Tank v. Citation Oil & Gas Corp., 2014 ND 123 (N.D. 2014).

In Tank, the North Dakota Supreme Court reviewed and affirmed a district court decision in a case involving two potentially conflicting provisions within the same oil and gas lease. In 1982, George and Phyllis Tank executed an oil and gas lease (the “Tank Lease”) covering the northwest quarter and the south half of a section of land location in McKenzie County. The Tank Lease was later ratified and extended by George and Phyllis Tank, stretching the primary term to July 15, 1989. The first well was spud pursuant to the Tank Lease within the northwest quarter of the section in May 1983, and—except for a period from October 1996 to June 1998 when a replacement well was being drilled—oil and gas production within the northwest quarter continued consistently through the date of the Tank decision.

However, the lands under review in Tank were the southwest quarter of the section, within which the Tank 13-10 well had been spud in June 1988 and produced oil and gas continuously until October 2008, when production ceased. On October 30, 2009, Petro-Hunt, LLC was granted a state permit to drill a well within a 1280-acre spacing unit involving all of the lands covered by the Tank Lease. After two new wells were spud by Petro-Hunt within the 1280-acre spacing unit, Greggory G. Tank, as successor-in-interest to George and Phyllis Tank, sued to have the Tank Lease cancelled to the extent it covered the southwest quarter of the section. The district court granted summary judgment to Greggory G. Tank on the basis that the Tank Lease contained a Pugh clause, and there was a cessation of production within the southwest quarter without new drilling operations therein from October 1, 2008 to at least October 30, 2009.

On appeal, the North Dakota Supreme Court considered two key provisions within the Tank Lease. The first was the drilling operations clause, which provided that “notwithstanding anything in the lease to the contrary,” the lease would remain in force “so long as operations are continuously prosecuted and, if production results therefrom, then as long as production continues.” The appealing parties argued that, under this drilling operations clause, the Tank Lease was held in full force and effect as to all of the original leased lands due to the fact that, from the end of the primary term through the present day, there had always been production at any given time from either the well within the northwest quarter of the section or the Tank 13-10 well within the southwest quarter of the section.

However, the Tank Lease also contained a “Pugh” clause, which expressly provided that “notwithstanding anything in the lease to the contrary,” after the end of the primary term, the lease would expire as to those lands: 1) not included in a producing unit, and 2) upon which drilling operations were not conducted during each one-year term after the end of the primary term of the Tank Lease (in other words, the one-year period before each anniversary of the end of the primary term). Base on this provision, Greggory G. Tank argued that the Tank Lease expired as to the southwest quarter of the section because, when the anniversary of the primary term occurred on July 15, 2009, the southwest quarter of the leased lands were not located within a producing unit, and no drilling operations had been conducted therein during the previous one-year time period.

The Supreme Court agreed with Greggory G. Tank and affirmed the district court’s summary judgment. After considering that both the drilling operations clause and the Pugh clause within the Tank Lease included “notwithstanding” language—which raised the question as to which provision should supersede the other—the Supreme Court addressed this issue by citing a North Dakota statute requiring that, when interpreting contracts, courts should attempt to give effect to every clause, sentence and provision in a contract. The Court then held that the only way to give effect to all of the provisions within the Tank Lease was to interpret the Pugh clause as a modification of the drilling operations clause. Accordingly, the Tank Lease was deemed to be expired as to the southwest quarter of the section.