Opinion ID: 1796655
Heading Depth: 1
Heading Rank: 1

Heading: field-wide drainage

Text: Whether Amoco had a duty to protect the Alexander downdip leases from field-wide drainage, or a duty not to drain the leases by its updip operations has not been considered by the Texas courts. The Court of Civil Appeals held Amoco had a duty to protect the Alexanders from field-wide drainage. An oil and gas lessee has an implied obligation to protect from local drainage. Local drainage is oil migration from under one lease to the well bore of a producing well on an adjacent lease. Local drainage depends upon production from wells in a specific area in a field. It will begin, increase, or decrease according to production. Local drainage may be in several directions in one field and can be prevented by drilling offset wells. Field-wide drainage in a water-drive field, however, is relatively independent of the location of particular wells. It depends on the water-drive and production from all wells in the field. Protecting from field-wide drainage, therefore, is more difficult than protecting from local drainage. Amoco urges the Court of Civil Appeals correctly held the drainage in this case was field-wide but the court erred in holding the law imposes an obligation upon Amoco to prevent field-wide drainage, or an obligation not to drain the Alexander leases by its updip operations. Amoco recognizes the obligation to protect from local drainage, but states the Court of Civil Appeals was in error in extending that obligation to require a lessee to protect his lessor from field-wide drainage. Amoco argues this imposes a new implied obligation never previously held to exist. Has the Court of Civil Appeals imposed a new obligation never previously held to exist? The terms obligation, duty, and covenant have been used interchangeably in oil and gas cases to describe the performance required of a lessee under an oil and gas lease. Traditionally, matters relating to the development of the lease and the protection of the lessor's interest are not expressly included in the written lease. Since the early history of oil and gas litigation, the courts have held that covenants are implied when an oil and gas lease fails to express the lessee's obligation to develop and to protect the lease. In recent years, implied covenants have been expanded to matters of management of the lease. The words duty or obligation are best used to express the requirements of a lessee in performance of the implied covenants. Commentators differ on the classification of implied covenants in oil and gas leases. See R. Hemingway, The Law of Oil and Gas § 8.1 (1971); 5 E. Kuntz, a Treatise on the Law of Oil and Gas § 55.1 (1978); 5 H. Williams & C. Meyers, Oil and Gas Law § 804 (1980); Walker, The Nature of the Property Interests Created by An Oil and Gas Lease in Texas, 11 Texas L.Rev. 399 (1933). These covenants are usually grouped into categories according to the factual basis of the dispute between the lessor and lessee. 5 H. Williams & C. Meyers, Oil and Gas Law § 804 (1980). However, these categories are specific applications of three broad implied covenants to particular controversies. These broad implied covenants are: (1) to develop the premises, (2) to protect the leasehold, and (3) to manage and administer the lease. [1] The standard of care in testing the performance of implied covenants by lessees is that of a reasonably prudent operator under the same or similar facts and circumstances. Shell Oil Co. v. Stansbury, 410 S.W.2d 187, 188 (Tex.1966); Texas Pac. Coal & Oil Co. v. Barker, 117 Tex. 418, 431-32, 6 S.W.2d 1031, 1035-36 (1928). The reasonably prudent operator concept is an essential part of every implied covenant. Every claim of improper operation by a lessor against a lessee should be tested against the general duty of the lessee to conduct operations as a reasonably prudent operator in order to carry out the purposes of the oil and gas lease. Amoco contends the Court of Civil Appeals' holding expands the offset drilling obligation beyond the point of fairness and workability by including within it the obligation to offset field-wide or regional drainage. Field-wide drainage affects all leases in the field; and if the duty exists, each lessee may be required to drill offset wells. The drilling of offset wells increases field-wide drainage and sets off a chain reaction the drilling of each additional well would trigger a field-wide obligation to drill more offsets and each drilling would further accelerate the field-wide drainage. Amoco argues, therefore the end result of carrying out the obligation would be self-defeating. Amoco also says that updip leases enjoy a natural advantage over downdip leases. If the natural drainage is to be offset, the only valid way is through field-wide regulation by the Railroad Commission regulating rates of production to protect correlative rights in the field. The implied covenant to protect against drainage is part of the broad implied covenant to protect the leasehold. The covenant to protect the leasehold extends to what a reasonably prudent operator would do under similar facts and circumstances. As is true of the other implied duties, it is not easy to separate the duty from the standard of performance. The lessee is required generally to do what a prudent operator would do. Protection of the leased premises against drainage is but a specific application of that general duty. 5 E. Kuntz, a Treatise on the Law of Oil and Gas § 61.3 (1978). The covenant to protect from drainage is not limited to local drainage. It extends to field-wide drainage. Oil lost by field-wide drainage is just as lost as local drainage oil. The methods of safeguarding from the loss may be different and protecting from local drainage may be easier. However, it is no defense for a lessee to say there is no duty to act as a reasonably prudent operator to protect from field-wide drainage. A lessor is entitled to recover damages from a lessee for field-wide drainage upon proof (1) of substantial drainage of the lessor's land, and (2) that a reasonably prudent operator would have acted to prevent substantial drainage from the lessor's land. In Shell Oil Co. v. Stansbury, supra , this Court held a reasonably prudent operator would have drilled a well on the lessor's land to protect from drainage. However, because of the complexity of the oil and gas industry and changes in technology, the courts cannot list each obligation of a reasonably prudent operator which may arise. The lessee must perform any act which a reasonably prudent operator would perform to protect from substantial drainage. The duties of a reasonably prudent operator to protect from field-wide drainage may include (1) drilling replacement wells, (2) re-working existing wells, (3) drilling additional wells, (4) seeking field-wide regulatory action, (5) seeking Rule 37 exceptions from the Railroad Commission, (6) seeking voluntary unitization, and (7) seeking other available administrative relief. There is no duty unless such an amount of oil can be recovered to equal the cost of administrative expenses, drilling or re-working and equipping a protection well, producing and marketing the oil, and yield to the lessee a reasonable expectation of profit. Clifton v. Koontz, 160 Tex. 82, 96-97, 325 S.W.2d 684, 695-96 (1959). The Court of Civil Appeals has not imposed a new obligation upon Amoco. The jury, in finding that Amoco failed to operate the Alexander leases as a reasonably prudent operator, has determined that Amoco failed in its duties under the implied covenants to protect the leasehold. Amoco argues the Court of Civil Appeals did not consider that Amoco has obligations to all of its lessors in the field. Anything it does to maintain or increase production from updip leases may accelerate the water drive and expose Amoco to liability to downdip lessors. If Amoco fails to maintain or increase updip production, it is exposed to liability from the updip lessors. Amoco argues the Court has placed it between contrary obligations from which there is no escape. The fulfilling of one obligation necessarily causes the breach of the other. The conflicts of interest of Amoco, as a common lessee, cause us concern. The Alexander leases provided for 1/6th royalty while Amoco's updip leases provided for 1/8 th royalty. There is no economic incentive for Amoco to increase production on the Alexander lease because it will eventually recover the Alexander's oil updip. Money invested in the Hastings, West Field, will have a longer productive life if invested updip. The greater the updip production the sooner Amoco's competitor Exxon will water out. Money spent updip will yield greater returns than money spent downdip because of higher daily production. With downdip operators out of production Amoco can produce its upper sands without competition and can begin production from its lower sands where it does not have significant production competition. These conflicts would not occur if Amoco was not a common lessee (lessee common to downdip and updip lessors). If the Alexanders were the only Amoco lessor, their interests would more nearly coincide. Amoco's interest would be to capture the most oil possible from the Alexander leases before they watered out. Amoco's responsibilities to other lessors in the same field do not control in this suit. This lawsuit is between the Alexanders and Amoco on the lease agreement between them and the implied covenants attaching to that lease agreement. The reasonably prudent operator standard is not to be reduced to the Alexanders because Amoco has other lessors in the same field. Amoco's status as a common lessee does not affect its liability to the Alexanders.