CHAPTER 5 PANEL DISCUSSION—HYPOTHETICAL

• Jurisdiction: United States

Implied Covenants
(Nov 1986)
CHAPTER 5
PANEL DISCUSSION—HYPOTHETICAL
J. Hovey Kemp
Davis, Graham & Stubbs
Denver, Colorado
Marvin G. Twenhafel
Texaco Inc.
Denver, Colorado
Robert L. Verschure
Holland & Hart
Denver, Colorado
Charles "Chuck" Woodin
Foulson, Siefkin, Powers & Eberhardt
Wichita, Kansas

This hypothetical fact situation is concerned with the validity of a 1968 oil and gas lease covering the Smith family's 6,000-acre ranch in Weld County, Colorado. The Smith family's ranch is divided almost in half, by a north and south farm-to-market road that crosses through the center of the property.

The lease in question was executed by Opie Smith and other members of the Smith family on March 1, 1968, with a primary term of 10 years (the "Lease"). The lessee of the Lease was and is Big Oil, Inc., a very old and large oil and gas company. The Lease was on a standard "Producer's 88" form provided to the lessors by Big Oil. In 1971, Big Oil drilled to a depth of 7,500 feet and completed the Smith #1 Well in the oil-bearing "J" Sand, which was the discovery well for what became known as the Smith Ranch Field. Between 1972 and 1978, the well was followed by Big Oil's drilling 15 additional oil wells on the 6,000-acre leased premises, 11 of which resulted in the discovery of additional "J" Sand hydrocarbons. The last well, a dry hole, was drilled in early 1978. All of Big Oil's wells are located in the approximately 2,000-acre Smith Ranch Field, and all are located in the 3,000 acres north of the above-referenced farm-to-market road. At present, 10 wells are producing from the "J" Sand (found between 7,500 and 8,000 feet) in the Smith Ranch Field. Over the term of the Lease, over a million barrels of oil

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have been produced. Natural gas production has been insignificant.

Since about 1976, several significant events have occurred. First, Big Oil has generated some half-dozen seismic surveys, the most recent in 1980, covering the leased premises. Five of the 6 surveys concentrated on the Smith Ranch Field, north of the farm-to-market road. In late 1981, Big Oil planned to conduct another seismic survey on both the north and south portions of the Lease, but had difficulty negotiating a seismic agreement with the Smiths. Negotiations were ultimately broken off by Big Oil, largely as a result of gloomy market forces over future prices for oil and gas.

Second, as a result of the active exploration and drilling efforts of a number...