Offset Well Covenant

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The Offset Well Covenant


In Alabama, an oil and gas lease imposes an implied covenant to prevent drainage.  The issue arose in the case of Sheffield v. Exxon Corp., 424 So.2d 1297, 1304 (Ala. 1982), where the Alabama Supreme Court wrote:


There is an implied covenant in a lease of oil property that the lessee will do nothing to impair the value of the lease, and must use reasonable care to protect the lessor from damage or loss by the affirmative act of such lessee. This implied obligation has been extended to include, in the absence of express stipulation, a duty to drill offset wells if practicable and profitable.


Some lessees have requested the following Offset Well covenant to dilute the implied covenant somewhat:


Offset Well. If any well should be completed on land adjacent to or near the Leased Premises or Land Unitized therewith (whether or not owned by Lessor) which is capable of producing a Mineral in paying quantities, Lessee shall be obligated to drill on the Leased Premises such well or wells as a prudent operator, under the same or similar circumstances, would drill to protect the Leased Premises from drainage; provided, however, that Lessee shall not be obliged to offset any gas well as long as the same is shut-in and not producing; and that if Lessee does not wish to undertake the offset obligations hereunder, it may exercise its voluntary rights under Section 8 [release of the lease].

Copyright 2011 by Edward G, Hawkins. All rights reserved.