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Commentary and Analysis Regarding Colorado Law

Why am I not Benefiting from all this Oil and Gas Drilling?

Submitted by John Gaddis

Even with the ups and downs of oil prices, the oil and gas boom in Colorado is continuing. However, if you own land that has an existing oil and gas lease but there is no development of the minerals on your property, what do you do? Does a landowner have any recourse to require the lease holder to explore, develop and produce the minerals? Can the landowner seek to cancel the existing lease and negotiate a new one?

In many instances, the answer is YES. If your property is located in a proven oil and gas area, the operator has a duty to reasonably explore and develop the resources on your property. If the operator is not fulfilling that duty, then the landowner can seek to terminate the lease. Once that lease is terminated, the landowner can negotiate a new lease with a company that will diligently seek to develop the minerals.

Even though it is not expressly stated in your oil and gas lease, there are four covenants that the law implies in every oil and gas lease. Those implied covenants are: (1) a covenant to conduct exploratory drilling; (2) a covenant to develop after discovering resources that can be profitably developed; (3) a covenant to operate diligently and prudently; and (4) a covenant to protect the leased premises against drainage. If the company breaches any one of these four implied covenants, the landowner may potentially terminate the lease.

In particular, if your property is within a proven field of oil and gas reserves and the lease holder is not attempting to develop these known resources profitably, the lease holder risks losing the lease. The landowner does have leverage in this situation.

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