March 21, 2019

Colorado Court of Appeals: Lease for Oil Drilling Not Violated; Trial Court Erred by Not Considering Trade Usage and Commission Regulation Language Regarding the Capability of a Drilling Rig to Produce Gas

The Colorado Court of Appeals issued its opinion in Bledsoe Land Company LLLP v. Forest Oil Corp. on June 23, 2011.

Breach of Contract—Oil and Gas Lease—Contract Interpretation—Ambiguous.

In this dispute alleging breach of an oil and gas lease, defendants Forest Oil Corporation and Omimex Petroleum Inc. (collectively, Forest Oil) appealed the trial court’s judgment in favor of plaintiffs (collectively, the Bledsoes). The judgment was reversed.

The Bledsoes own a ranch in Yuma and Phillips Counties covering 60,418.79 gross surface acres and 37,771.64 net mineral acres. In September 2001, the Bledsoes entered into a lease with William H. Champion, an oil and gas landman doing business for Tipperary Oil & Gas Corporation (Tipperary). The lease granted Tipperary the right to explore and develop the minerals on the Ranch through drilling for and production and sale of oil and gas. In June 2007, the lease was assigned to Forest Oil. In July 2008, the Bledsoes filed this action, alleging that Forest Oil failed to drill a new well within 180 days of completion of a prior well and failed to continuously prosecute wells on the ranch as required by the lease. Thereafter, the court entered judgment in favor of the Bledsoes.

On appeal, Forest Oil contended that the trial court erred in its interpretation of the terms “completion” and “continuously prosecuted” as used in the lease. “Completion” has a common trade usage meaning “capable or ready to produce gas,” which the trial court disregarded in concluding that completion occurred at the time the drilling rig was released. Further, there is nothing in the lease that altered this definition. The lease also is subject to Colorado Oil and Gas Conservation Commission regulations, which state “[a] gas well shall be considered completed when the well is capable of producing gas through wellhead equipment from the ultimate producing zone after the production string has been run.” The undisputed testimony at trial established that Forest Oil did not complete Well #10-6-5-44 until it was hydraulically fractured on August 9, 2007; therefore, only 176 days passed between completion of Well #10-6-5-44 and commencement of Well #8-3-5-45. Accordingly, Forest Oil did not violate the 180-day provision of the lease. Further, because the lease defined the term “continuously prosecuted” as drilling a new well every 180 days, the trial court erred in concluding that Forest Oil breached the lease by failing to drill or rework wells on a continuous basis. Consequently, Forest Oil did not breach the lease and reversal was required.

This summary is published here courtesy of The Colorado Lawyer. Other summaries for the Colorado Court of Appeals on June 23, 2011, can be found here.

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