The Ohio Supreme Court’s latest oil and gas decision is good news for the industry. On Jan. 3, 2018, the Court decided Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8, which held that under Ohio law, “there is no implied covenant to explore further separate and apart from the implied covenant of reasonable development.” Id. at ¶25.
The facts are straight forward and did not seem to make much difference in the decision. The Plaintiff-appellant filed suit in 2015 in Washington County against Defendant, a conventional oil and gas operator who had continuously operated a conventional Gordon Sand well on Plaintiff-appellant’s 74 acre parcel since 1981. However, the Defendant apparently refused Plaintiff-appellant’s demand to develop the deep rights on the property, including the Utica and Marcellus shales, presumably because it thought such development was premature in that area. Consequently, Plaintiff-appellant filed suit, alleging that the Defendant breached an implied covenant to explore further and sought a horizontal forfeiture of the deep rights on her property. The trial court dismissed plaintiff-appelant’s complaint for failure to state a claim, and the Fourth Appellate District affirmed.
Notably, the Fourth Appellate District’s decision was based entirely on its rejection of plaintiff-appellant’s requested remedy of a horizontal forfeiture of oil and gas rights. The Fourth District held that “because current precedent does not recognize the availability of partial horizontal forfeiture of oil and gas rights in Ohio, we agree with the trial court that . . . landowners could prove no set of facts entitling them to their requested relief.” Alford v. Collins-McGregor Operating Co., 4th Dist. Washington No. 16CA9, 2016-Ohio-5082, ¶ 22, aff’d on other grounds, Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8. Other than summarily including the implied covenant of further exploration among a laundry list of “the most commonly recognized implied covenants,” the Fourth District’s decision did not discuss whether the implied covenant to explore further was a valid cause of action.
On appeal to the Ohio Supreme Court, Plaintiff-appellant put both the implied covenant to explore further and the remedy of horizontal forfeiture at issue, positing that “The breach of the covenant to explore further allows for the cancellation, forfeiture, abandonment, and/or termination of an oil and gas lease as to its unused portions, horizontally and vertically.” Although the Supreme Court affirmed the Fourth District’s decision in favor of Defendant, the Supreme Court’s decision relied completely on its repudiation of the implied covenant to explore further, and it declined to address Plaintiff-appellant’s request for horizontal forfeiture. The Court explained, “it is unnecessary for us to address the Landowners’ second argument concerning the availability of partial horizontal forfeiture as a remedy, and we express no opinion on the appellate court’s decision on that issue to the extent it applies to the implied covenants raised by the Landowners other than the implied covenant to explore further.” Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8, ¶ 25.
Overall, the Ohio Supreme Court believed that the comprehensive scope of the covenant of reasonable development would take into account all relevant facts and circumstances to adequately protect the sometimes competing interests of both the lessor and lessee. The Court, following precedent from the Oklahoma Supreme Court, observed:
[T]he issue is whether a prudent operator would further develop the land “having due consideration for the interest of both the lessee and lessor, considering all factors, including what is known about the market, the geology and adjoining activity.” Recognizing a separate implied covenant to explore further would prove unhelpful at best, as it would focus on just a small subset of factors relevant to the overall profitability of development to the lessor and the lessee.”
Id. at ¶23, quoting Mitchell v. Amerada Hess Corp., 638 P.2d 441, 447 (Okla.1981). Ultimately, the Court held, “the Landowners’ interests in exploration of deep formations . . . are sufficiently protected by the implied covenant of reasonable development. We therefore decline to recognize a separate covenant to explore further.” Id. at ¶22.
As indicated, the Ohio Supreme Court’s decision is interesting because it affirmed the Fourth Appellate District’s decision, but it did not follow their reasoning. Consequently, the Fourth District and the Supreme Court got to the same result (agreeing that Plaintiff-appellant’s complaint failed to state a cause of action) but for different reasons. The outcome is two independent lines of precedent – one from the Ohio Supreme Court rejecting the implied covenant to explore further as a cause of action, and one from the Ohio Fourth Appellate District rejecting horizontal forfeiture of oil and gas rights as a remedy for breach of implied covenants. This is great news for the industry.
However, the Alford Court includes a cautionary disclaimer about stretching its opinion too far. The Court noted, “the implied covenant of reasonable development is well suited to address the primary driver of the Landowners’ interests here, namely, the emergence of new drilling technologies permitting production from deep strata that could not be obtained before. We need not address that issue here, however, because the Landowners have raised only the implied covenant to explore further in this proposition, and we express no opinion with respect to how a prudent operator would or would not employ new deep-drilling technologies.” With this language, the Court reinforces the common sense notion that although the implied covenant to explore further is not an recognized cause of action in Ohio, it has not ruled out the possibility that oil and gas operators have a duty to develop deep rights under the implied covenant of reasonable development as would any reasonably prudent operator under the circumstances.