Implied Covenants of Reasonable Development and Further Exploration

Question 1

Speculative purposes

Answer 1

holding a lease for speculative purposes is considered a breach of the implied covenant of reasonable development

Question 2

Required Elements for Lessor to Prove

Answer 2

Probability of profit: Additional development would probably have been profitable

Imprudent Operator: The lessee acted imprudently in failing to develop

Question 3

Whitham Farms v. City of Longmont

Answer 3

Colorado
Defendant argued it was not currently economically prudent to develop the leasehold, but claimed they could hold the lease until development became economically prudent

If a reasonably prudent operator found they couldn’t drill additional wells at a profit, then not doing so would not constitute a breach of the implied covenant of reasonable development

Question 4

Gulf v. Kishi

Answer 4

Texas
Defendant owned leases stipulating a specified number of wells to be drilled in a specific time. During the time the defendant drilled more than a sufficient number of wells on the leases.

Express drilling provisions trump the implied covenant of reasonable development never arose

Question 5

Three separate remedies for a breach of the covenant of reasonable development

Answer 5

1. Cancellation: cancel the lease, save for a small area around existing producing wells
2. Conditional decree of cancellation: The lease is cancelled unless a specified number of wells are drilled within a fixed period of time
3. Damages: generally royalties are awarded as damages

Question 6

Implied covenant of further exploration

Answer 6

Colorado
requires lessee to explore undeveloped parts of the lease, not just known deposits. The lessor must prove that the lessee was unreasonable in not further exploring under the circumstances. Does not rest solely on profitability.

Question 7

Gillette v. Pepper Tank Co.

Answer 7

Colorado
Over a period of 20 years, the lessee developed one marginal well and one failed water-flood project.

Factors to be considered include time since last well was drilled, size of tract and number and location of existing wells, favorable geological inference, willingness of another operator to drill. Found the defendants had failed to explore and develop

Question 8

Sun Exploration v. Jackson

Answer 8

Texas
Plaintiff discovered a reservoir known as the Oyster Bayou Field.

In Texas development and exploring are not the same, so by developing the field they were fulfilling the covenant

Question 9

Implied Covenant to Market

Answer 9

To prove a breach of the implied covenant to market, it must be proven that the operator did not exercise due diligence in attempting to obtain or reestablish a market.

Question 10

McDowell v. PG & E

Answer 10

Louisiana
Mixed wet and dry gas to get it in the pipeline

COurt found that PG had made constant diligent attempts to restore the market and therefore there was no breach of covenant