Oklahoma Court of Civil Appeals Addresses Off-Unit Commencement Activities
On June 9, 2014, Harold Lawson executed an oil and gas lease covering approximately 320 acres in the NW/4 and SE/4 of Section 11-11N-6W, Canadian County, Oklahoma, IM (hereinafter “Lawson Lease”). In May, 2017, the Oklahoma Corporation Commission established a 640-acre horizontal drilling and spacing unit for Section 11. On the same day, the Oklahoma Corporation Commission established a 640-acre horizontal drilling and spacing unit for Section 14, the section south of Section 11. Pursuant to 50 O.S. Supp. 2014 § 87.8(C), Citizen Energy II filed its application for a multi-unit horizontal well with the completion interval in two units, Sections 11 and 14. The application was granted in May 2017. The McWhirther 1H-14-11 well was spud in the SE/4 of Section 14. The intent of the Operator was to drill a horizontal lateral from south to north, eventually penetrating Section 11. This lateral did not penetrate Section 11 before the primary term of the Lawson Lease expired. However, commencement of operations did occur in Section 14 before the expiration of the Lawson Lease’s primary term. The dispute in this case is whether the operations that were commenced in Section 14 were sufficient to satisfy the commencement of the drilling clause in the Section 11 Lawson Lease.
The Court of Civil Appeals of Oklahoma, Division I (hereinafter “COCA”) answered in the affirmative. The question the court addressed was “[w]hether Owner’s leased acreage included in the Section 11 unit was extended into its secondary term as a matter of law by commencement of activities off-unit in Section 14.” Harold Lawson, Trustee of the Harold Lawson Living Trust (hereinafter “Lawson”) was the original Plaintiff in this case and is the party appealing the decision of the District Court. Lawson took the position that the literal terms of the Lawson Lease must be satisfied in order to perpetuate the Lease into its secondary term. The Lease provides that Lessee must “commence to drilling a well . . . within the terms of the lease . . . or on acreage pooled therewith.” Lawson contended that Operator, being the Defendant in this case, should have physically entered and commenced drilling on the leased premises or acreage pooled therewith within the primary term of the Lawson Lease. Conversely, Operator contended that physical entry is not required and that commencement of drilling in Section 14, which contemplated drilling on pooled acreage in Section 11, satisfied the commencement of drilling provision in the Lease.
The Oklahoma Supreme Court has interpreted “commence to drilling” language to mean something less than actual spudding of a well, absent specific language in the lease to the contrary, and that pre-drilling surface activities are sufficient to satisfy the commencement clause (See Kuykendall v. Helmerich & Payne, Inc., 1987 OK 51, and Cromwell v. Lewis, 1923 OK 1028). According to COCA, in this case the spudding of the McWhirther 1H-14-11 well in Section 14 sufficed as commencement of operations under the Lawson Lease.
Additionally, 50 O.S. Supp. 2014 § 87.8 authorizes multi-unit horizontal wells, meaning a well with the completion intervals in two or more units producing from the same formation. The statute provides that “[a] multiunit horizontal well shall be treated as a well in each of the affected units and shall be subject to all of the rules otherwise applicable to any other well in any of the affected units.” According to COCA, “affected unit” within the statute is defined as a unit included in a multi-unit horizontal well application, those units actually penetrated within the completion interval of the well, and the multi-unit horizontal well targeted common source of supply.
Here, Operator’s application for a multi-unit horizontal well proposed to drill a horizontal well with an extended length lateral to underlie both Sections 11 and 14 and contemplated completion in the Woodford and Mississippian formations underlying both Sections. According to COCA, “Sections 11 and 14 are affected units.” It would of course follow that a horizontal well drilled in Section 14 would be treated as a well commenced in Section 11. COCA concluded that commencement of operations in Section 14 during the Lease’s primary term in Section 11 “extended the Lease as a matter of law, provided the well so commenced is completed as a producing well.” Petition of Certiorari to the Oklahoma Supreme Court was denied on December 14, 2020. The COCA decision was ordered for publication to be given precedential effect.
The Lawson holding is clearly favorable to oil and gas operators drilling multi-unit horizontal wells under 50 O.S. Supp. 2014 § 87.8. Section 87.8(B)(3) directs that a multi-unit horizontal well is treated as a well in any affected unit. Because of this, once the necessary spacing and multi-unit horizontal well applications are approved by the Oklahoma Corporation Commission, commencement activities in one unit are treated as commencement activities in the other affected units. Consequently, leases in both sections of the multi-unit are perpetuated into their secondary terms as a matter of law, assuming there are no other provisions limiting such in the leases.
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