November 13, 2014 Articles

Operations under Ohio Oil and Gas Leases

The exact contours of what constitutes operations and what an implied covenant to develop looks like in Ohio are not clear.

By Stephanie Burt – November 13, 2014

Recently Ohio has seen a great deal of oil and gas lease disputes. One of the most common challenges brought by lessors is an action seeking to invalidate or terminate an oil and gas lease on the basis that the lease expired at the end of the primary term. Typically, the lessors seek to invalidate the oil and gas lease based on the belief that the conditions of the habendum clause were not satisfied so the lease could not have transitioned to the secondary term. This type of lease dispute usually boils down to the question of whether sufficient operations occurred on the leased property.

Historically, the standard for commencing operations in Ohio sufficient to keep a lease from expiring and hold it into its secondary term has been satisfied by preparatory actions such as surveying a well site, ground clearing, staking a well, or filing certain documents with the required government agencies. See, e.g.Kaszar v. Meridian Oil & Gas Enters., Inc., 499 N.E.2d 3, 4 (Ohio Ct. App. 1985). Recently, state and federal courts in Ohio have weighed in, elaborating on the standard and what is required for a lessee to hold an oil and gas lease into the secondary term.

The Sixth Circuit, applying Ohio law, held that applying for well permits and recording a declaration of pooling and unitization qualified as sufficient operations under an oil and gas lease to extend the lease into the secondary term. Henry v. Chesapeake Appalachia, L.L.C., 739 F.3d 909 (6th Cir. 2014). More specifically, the court held that filing a declaration of pooling and unitization was “similar or incidental” to searching for gas, which is what the lease required for operations to extend the lease. There may be circumstances, however, where filing a declaration of pooling and unitization is not considered sufficient to hold the lease into the secondary term, in light of the actual development contemplated in the unit.  An Ohio state trial court recently considered whether including a small portion of leased acreage in a drilling unit was sufficient to extend the primary term of the oil and gas lease into the secondary term. Rapp v. Eric Petroleum, No. CVH-2012-0005 (Ohio Ct. Com. Pl. Mar. 31, 2014). The court found that this did not constitute sufficient operations to extend the lease, instead explaining that including a small portion of the leased acreage—0.4 acres—did not serve the purpose of developing the leased property. This case is currently on appeal before the Ohio Seventh District Court of Appeals.

Although commencing or conducting operations is what is commonly required to hold an oil and gas lease into the secondary term, there are a number of other lease forms with variations in the habendum clauses and, therefore, different requirements. Courts in Ohio have considered a few of the more common variations on the habendum clause requirement. For example, the Southern District of Ohio held that “drilling or reworking operations” required something more than the Henry and Kaszar line of cases regarding operations. Curtis v. Hess Ohio Res., LLC, 2014 WL 4249857 (S.D. Ohio Aug. 27, 2014);Derosa v. Hess Ohio Res., LLC, 2014 WL 4249861 (S.D. Ohio Aug. 27, 2014). The district court reasoned that a “significant step” toward drilling was required, and found that the lessees had satisfied that requirement because they had received a drilling permit, prepared the location for the well pad and access road, recorded a declaration of pooling and unitization, and moved equipment onto the site. More commonly, if a habendum clause does not expressly reference “operations,” it requires a well capable of production on the leased acreage to extend the lease into the secondary term. An Ohio appellate court very recently explained that this type of language requires the drilling of a well capable of production to extend the lease into the secondary term, and that whether a well is capable of production is something left to the good faith and sound judgment of the lessee. Hupp v. Beck Energy Corp., 2014 Ohio 4225 (Ohio Ct. App. 2014).

The corollary to a discussion of what actions by the lessee are required to hold an oil and gas lease into the secondary term is that, once the lease is in the secondary term, the lessee may have an implied obligation to develop the leased acreage. Absent provisions in an oil and gas lease to the contrary, an covenant to develop the lease is implied by Ohio law. However, the breadth and applicability of this implied covenant is being litigated in the state’s trial courts, and a few recent opinions suggest that the implied covenant is fairly narrow. Confirming the understanding in the oil and gas industry, and in other mineral-producing jurisdictions, the Seventh District Court of Appeals held that any implied covenant to develop is excused during the primary term by a delay-rental provision in an oil and gas lease only. Hupp v. Beck Energy Corp., 2014 Ohio 4225 (Ohio Ct. App. 2014). In fact, the Seventh District held that the implied covenant to develop only exists in an oil and gas lease that does not contain any agreement regarding development. It follows, then, that if a lessee extends the primary term of an oil and gas lease pursuant to an extension provision in the lease, any implied covenant to develop does not obligate the lessee to develop during the extended primary term. Baile-Bairead, L.L.C. v. Magnum Land Servs., L.L.C., 2014 WL 1917527 (S.D. Ohio May 13, 2014). Ohio courts have also rejected other attempts by lessors to expand what the implied covenant to develop requires, joining Pennsylvania in holding that the implied covenant does not require lessees to develop all depths or all subsurface formations. Marshall v. Beekay Co., 13 QT 287 (Ohio Ct. Com. Pl. Apr. 9, 2014). On the other hand, the Curtis and Derosa opinions relied on the implied covenant to develop when the court found that the leases had expired as to only the acreage outside the drilling and production unit because the wells had been shut in for several years without evidence of plans to connect them into a pipeline.

While the exact contours of what constitutes operations and what an implied covenant to develop looks like in Ohio right now are not clear, it is clear that state and federal courts in Ohio will continue to address these evolving issues and define what is required of the lessee during the primary and secondary terms of an oil and gas lease.


Keywords: energy litigation, oil and gas lease, Ohio, primary terms, secondary terms


Stephanie Burt is an associate with Reed Smith LLP in Pittsburgh, Pennsylvania.


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