Legal Definitions - further-exploration covenant

A further-exploration covenant is an implied agreement within an oil and gas lease. It means that once a company (the lessee) has successfully begun producing oil or gas from one part of a leased property, they have an ongoing, unwritten obligation to continue searching for additional oil and gas deposits in other unexplored areas of that same property, or in different geological layers beneath it.

This covenant ensures that the landowner receives the full potential benefit from their property, as the lessee is expected to diligently explore and develop all promising areas, not just the easiest or first discovered ones. It acts as a safeguard against a lessee becoming complacent after an initial discovery, preventing them from holding onto a lease without fully developing its potential. Some legal systems consider this obligation to be part of a broader duty for "reasonable development" of the property, rather than a standalone promise.

Here are some examples illustrating how a further-exploration covenant might apply:

• Example 1: Unexplored Acreage

  Imagine an energy company leases a vast 2,000-acre ranch for oil and gas exploration. They drill a highly successful well on the northern 300 acres, which begins producing a significant amount of oil. Under a further-exploration covenant, the company would then be expected to continue exploring the remaining 1,700 acres of the ranch for additional oil and gas reserves, rather than simply focusing all their efforts on the initial productive area and neglecting the rest of the property.

  This illustrates the covenant by showing the expectation for the lessee to expand their search to other, undeveloped portions of the leased land after an initial discovery.

• Example 2: Deeper Geological Formations

  A drilling company successfully extracts natural gas from a specific shale layer located 6,000 feet below the surface of a leased farm. While this layer is productive, geological surveys suggest there might be other, potentially richer oil or gas reservoirs in deeper, unexplored sandstone formations at 9,000 feet or even 12,000 feet beneath the same farm. The further-exploration covenant would imply that the company has a duty to investigate these deeper formations, even after finding success in the shallower layer, to fully develop the property's potential.

  This example demonstrates the covenant's application to exploring different vertical layers or depths within the same property, beyond the initial discovery.

• Example 3: New Technologies and Re-evaluation

  A company has been successfully producing conventional oil from a specific formation on a 600-acre lease for many years. Initially, they explored other areas and formations but deemed them uneconomical with the technology available at the time. Years later, significant advancements in drilling and extraction technology make previously inaccessible or uneconomical deposits (like tight oil or shale gas) viable. The further-exploration covenant could then compel the company to re-evaluate and explore those previously overlooked areas or formations on the lease using the new technology, even though they had explored them before under different circumstances.

  This scenario highlights how the covenant can encourage ongoing exploration efforts, adapting to new information or technological capabilities to fully exploit the leased property's potential.