North Dakota Drilling Operations Cessation of Production

North Dakota Drilling Operations Cessation of Production

Lease Extension “Savings” Clauses;
Drilling Operations Cessation of Production

Since most lessees will not actually covenant – make a promise – to drill for oil and gas, the mineral lease will generally – in a North Dakota Drilling Operations and Cessation of Production clause:

  • provide the lessee with an option to drill or search for minerals during the primary lease term,
    and
  • allow the lessee to continue the lease past the primary term upon the occurrence of certain events (a “savings event“).

Therefore, even though the primary term of a mineral lease may be relatively short, the full duration of the lease may be significantly longer by reason of its extension into a secondary term due to the application of one or more of the following savings clauses:

  1. drilling operations provisions,
  2. cessation of production provisions,
  3. shut-in provisions,
  4. dry hole provisions,
    and
  5. force majeure clauses.

Drilling operations and cessation of production clauses will be addressed in this section.

North Dakota Drilling Operations Cessation of Production Clause

A drilling operations clause will generally extend the lease term for as long as the lessee is actively engaged in drilling operations, which in addition to drilling activity, may include:

  • well site surveying and staking,
  • construction of access roads,
    or
  • other preparatory activity.

Cessation of Production

“Cessation of production” provisions operate in a similar manner to dry-hole provisions, and attempt to identify the situations when a lease in its secondary term will be extended for a short period of time if a well stops producing – when the terms of the lease would otherwise declare the lease to have terminated.

If the lessee does not reinstate the lease during the “cessation of production” grace period – by restoring production or drilling a new well – the lease may terminate by its own terms.

In 1969, the North Dakota Supreme Court preserved the effectiveness of a mineral lease in its secondary term for a 9 month “cessation of production” period, even though the lease terms would have extended the term only:

“as long thereafter as oil, gas, . . . is produced from said premises”:

Although there was no “cessation of production” lease provision in that case, the court found that:

We agree with the general rule that temporary cessation of production will not, in and by itself, terminate the lease.”

Feland v. Placid Oil Company, 171 N.W.2d 829, 833 (N.D. 1969)

The North Dakota Supreme Court recited secondary sources of authority for the general statement that:

‘In North Dakota an oil and gas lease may be cancelled

  • on the theory of abandonment by the lessee
    or
  • for breach by the lessee of implied covenants for reasonable development.

To constitute abandonment there must be

  • proof of the lessee’s intention to abandon
    and
  • actual relinquishment of the property.

Cancellation of a lease for the breach of an implied covenant for development will not be granted in the absence of proof of

  • a demand upon the lessee to comply with the implied covenant
    and
  • an allowance of a reasonable time for compliance.’

Feland v. Placid Oil Company, 171 N.W.2d 829, 834 (N.D. 1969), citing secondary sources.

Some leases may limit the effectiveness of North Dakota Drilling Operations and Cessation of Production provisions:

  • to a complete cessation of production,
    rather than
  • a decline in production below commercial quantities,

and courts may be willing to give a company a reasonable period of time in which to increase production above a commercial-quantities threshold.

North Dakota Drilling Operations Cessation of Production Clause – Modern Lease

An oil and gas lease proposed to be used in North Dakota in the last few years by one oil company contained the following “drilling operations and cessation of production clauses“:

It is agreed that this lease shall remain in force for a term of Five (5) years from this date and as long thereafter as

  • oil or gas of whatsoever nature or kind is produced
    • from said leased premises
      or
    • on acreage pooled therewith,

    or

  • drilling operations are continued as hereinafter provided.

If, at the expiration of the primary term of this lease,

  • oil or gas is not being produced
    • on the leased premises
      or
    • on acreage pooled therewith
  • but Lessee is then engaged in drilling or re-working operations thereon,

then this lease shall continue in force so long as operations are being continuously prosecuted

  • on the leased premises
    or
  • on acreage pooled therewith;

and operations shall be considered to be continuously prosecuted if not more than one hundred eighty (180) days shall elapse between

  • the completion or abandonment of one well
    and
  • the beginning of operations for the drilling of a subsequent well.

If after discovery of oil or gas

  • on said land
    or
  • on acreage pooled therewith,

the production thereof should cease from any cause after the primary term, this lease shall not terminate if Lessee commences additional drilling or reworking operations within one hundred eighty (180) days

  • from date of cessation of production
    or
  • from date of completion of a dry hole.

If oil or gas shall be discovered and produced as a result of such operations at or after the expiration of the primary term of this lease, this lease shall continue in force so long as oil or gas is produced from the leased premises or on acreage pooled therewith.

Note that under the modern lease, the lessee had 180 days to continue additional drilling or reworking activities, either on the leased premises, or on any land “pooled” with the leased premises.

North Dakota Drilling Operations Cessation of Production Clause – 1981 Lease

For comparison purposes, an oil and gas lease actually used in Ward County, North Dakota in 1981 by an oil company in the business of oil exploration contained the following “drilling operations and cessation of production clauses“:

It is agreed that this lease shall remain in force for a term ending _____________, 1987, and as long thereafter as oil or gas or either of them, is produced from said land by the lessee, its successors and assigns.

If after the expiration of the primary term hereof, production shall cease from any cause,

  • this lease shall not terminate if lessee resumes operations for the drilling of a well or restoration of production within ninety (90) days from such cessation,
    and
  • this lease shall remain in force and effect
    • during the prosecution of such operations
      and,
    • if production results therefrom, then as long thereafter as such production continues.

Lessee shall have the right to drill to completion with reasonable diligence and dispatch

  1. any well commenced within the term of this lease
    and
  2. any well commenced before the completion of a well which has been commenced within such term.

If oil and gas or either of them be found in paying quantities in any such well, this lease shall continue and be in force with like effect as if such well had been completed within the term of years herein first mentioned.

Note that under the 1981 lease, the lessee had only 90 days to continue additional drilling or reworking activities on the leased premises.

North Dakota Drilling Operations Cessation of Production – 1977 Lease

For further comparison purposes, an oil and gas lease actually used in Ward County, North Dakota in 1977 by an oil company in the business of oil exploration contained the following “drilling operations and cessation of production clauses“:

Subject to the other provisions herein contained, this lease shall remain in force for a term of 5 years from this date (called “primary term”) and as long thereafter as oil, liquid hydrocarbons, gas or their respective constituent products, or any of them, is produced from

  • said land
    or
  • land with which said land is pooled.

If, at the expiration of the primary term, oil, liquid hydrocarbons, gas or their respective constituent productions, or any of them, is not being produced on

  • said land
    or
  • land pooled therewith

but lessee is then engaged in operations for drilling or reworking of any well or wells thereon, this lease shall remain in force

  • so long as such operations or said additional operations are commenced and prosecuted (whether on the same, or successive wells) with no cessation of more than sixty (60) consecutive days,
    and, if they result in production,
  • so long thereafter as oil, liquid hydrocarbons, gas or their respective constituent products, or any of them, is produced from
    • said land
      or
    • land pooled therewith.

Note that under the 1977 lease, the lessee only had 60 days to continue additional drilling or reworking activities, either on the leased premises, or on any land “pooled” with the leased premises.

North Dakota Drilling Operations Cessation of Production Clause – Comparison of Lease Terms

With the exception of the number of days the lessee was allowed to continue drilling operations after any cessation, there are no significant differences between the terms of the three Assignment Clauses identified above.

Topics of Interest – North Dakota Ancillary Probate

Topics of Interest – North Dakota Mineral Rights.

Topics of Interest – North Dakota Transfer on Death Deeds

Topics of Interest – North Dakota Affidavits of Heirship

Topics of Interest – North Dakota Intestate Succession.

Topics of Interest – North Dakota Informal Probate

Topics of Interest – North Dakota Intestate Succession.

Copyright 2019 – All Rights Reserved

North Dakota Mineral Leases

North Dakota Drilling Operations Cessation of Production Clause

 Gary C. Dahle –  Attorney at Law
2704 Mounds View Blvd., Mounds View, MN 55112

 Phone:  763-780-8390   Fax:     763-780-1735      gary@dahlelaw.com

Gary C. Dahle has represented clients from the countries of Canada, Norway, and Sweden, and the states of Alabama, Arizona, California, Colorado, Connecticut, Florida, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, Washington, and Wisconsin in the United States, with respect to North Dakota mineral rights and probate issues in various North Dakota Counties.

http://www.legis.nd.gov/general-information/north-dakota-century-code

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