In the 19-page ruling released Wednesday, the appellate court rejected District Judge Charles B. Adams' finding that Questar never intended to develop the Annie and Santo Ferraras' deep rights.
"The record does not support a finding that Questar failed to act as a reasonably prudent operator for the mutual benefit of itself and its lessor" as required by state law, the court states.
It further notes: "We certainly understand the district court's sense of awe at the potential of the Haynesville Shale, but there is inadequate support for a blanket finding of 'plans to drill wells in every section or every square mile.' More importantly, there was no evidence that a prudent operator utilizing geological data would have drilled on the Ferraras' property to the Haynesville Shale depth by the date of trial."
It's unknown if the Ferraras will appeal. Their attorney, Randall Davidson, did not return a phone call seeking comment Wednesday.
The Ferraras own 47 acres in DeSoto Parish. The land was first leased in 1988. In 2001, Questar drilled a well in the Hosston unit. Santo Ferrara made a demand on Questar in August 2008 to further develop the deep rights.
He filed suit in 2008 seeking dissolution of the lease based on Questar's failure to develop the Haynesville Shale, which gained the public's attention in March 2008.
Questar did not respond to the demand letter or lawsuit. And during a two-day trial in May 2010, the company did not present any evidence on its behalf.
Adams cited the company's lack of communication in his June 2010 judgment. Adams said it was clear Questar did not intend to develop Ferrara's deep rights.
The panel of 2nd Circuit judges said it completely understood the Ferraras' and district court's "impatience and indignation at Questar's inexplicable failure even to acknowledge the demand letter, its dilatory conduct after suit was filed and its unhelpful strategy of putting on no evidence. However, the Ferraras received royalties from shallow strata continuously since 1988 and made no demand for further exploration or development since 1994. The instant demand came a mere one week after the commissioner recognized the potential of the Haynesville Shale by dispensing with test wells; suit was filed only 46 days after the unanswered demand letter. The record is utterly devoid of evidence that any reasonably prudent operator could have begun exploration, much less drilled a well to the deep Haynesville Shale stratum, within this remarkably short time."Questar also objected to Adams' use of an expert witness and his reliance of evidence of post-suit activity in the Haynesville Shale play to determine of the company breached its obligation. The appellate court, however, rejected those arguments and found no error in Adams' actions.
I agree with Henry and Skip,
It is important to note that the agressive drilling is taking place in the HA sweet spots. Also, I believe that Encana and Exco are looking to drive up their daily production numbers, they also have smaller leaseholds than CHK or even HK.
Exco in particular is testing the thoery that by completing anentire 8 well unit at the same time will lead to higher EUR's. I have also heard of instances where interference in HA wells has caused declines or enve caused a cease in production. They may believe that their stratagy is the best way to deal with this. Also, they may just be more bullish on prices going up, or have lower drilling costs (Encana claims that its costs continue to fall).