Legal Updates

The Surge in DUC Wells Begs the Question: How Long Can a DUC Well Hold a Lease?

Just over a year ago, the U.S. Energy Information Administration (“EIA”) began including a supplement to its Drilling Productivity Report that contains monthly estimates of the number of drilled but uncompleted (“DUC”) wells in seven key oil and gas producing basins (the Anadarko, Appalachia, Bakken, Eagle Ford, Niobrara, Haynesville, and Permian basins). Prior DUC well inventory numbers made headlines starting in late 2015 (see here and here). The most recent EIA Drilling Productivity Report 1 shows that while DUC well inventory began to subside in the latter part of 2016 and first part of 2017, there has been a recent surge – largely led by significant growth in the Permian basin.

The economic impact of completing and bringing these wells online could create a surge in oil supply and destabilize recent crude oil price gains. Aside from the potential implications to crude oil prices, one consideration that remains top of mind for operators with DUC wells on maturing oil and gas leases is whether, or for how long, a DUC well can hold a lease.

One way to extend a lease beyond its primary term is through the continuous drilling provision in the “habendum” or secondary term portion of a lease. The habendum clause of a typical oil and gas lease provides that a lease will not terminate if the lessee “commences operations for the drilling of a well on leased lands or on acreage pooled therewith” by the end of the primary term. Not surprisingly, lessees, lessors, and litigants frequently disagree on what it means to “commence operations” to adequately hold the lease.

Unfortunately, there is no bright-line rule. Determining whether operations, including drilling but not completing a well, extend a lease beyond its primary term requires a fact specific, case by case analysis. Further, courts do not approach the issue uniformly from jurisdiction to jurisdiction. Generally, courts use both an objective standard (i.e. whether the operator diligently pursued completion of the well) as well as a subjective standard (i.e. whether the operator acted in good faith in relation to the lessor) to determine if DUC operations hold a lease beyond the primary term.2

Operators should exercise caution by documenting the type and scope of operations related to DUC wells and, if necessary, stagger operations so that significant gaps in time do not expose the operator to lessor claims that the operator has not diligently pursued completion of a well.3 Because operator conduct is judged against that of the “reasonably prudent operator” in similar circumstances, operators should also be aware of how the timing of their well completions and related operations stack up against other operators in the same field or region.

As always, numerous other lease provisions could affect duration and hold a lease beyond its primary term. While this post references the continuous drilling portion of the habendum clause in an oil and gas lease, it does not address shut-in royalty, pooling, unitization, Pugh, continuous operations, delay rental, or cessation of production clauses, among others, all of which may impact the duration of an oil and gas lease.

1DUC well data through October 2017 is found by clicking on “DUC data,” which loads an Excel spreadsheet showing data going back to December, 2013.

23 Patrick H. Martin and Bruce M. Kramer, Williams & Meyers Oil and Gas Law § 618.3 (2017) (collecting cases).

3E.g. Abell v. GADECO, LLC, 2017 ND 163, ¶ 6, 897 N.W.2d 914, 916 (reversing a trial court’s summary judgment order to terminate a lease in part because of operator’s preparatory activities such as surveying and staking a well site prior to expiration of the primary term); LeBar v. Haynie, 552 P.2d 1107, 1111 (Wyo. 1976)(operator acted diligently despite periodic interruptions in drilling activity because facts demonstrated a good faith intention to complete well and achieve production); Simpson v. Stanolind Oil & Gas Co., 210 F.2d 640, 642 (10th Cir. 1954).