To Drill or Not to Drill: Implied Covenants in Oil and Gas Leases

Will Rogers' Depression-era remark is painfully apt to the energy business of today. The low prices of recent years have inspired countless complaints that things can't go on like this. Lower energy prices tend to reduce leasehold activity, thereby reducing production and royalties. During such hard times, the potential for conflict between oil and gas lessors and lessees increases. The parties may review their lease for express performance obligations and find few. The role of implied covenants then becomes the focus of the analysis. Although the rules applicable to implied covenants vary by jurisdiction and with the facts of each case, there are common themes. In general, implied covenants sound in good faith and reasonableness. They are therefore adaptable to changing economic conditions. What is reasonable in one price environment may be unreasonable in another. Such flexibility is only fair because the lessor's remedies for breach of im-