Off-Unit Commencement of Operations

Most modern oil and gas leases provide that a lease will not terminate if the lessee “commences operations for the drilling of a well on the leased lands or on acreage pooled therewith” by the end of the primary term as stated in the lease. This lease clause has generally been held to allow the lessee to begin surface operations prior to the expiration of the primary term to continue the lease. Certain surface activities such as roadwork, clearing the land, surveying, or constructing a padsite may allow the lessee to extend the oil and gas lease past the primary term without the lease terminating. Some jurisdictions have drawn a distinction between commencing the drilling of a well versus commencing operations on site (to be later followed by the drilling of a well). But, after surface operations have begun, courts generally require that a bona fide attempt to proceed thereafter with due diligence toward the drilling and completion of a producing well to continue to hold the lease.

In the most technologically advanced era in the oil and gas industry, massive horizontal wells and multi-unit drilling projects have become a standard procedure amongst companies. Oil and gas lessees, or operators, often do this by drilling off-unit in another direction into another separately spaced unit to maximize efficient recovery of the hydrocarbons underlying that specific tract of land. In other cases, a lessee or operator will commence a well in one section and then extend said well horizontally into an adjacent section, thereby creating a “multiunit well.” Following the standardization of these large horizontal wells, a novel issue has arisen in the case where an operator commences operations on lands located outside the drilling and spacing unit, and in the process of drilling does not transverse the second drilling and spacing unit or section until after the primary term of one of the leases have expired.

Off-Unit Commencement of Operations

If the lease, by its terms, allows the commencement of operations on a lease tract to extend the primary term, would the clause still have the same effect when the surface operations are commenced outside the lease tract or spacing unit? This may be the sole question to answer if analyzing whether or not commencement of operations or drilling off-site began near the expiration of the primary term. Due to the recent adaption of multi-unit wells and offsite drilling as the norm, this issue could be determinative in deciding whether or not the lease has expired.

Although there is no Oklahoma caselaw dealing with this particular issue, there are a few cases[1] that have dealt with the issue of off-unit commencement of operations where the drillbit did not enter into the drilling unit until after the expiration of the primary term of the lease. In these cases, the courts looked to the specific language of the lease clause to determine whether or not the penetration of the drillbit in one unit was sufficient to hold both units. In analyzing the lease clauses, the courts looked to whether the operations standing alone would be sufficient to perpetuate the lease, even if performed off-site. The commencement clauses were also scrutinized by the courts to see if the lease required commencement on the surface of the leased tract as opposed to commencement off-site. Finding that the operations complied with the parties’ intent, the courts found that the leases were not expired, and allowed the off-site commencement of operations to hold the leases into their secondary terms.

To conclude, whether analyzing the title to a multi-unit section, or putting together the drilling schedule for a large multi-unit horizontal well, be careful to review the commencement clauses of all of your particular leases to know what the lease specifically requires to deem that the well is “commenced.” If there are any other topics/issues you would like to discuss with the energy community, or myself, please mention your ideas and thoughts in the comment section.

[1] See A&M v. Miller, 11 Kan. App. 2d 152 (1986); Manzano Oil Corporation v. Chesapeake Operating, Inc., 178 F. Supp. 2d 1217 (D.N.M. 2001).

Jordan D. Volino is an attorney at Hampton and Milligan practicing in Oklahoma City, Oklahoma, who specializes in mineral title examination, oil and gas law, property law, as well as federal and Indian title and leasing. Jordan is a member of the Oklahoma Bar Association and the Oklahoma City Association of Professional Landmen. Jordan also is a published scholar, national champion in energy negotiations, and frequently lectures over Oklahoma oil and gas matters.

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