Oil and Gas Update

Supreme Court of Ohio Declines to Recognize Implied Covenant to Explore Further

January 9, 2018

In Alford v. Collins-McGregor Operating Co., 2018-Ohio-8, the Supreme Court of Ohio decided that Ohio does not recognize an implied covenant to explore further, separate and apart from the implied covenant of reasonable development. In Alford, the Appellants were landowners and lessors of an oil and gas lease with Appellees. The lease was held by the production of a single well drilled to the Gordon Sand formation in 1981. The Appellants claimed that the lease should be partially forfeited due to the Lessee’s breach of an implied covenant to further explore deeper stratigraphic depths and utilize more modern drilling technology.

The trial court had dismissed the Appellants’ claim and held that the production from the 1981 well was sufficient to hold the lease. The Fourth District had affirmed, holding that Ohio does not recognize partial horizontal forfeiture of an oil and gas lease as an available remedy.

The Supreme Court of Ohio affirmed the judgment of the court of appeals, and declined to recognize an implied covenant to explore further. The holding found that long-recognized implied covenant of reasonable development is an adequate protection for lessors. The Court recognized the risk undertaken when lessees develop oil and gas leases, as well as the motivation of both the lessee and lessor to profit from the lease. Instead, the Court favored the implied covenant of reasonable development which considers all factors, including market conditions, geological knowledge and adjoining activity. While the Court acknowledged that the implied covenant of reasonable development was well suited to address the lessors’ interests, no opinion was expressed in this regard as the only issue raised by Appellants regarded the implied covenant to explore further.

This blog was authored by Andrew Schock, Jackson Kelly PLLC. For more information on the author, see here.