Opinion ID: 882219
Heading Depth: 2
Heading Rank: 3

Heading: Prudent Operator/Reasonable Man Standards.

Text: The Sundheims maintain that Reef Oil and Frank Hiestand, in addition to breaching implied covenants to the lease, also violated the prudent operator standard. This standard is best understood through analogy to the reasonable man standard of tort law. Simply stated, the prudent operator is a reasonable man engaged in oil and gas operations. He is a hypothetical oil operator who does what he ought to do not what he ought not to do with respect to operations on the leasehold. Williams and Meyers, Oil and Gas Law § 806.3 (1990). Sundheims argue that Reef Oil and Frank Hiestand breached this obligation because they did not develop the leasehold. Instead, they took the lease for speculative purposes, and while they were searching for an individual to commence drilling operations substantial drainage occurred. The District Court granted summary judgment in favor of the defendants on this count. It held that the prudent operator standard was not in itself an independent cause of action and the prudent operator standard is applied in conjunction with and serves to define the other implied covenants. We agree with the District Court. We have previously held that the Sundheims have presented a valid cause of action for breach of the implied covenant to protect. The duty to act as a prudent operator underlies this contractual obligation. In order to prevail on this issue, the Sundheims must prove at trial that, under the circumstances of their case, Reef Oil and Frank Hiestand did not act as reasonably prudent operators to prevent drainage. Proof of this issue necessarily entails a showing that actual drainage occurred and that an offset well would have produced oil in paying quantities. Williams and Meyers, Oil and Gas Law § 822 (1990). Proof of the second element of the above test would necessarily establish that the defendants failed to act as reasonably prudent operators and, assuming drainage can be established, that they breached the covenant to protect. This rule of law is supported by the rationale that a reasonably prudent operator would drill an offset well if he could gain a profit and if it was necessary to protect the value of the lease. On the other hand, no breach of this standard, could be established if it cannot be shown that such a well could be drilled at a profit to the lessee. Accordingly, in such circumstances there would be no breach of the covenant to protect. It is clear from the facts of this case, that the Sundheims allegations of breach of the covenant to protect and breach of the prudent man standard are one in the same. Proof of one necessarily entails proof of the other. Therefore, the District Court correctly granted summary judgment dismissing the allegation alleging breach of the prudent operator standard.