APPELLATE COURT REVERSES RULING IN HAYNESVILLE SHALE LAWSUIT - shreveporttimes.com

The 2nd Circuit Court of Appeal has reversed a DeSoto district judge's ruling that partially canceled the mineral lease of a DeSoto Parish landowner who sued Questar Exploration and Production Co., for failing to develop lower producing levels, including the Haynesville Shale.

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.

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Permalink Reply by Zydeco on June 30, 2011 at 2:13
With the reversal of the orginal ruling , is this over ???? 
Permalink Reply by P.G. on June 30, 2011 at 4:03

Maybe a clause is needed in a lease to set a time limit for future development of the minerals would remedy something like this. Leases have a time limit for the first well, why not for other wells? Perhaps if no other wells are drilled in a reasonable time frame, the lease would be bound only to existing wells and a new lease would be required..

That would free up a mineral owner to seek out someone else who may wish to develop the minerals..

Permalink Reply by Two Dogs, Pirate on June 30, 2011 at 4:23
PG a vertical Pugh Clause will work.
Permalink Reply by P.G. on June 30, 2011 at 4:31

How would that encourage further development?

I mean if someone sunk a deep well  and then quit, (drilled no more wells) the mineral owner is pretty much at the lessee's mercy for any more development..

Seems there could be some kind of clause that would have consequences for the driller..

Permalink Reply by Two Dogs, Pirate on June 30, 2011 at 4:38
Thats what vertical and horizontal Pugh Clauses do, if you don't use it you lose it.
Permalink Reply by P.G. on June 30, 2011 at 4:54

I thought those pugh clauses would hold a lease to those depths or areas and only exclude depths or areas not developed...how would that encourage a driller to drill more than one well at similar depths and in the same unit where more wells were allowed to be drilled?

Say if one had a vertical  pugh clause that excluded depths 100 feet below the deepest depth of of a well...wouldn't any future wells to that depth or less be held by production? Meaning the mineral owner couldn't lease to anyone else at similar depths if the driller decided to only drill one well even though he could have drilled 7 more wells in that unit? How could the mineral owner encourage the driller to fully develop the MOs minerals?

Permalink Reply by Spring Branch,mineral owner on June 30, 2011 at 5:05
It would take some sort of continuous drilling clause to accomplish what you are referring to, PG.  I have seen them on farmouts, but never on a lease.
Permalink Reply by adubu on June 30, 2011 at 15:14
talking about farmouts of say a unit of 600a that operator has HBP with 76% net revenue that on farmout to another operator what is terms of general standard (If there is such a thing) farmout agreement? what's the back in % WI for the operator that owns the unit HBP well afteer pay out 1st well and then if addition wells drilled per spacing?
Permalink Reply by Two Dogs, Pirate on June 30, 2011 at 5:17
PG, you can put whatever clause you want into a lease. It would be a matter of the company approving your clause. It is a two way street. The last Evan's lease that I looked at had a clause saying the deal would end in 30 years. That was a deal killer for the company.
Permalink Reply by P.G. on June 30, 2011 at 5:39
I wouldn't know why a company would bulk at a lease where terms would be binding to wells drilled in a timely manner...Why should a company expect to get to hold lands forever for drilling just one well. If more MOs were insistent on a driller fully developing the leased field, they'd have no choice if they wanted the lease... Drillers now can drill a well, cap it, and bind the MOs minerals for a long time...If that's a make or break for a driller, it might indicate what his real intentions are..Perhaps the MO needs to find a driller or lease speculator who's going to perform to a given standard that would benefit the MO..Not leave the MO at their mercy...or at least some kind of compromise of reasonable timing....bet some of those MOs who are being HBP by old old leases had such a clause..
Permalink Reply by Two Dogs, Pirate on June 30, 2011 at 5:53
PG, I would think that some sort of spacing clause would be what you would be talking about. Say limiting to spacing to 40 acres around each well. This would only work for shallow production. The HA is a whole nuther ball game. If you owned the whole section you may be able to call some of the shots but lets say you own just 10 acres of a 640 acre unit. No operator that I know would give you that kind of clout in governing what they do. There is a misconception among the folks that drilling and capping a well will hold the lease. This is not true, production in paying quantities holds the lease.
Permalink Reply by Eliza on June 30, 2011 at 6:13
But what is a legal definition of "paying quantities". Has there been a case where a MO was able to get out of their lease that was held by a low production HA well? In my case I wouldn't consider a well paying out only $100 a day for the entire 640 mineral acres productive.

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