Implied Covenants of Oil & Gas Leases
This post will cover some of the implied covenants included in all Oil & Gas Leases executed in Oklahoma. You can think of these implied covenants as obligations and duties that oil and gas companies owe to the mineral interest owner. Since these covenants are implied, it is not necessary that they be written into an Oil & Gas Lease, although they may still be included. Let’s get started!
Implied Covenant to Protect Against Uncompensated Drainage
Although oil and gas substances typically collect in reservoirs below the surface, these substances are not static and can therefore move around. This means that a successfully producing well could potentially be drained by a second well located on adjoining land if it is producing from the same reservoir/formation. Oil and gas companies have an implied duty to prevent against such drainage and may be found to be in breach of this covenant is the drainage is considered substantial.
Implied Covenant to Maintain a Well Capable of Producing in Paying Quantities
If a well is drilled and can produce in paying quantities, then the oil and gas company is obligated to maintain such a well. This means that the oil and gas company can’t do things like plug or abandon the well. But what does it mean for a well to “produce in paying quantities”? In Oklahoma, it means that the oil and gas company can make a profit from the produced minerals after accounting for operating and maintenance costs of the well. To meet this standard, Oklahoma does account for marketing costs when determining if production is profitable.
Implied Covenant to Market the Oil and Gas Produced
Once it’s determined that a well is capable of production in paying quantities, the oil and gas company has a duty to market the produced oil and gas. The oil and gas company isn’t required to immediately market the produced minerals, but must do so with a reasonable time. When it comes to determining what qualifies as a “reasonable time,” Oklahoma takes a case-by-case approach. What’s considered reasonable for one well may not be reasonable for another, due to different factors like the type of minerals produced and market circumstances.