946 N.W.2d 746
N.D.2020Background
- In 2004 AgriBank leased mineral acres in Mountrail County; the Hess Group later acquired a working interest in those leases (the "Subject Leases").
- The Subject Leases had a five-year primary term extended to April 2, 2012, and included an identical "Continuous Drilling Clause" preserving the lease so long as "actual drilling operations" were being conducted (with a 120-day cessation limit).
- Hess alleged Continental (the operator) performed on-site preparatory activities (e.g., building a pad) in March 2012 and began drilling in early May 2012, producing thereafter in paying quantities.
- Intervention Energy and Riverbend moved to dismiss under N.D.R.Civ.P. 12(b)(6); the district court held the clause required placing a drill bit into and penetrating the soil before the primary term expired, dismissed the Hess Group’s claims, and partial dismissals as to unjust enrichment/accounting followed.
- On appeal the sole disputed legal question was the meaning of "actual drilling operations" in the Continuous Drilling Clause; the Supreme Court of North Dakota reviewed de novo and considered whether the term is ambiguous.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does "actual drilling operations" in the continuous drilling clause include preparatory, on-site work (pad construction, equipment mobilization, good-faith intent) or does it require the drill bit to penetrate the ground? | Hess: "Actual" modifies intent/seriousness, so good-faith, on-site preparatory activities at the well site suffice to extend the lease. | Appellees: "Actual" narrows the phrase; it requires physical drilling — placing a rotating drill bit into and penetrating the soil. | The phrase is ambiguous as used in these leases; reasonable arguments support both readings. Dismissal was improper; matter remanded for factual findings based on extrinsic evidence. |
Key Cases Cited
- Abell v. GADECO, LLC, 2017 ND 163, 897 N.W.2d 914 (N.D. 2017) (discussed definition of "operations" and precedent holding preparation can constitute drilling operations where lease language supports it)
- Anderson v. Hess Corp., 733 F. Supp. 2d 1100 (D.N.D. 2010) (adopted a three-part test for commencement of drilling operations including preparatory work and good-faith intent)
- Murphy v. Amoco Prod. Co., 590 F. Supp. 455 (D.N.D. 1984) (described when drilling operations commence — preparatory work, capability, and good-faith intent)
- Enduro Operating LLC v. Echo Prod., Inc., 413 P.3d 866 (N.M. 2018) (interpreted "actually commence" drilling language in related drilling contexts)
- Peironnet v. Matador Res. Co., 144 So.3d 791 (La. 2013) (construed a lease-defining "actual drilling operations" to require drilling into the ground)
- Exxon Mobil Corp. v. Ala. Dep’t of Conservation & Natural Res., 986 So.2d 1093 (Ala. 2007) (treated "actual drilling operations" as commencing with spudding-in)
- Johnson v. Statoil Oil & Gas LP, 2018 ND 227, 918 N.W.2d 58 (N.D. 2018) (reiterated rules for construing oil and gas leases as contracts)
- Grynberg v. Dome Petroleum Corp., 1999 ND 167, 599 N.W.2d 261 (N.D. 1999) (explained general contract interpretation principles applied to leases)