Opinion ID: 154917
Heading Depth: 2
Heading Rank: 2

Heading: t he d rainage c laim

Text: Finally, Lessors argue that ARCO failed to protect their units against drainage. The district court granted summary judgment to ARCO on this issue because it found that a prior decision of the Oklahoma Corporation Commission bars Lessors’ claim.
Under Oklahoma law, all oil and gas leases contain the implied covenant to develop a lease as a prudent operator, which includes “a duty to protect against drainage by the lessee’s other operations.” Leck v. Continental Oil Co., 800 P.2d 224, 228 (Okla. 1989) (quoting Samson Resources Co. v. Corporation Comm’n, 702 P.2d 19, 23 (Okla. 1985)). Normally, the duty to protect against drainage requires the lessee to drill an offset well on the lessor’s land or pay damages to the lessor to compensate for gas being drained by adjacent wells. See Leck, 800 P.2d at 227. Thus, an action for drainage is proper where a lessee operates wells on the adjacent tracts in such manner as to “get a larger share” of the minerals beneath the leased premises or “to favor one lessor at the expense of another.” Id. (quotation omitted). Under Oklahoma law, the failure to protect against drainage, under appropriate facts, “may be more than just a breach of the contract - 24 - (lease), but could amount to a tortious act.” Id. (citing Morriss v. Barton, 190 P.2d 451, 457 (Okla. 1947)).
In this case, the district court did not separately address the merits of Lessors’ various theories of liability in support of their drainage claim. Instead, the district court held that Lessors’ drainage claim was barred by the “governmental regulations” clause in their leases with ARCO. This clause states: This lease shall not be terminated, in whole or in part, nor shall lessee be held liable in damages, for failure to comply with the express or implied covenants hereof, if compliance therewith is prevented by, or if such failure is the result of any Federal or State laws, executive orders, rules or regulations. App’t. App. at 99. The district court concluded that any failure by ARCO to protect Lessors from drainage was caused by ARCO’s compliance with the OCC Field Rules. The court noted that under the Field Rules, ARCO had until the end of 1991 “to adjust any over and under production.” Because ARCO performed the workovers “in conformity with” the Field Rules, the court held that the governmental regulations clause excused ARCO from any potential liability for failure to comply with the covenant to protect against drainage. In so holding, the court relied on Fransen v. Conoco, Inc., 64 F.3d 1481 (10th Cir. 1995). We disagree that the governmental regulations clause bars Lessors’ claim against ARCO for breach of the implied covenant to protect against drainage. - 25 - While we recognize that “the express provisions of an oil or gas lease may negate or modify the lessee’s implied covenants,” Fransen, 64 F.3d at 1488, we conclude that the provisions of the Field Rules did not prevent or render impossible ARCO’s compliance with its duty to protect against drainage. Although the Field Rules may have allowed ARCO to perform the workovers, nothing in the Field Rules excused ARCO from liability for drainage caused by the workovers. Put differently, the Field Rules neither commanded ARCO’s selective performance of workovers nor precluded ARCO from taking action with respect to Lessors’ wells to prevent the alleged drainage from occurring. As such, the Field Rules did not prevent ARCO’s compliance with its implied duty to protect Lessors’ units against drainage. We do not read Fransen as broadly as the district court. In Fransen, several lessors alleged that their lessee breached the covenant to protect against drainage by failing to drill an offset well on their property. Fransen, 64 F.3d at 1484-85. The lessee defended on the basis that the OCC had specifically denied permission to drill a second well on the lessors’ land, excusing the lessee from any liability resulting from its failure to drill an additional well. Id. at 1488. We held that the lessors’ drainage claim was barred because the OCC decision “prevented compliance with any duty the defendants might otherwise have had to drill an - 26 - offset well” and because “a prudent operator would not drill a well that was prohibited by law.” Id. ARCO contends that Fransen bars Lessors’ drainage claim in this case because ARCO’s workover operations, as the district court put it, “equate[d] with compliance with . . . the Field Rules.” Watts v. Atlantic Richfield Co., No. 95339-S, slip op. at 13 (E.D. Okla. Jan. 11, 1996). Mere compliance with a governmental regulation, however, is insufficient to satisfy the standard contained in a governmental regulations clause. Fransen makes clear that to satisfy this standard, the governmental regulation at issue must preclude a lessee from performing the sought-after relief. In Fransen, an OCC decision specifically prevented the drilling of an offset well. Unlike the situation in Fransen, nothing in the Field Rules prevented ARCO from taking steps to protect Lessors’ units from drainage. More importantly, nothing in the Field Rules sanctioned the selective performance of workovers on some wells thereby causing drainage from other wells operated by the same lessee. Because Fransen is not so broad as to bar Lessors’ claim for drainage, we reverse the grant of summary judgment in favor of ARCO and remand for further proceedings.