Implied Covenant to Protect from Drainage

Question 1

Required elements of drainage

Answer 1

1. Substantial drainage from the leasehold
2. Probability of profit

The lessee as an RPO has a duty to protect the leasehold from both local and field-wide drainage
Under the implied covenant, Production in paying quantities means a reasonable profit over all costs, not just operating costs

Question 2

Sundheim v. Reef

Answer 2

Montana
Due to insufficient financial ability to redrill the well, nothing was done for a period of four years, during which plaintiffs allege as much as 145,000 barrels of oil was drained from wells on adjacent majors

The court agreed that notice of drainage is required, however, it can be either actual or constructive. It must be proved that the operator knew there was drainage occurring.

Question 3

Finley v. Marathon

Answer 3

Illinois
Defendant drilled an injection well on the property, and began a water injection project, which the plaintiffs allege forced oil to migrate to the neighboring tract

Drainage could not be proved. A communitization agreement is not equivalent to a unitization agreement, which creates a joint venture and establishes fiduciary duties. There is no fiduciary duty here, as the lease benefits both parties

Question 4

Amoco v. Alexander

Answer 4

Texas
Defendant owned both downdip and updip leases.

The defendant should have sought rule 37 permits to drill additional wells. Must protect from field wide drainage and act as a prudent operator with respect to each well