Implied Covenants Discovered: The landmark Supreme Court case Amoco Prod. Co. v. Alexander, 622
The Texas Supreme Court has described the implied covenants in Texas as these broad implied covenants: (1) to develop the premises, (2) to protect the leasehold, and (3) to manage and administer the lease. 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 568*568 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.
Reasonably Prudent Operator
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.
Implied Covent to Protect the Leashold
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. 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.
Reasonably Prudent Operator Protecting Against 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).
Proving Your Case
This is only meant as a short discussion of implied covenants and not an complete review or analysis. For a landowner to prove that a produce breached on of the implied covenants of the oil and gas lease requires and exhaustive analysis of the facts to see if a covenant was breached. In light of the recent Supreme Court decisions in Texas putting a lot of responsibility on landowners to discover breaches on their own, it is important that landowners quickly contact an Oil and Gas attorney as soon as they suspect one of these covenants has been breached.
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