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Duty to Develop a Well

An oil and gas lease lays out the entirety of the contract between an oil and gas company and a landowner, which typically results in the payment of fees to a landowner in exchange for the ability of the oil and gas company to drill on their land. However, implied covenants exist in addition to the promises made within the contract, and these implied duties lead to the ability of a landowner to sue an oil and gas company for any inaction on their party, such as breach of the duty to develop.

Duty to Develop

Most oil and gas lease provide a set timetable for the development of a well, or the oil and gas company will be forced to pay agreed-upon amounts to the lessor of the property. However, there is also an implied duty to develop buried within Texas law. Through this duty, an oil and gas company must act as a reasonably prudent operator in developing the premises.

In the development process, oil and gas companies often drill “wildcat” wells, often followed by development wells. The majority of actions against oil and gas companies is the failure to drill a development well. While oil and gas companies do have the implied duty to develop, they are not subject to a duty to explore. Therefore, if you estimate that the company could be developing 10,000 acres and the company is only exploring and developing 1,000 acres, you cannot bring a suit for a breach of duty.

Damages for Failure to Develop

As a landowner or lessor of the lease, you are entitled to seek compensation from the oil and gas company for their failure to develop. When seeking cancellation of a lease, you must first give the oil and gas company notice, and therefore the opportunity to comply with the lease.

Damages are often measured by the amount of royalties you would have received had the oil and gas company drilled the well. Interest is often included in this amount as well. However, breach of the duty to develop is contingent on many factors, including whether a reasonably prudent operator would have developed the well. Courts will also look at the following calculation: total profit – operating and capital expenses.

In Texas, the oil and gas company may get an alternative decree by the court that acts like a one last chance doctrine. However, the company may be liable for the amount of royalty plus interest owed if the company does not act within the added period of time.

Malley Law Firm | Houston Oil and Gas Attorney

If you have questions regarding the duty to develop or believe that you have been wronged by an oil and gas company, do not hesitate to contact the Malley Law Firm. Tony Malley has years of experience in handling oil and gas disputes, and is especially experienced in drafting and reviewing lease agreements. Contact our Beaumont or Houston office today for your initial free consultation.

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