Court Opinion

ID: 9800076
Source: CourtListenerOpinion
Date Created: 2023-08-31 07:53:25.721751+00
Date Added: 2024-06-11T09:40:39.902008
License: Public Domain

SANDSTROM, Justice,
dissenting.
[¶ 36] I respectfully dissent.
[¶ 37] The lynchpin of the majority opinion is the flawed premise that equates “no longer producing” with “undeveloped.” That’s like saying a person who’s had several children “the old-fashioned way” but stops having sex is a virgin.
[¶ 38] In the oil and gas lease, the Pugh clause provides, in part:
[I]f, at the end of the one year period from the end of the primary term hereof, this lease is maintained in full force and effect by virtue of production of oil and/or gas, this lease shall nevertheless expire as to all that part of said lands not included in a producing unit unless operations for the drilling of a well have been conducted during such one-year period. Lessee may continue to hold this lease in full force and effect as to all of said lands for subsequent and successive periods of one year by [conducting] additional drilling operations on undeveloped portions of said lands during each preceding one-year period. Should Lessee fail to conduct drilling operations during any such one-year period, then this lease shall expire as to said lands not included in producing units at the end of the one-year period during which no drilling operations were conducted....
[¶ 39] In interpreting the lease, the majority states, at ¶ 18, “[T]he lease will remain in full force and effect for one-year terms for all of the leased property when the lease was sustained by production and drilling operations under the terms ... as long as the lessee conducts additional drilling operations on undeveloped portions of the land during each one-year period.” (Emphasis added.) I agree with this statement by the majority; however, I cannot concur with the majority’s interpretation of “undeveloped” land as contained within the lease.
[¶ 40] Citing a few separate authorities, the majority, at ¶ 18, defines “developed” land to generally mean “land that has a completed well capable of producing oil or gas in paying quantities.” The majority, again at ¶ 18, then goes on to define undeveloped land, without citing any authority, as “land that does not have a completed well capable of producing oil or gas in paying quantities.”
[¶ 41] “The words of a contract are to be understood in their ordinary and popular sense rather than according to their strict legal meaning, unless used by the parties in a technical sense, or unless a special meaning is given to them by usage,....” N.D.C.C. § 9-07-09. Oil and gas leases are subject to the statutory rules of construction and interpretation. See MacMaster v. Onstad, 86 N.W.2d 36, 40 (N.D.1957).
[¶ 42] The problem with the majority’s reasoning is that it allows land that has a previously, but no-longer, producing well to be classified as undeveloped land. This construction cannot reasonably be included under the ordinary and popular sense of the word “undeveloped.” A review of oil and gas cases likewise demonstrates that “undeveloped land” cannot be construed in *703the way the majority has defined it for this lease.
[¶48] A court in Texas recently explained how the Pugh clause in one oil and gas lease operated: “[T]he Pugh clause operates at two mutually exclusive stages: either ‘[a]t the expiration of the Primary Term’ or ‘the conclusion of the continuous development program.’ ” Cmty. Bank of Raymore v. Chesapeake Exploration, L.L.C., 416 S.W.3d 750, 755 (Tex.App.2013). In that same case, the court explained the meaning of “undeveloped acreage” as “acreage not included in producing units or in units on which drilling has commeneed[.]” Id. The court explained the reasoning behind this construction: “As recognized in Sandefer Oil & Gas, the Pugh clause was created not only to protect the lessor from the anomaly of having the entire property held under a lease by production from a very small portion, but also to foster reasonable development of leased property.” Id. at 756.
[¶ 44] As the court recognized in Chesapeake Exploration, I would similarly conclude that the Pugh clause in this case can operate only at the expiration of the primary term or at the conclusion of a drilling or development program. “Undeveloped land” does not include land “in producing units or in units on which drilling has commenced.” See Chesapeake Exploration, 416 S.W.3d at 755. The majority attempts to categorize as undeveloped land, land which has previously had a producing well. This classification is contrary to the authority cited above, and is contrary to logic. I would conclude that once a unit of land has had a producing oil well, a Pugh clause relating to “undeveloped land” cannot operate to end the oil and gas lease with regard to that unit.
[¶ 45] In this case, there was a producing well which stopped producing oil and gas in paying quantities in October 2008. In November 2008, the North Dakota Industrial Commission granted Petro-Hunt’s application to create a spacing unit which included this particular unit. Petro-Hunt’s application for a drilling permit for the new spacing unit was not approved until October 2009. The wells were spud-ded and producing in 2010. The majority concluded that on July 15, 2009, the lease expired on that land under the terms of the Pugh clause. The majority’s construction of the lease is not reasonable under the law, or under the facts of this case. I would conclude the lease continued.
[¶ 46] DALE V. SANDSTROM