North Dakota federal court grants summary judgment against lessors' lease termination claims, finding the pre-drilling operations sufficient as a matter of law to hold the leases under the habendum clauses. Wold, et al. v. Zavanna, LLC, et al., 2013 U.S. Dist. LEXIS 181631 (D.N.D. December 31, 2013).
Plaintiffs, a small group of lessors, claimed that their leases had expired because no drilling occurred during the primary term or, in the alternative, that the preliminary development activity was insufficient to hold the leases. Prior to the expiration of the primary term, defendant Zenergy, Inc. obtained necessary permit and regulatory approvals to drill a well and completed all the work to make the site "100 percent ready for the drilling rig," and approximately 5 percent of the rig and other drilling equipment had been moved to the site. Drilling commenced six days after the primary term, and the well was completed and producing oil and gas months later. Defendant claimed these operations were sufficient to hold the leases under the habendum clauses.
The District Court relied heavily on its 2010 opinion in Anderson v. Hess Corp. 733 F. Supp. 2d 1100, which dealt with similar issues, and which was affirmed in 2011 by the Eighth Circuit, 649 F.3d 891. In Anderson, the court held that the phrase "engaged in drilling or reworking operations" in the habendum clause meant either "drilling operations" or "reworking operations"—not "drilling" or "reworking operations"—thereby allowing a lease to be held by drilling operations which occurred before the actual drilling commenced. The court further found that Hess's pre-drilling activities of obtaining permits, leveling the pad, digging the drilling pit, lining it with gravel and clay, widening the access road, drilling the rat hole for the main conductor pipe, moving equipment to the location, and drilling the mouse hole were sufficient to hold the lease. In this case, the court found that the facts were "materially indistinguishable from those in Anderson." In addition to the similarity between Zenergy's and Hess's drilling activities prior to the expiration of the respective primary terms, the court also emphasized that their continuous work to complete the well with "reasonable diligence" evidenced their good faith intent.
Based on Anderson and the other cited authority, the court rejected each of plaintiffs' arguments, including that the meaning of "drilling operations" was ambiguous and, thus, a fact issue. The court found that defendant's activities were sufficient as a matter of law to hold the leases and granted summary judgment. This case further solidifies that actual drilling is not required to hold a lease, and the facts of the case provide E&P companies guidance with the types of pre-drilling actions that are sufficient to hold on to their producing assets. The case also provides practitioners a good summary of the North Dakota cases addressing the habendum clause.