Planning to be a Reasonable and Prudent Operator

November 14, 1993

Introduction

We, as lawyers, seldom have the opportunity to be involved in planning operations with our producer clients. Most often the important facts already exist before we are involved. We are more like firemen. The fire is already raging, when the client shows up with either a demand letter or Plaintiff's Original Petition in hand and the query: "They can't say these terrible things about me; they can't make me do these things - can they?" Your produces client will probably tell you that he is, in fact, a reasonable and prudent operator. The problem then is to explain to your client the difference between the "coffeeshop law" definition of a reasonable and prudent operator and the legal definition; and how that definition applies to his particular situation. As part of that discussion, you will introduce your client to the idea of implied covenants. Your client's training will most likely be in geology or engineering and he will be excited to learn that, as the lessee under an oil and gas lease, he has obligations to the lessors that are not spelled out in the lease, but are imposed hy the law, for the protection of the lessor. There is, however, still an opportunity for planning even though a demand letter has been received or a suit has been filed. One response of the producer to a demand letter or to a suit can be planning to become a reasonable and prudent operator as part of the settlement or trial of the lessor's claims.

This paper is not an exhaustive treatment of implied covenants. More than 500 pages is devoted to implied covenants in H. Williams & C. Meyers, Oil and Gas Law, Volume 5 (1992), hereafter "Williams & Meyers." You should refer to this or any of the other authorities on implied covenants for a scholarly discussion of implied covenants. This paper does not cover the reasonable and prudent operator standard as it may exist between an operator and non-operators under an operating agreement. This paper will briefly review the background and the black letter law of implied covenants and the prudent operator standard applicable to the lessor-lessee relationship. Then this paper will the analyze several important cases concerning implied covenants. The analysis will be from the perspecitve of a practitioner examining the facts in the cases analyzed and planning a response for a lessee to a claim for breach of one or more of the implied covenants.

Email Disclaimer