of leased premises by applying the prudent operator’s standard[vii]; and
• examining whether the lessee acted with due diligence for the benefit of both the lessor and the lessee[viii].

The implied obligation of a lessee to exercise reasonable diligence in development and mining can be suspended or totally terminated if the market conditions are such that development would result in a net loss to the lessee[ix].  Reasonable diligence in development and mining can be suspended under adverse conditions such as severe drop in prices or absence of pipeline accommodation.  But once the market conditions or temporary economic conditions beyond the control of a lessee get restored, the lessee would have a duty and responsibility to resume mining and development operations immediately under the implied covenant to mine.

However, a depression in oil market will not excuse oil and gas lessees from an implied obligation to exercise reasonable diligence because depression in market will not prevent the lessees from operating oil wells.

The implied obligation to develop leased property under oil and gas leases is not complete by the mere drilling of a well; the lessees’ duty also includes marketing of gas that is discovered in paying quantities from the wells drilled.  Therefore, a lessee must proceed with reasonable diligence from the standpoint of a reasonably prudent operator to market oil and gas after a well ha been drilled and oil or gas produced[x].  If there is no express provision as to marketing in an oil and gas lease, such covenant on the part of a lessee to do marketing is only an implied one and the said lessee will get a reasonable time after completion of a well to comply with such covenant[xi].

[i] Carter v. Arkansas Louisiana Gas Co., 213 La. 1028 (La. 1948).

[ii] Hickernell v. Gregory, 224 S.W. 691 (Tex. Civ. App. 1920).

[iii] Colpitt v. Tull, 204 Okla. 289 (Okla. 1950).

[iv] Park v. Young, 261 Ky. 367 (Ky. 1935).

[v] Johnson v. Hamill, 392 N.W.2d 55 (N.D. 1986).

[vi] State ex rel. Shell Petroleum Corp. v. Worden, 44 N.M. 400 (N.M. 1940).

[vii] Young v. Amoco Production Co., 610 F. Supp. 1479 (E.D. Tex. 1985).

[viii] Fischer v. Magnolia Petroleum Co., 156 Kan. 367 (Kan. 1943).

[ix] Weatherly v. American Agricultural Chemical Co., 16 Tenn. App. 613 (Tenn. Ct. App. 1933).

[x] Berry v. Wondra, 173 Kan. 273 (Kan. 1952).

[xi] Davis v. Cramer, 808 P.2d 358 (Colo. 1991).