Almost all mineral leases will have an initial term, generally between 3 and 5 years. During this initial term the energy company (“Lessee”) must commence the drilling of a well, or the lease will expire. Once the initial well is drilled, the lease will often specify a period of time for the next well to be drilled. If the oil company does not commence a well in this second time period the undeveloped portions of the lease may expire. One common issue that arises is, “What does it mean to ‘commence’ the drilling of a well”?
Generally speaking, the drill bit does not have to actually go into the ground for the drilling of a well to be “commenced”. The District Court for North Dakota articulates this principal as follows: “Drilling operations commence when (1) work is done preparatory to drilling, (2) the driller has the capability to do the actual drilling, and (3) there is a good faith intent to complete the well. It is not necessary that the drill bit actually penetrate the ground”. Anderson v. Hess, 733 F.Supp.2d 1100, 1107 (D. N.D. 2011).
W.L. Summers Oil and Gas Treatise, Section 349 expands on this topic: “The general rule seems to be that the actual drilling is unnecessary, but that the location of wells, hauling lumber on the premises, erection of derricks, providing a water supply, moving machinery on the premises and similar acts preliminary to the beginning of the actual work of drilling, when performed with the bonafied intention to proceed thereafter with diligence toward the completion of the well, constitute a commencement or beginning of a well or drilling operations within the meaning of this clause of the lease. If the lessee has performed such preliminary acts within the time limited, and has thereafter actually proceeded with the drilling to completion of a well, the intent with which he did the preliminary acts are unquestionable, and the court may rule as a matter of law that the well was commenced within the time specified by the lease.”
This issue comes up most often when (a) the landowner has leased his land to an energy company; (b) the land has become more valuable since the lease was entered; and (c) the landowner would now like to have the lease terminated. The bottom line in this case is, as long as the energy company is making sincere preparations to drill by their deadline, they have met their obligations under the lease.
As always, the publication of this post will not create an attorney-client relationship. Nor can the posting be considered “advice” as every situation needs to be evaluated according to its own facts. These posts are intended as informational only. Any party entering a mineral lease should hire a qualified attorney for representation.