Legal Definitions - protection covenant

A protection covenant is an unwritten but understood agreement within an oil and gas lease. It obligates the company drilling for oil or gas (the lessee) to take reasonable steps to prevent oil and gas from being lost from the leased property due to extraction activities on neighboring lands. This typically involves drilling additional wells, known as "offsetting wells," near the property boundary to counter the "drainage" of resources by wells on adjacent parcels.

This obligation only applies if a competent and careful oil and gas operator would reasonably undertake such drilling to protect the resource. It's a fundamental principle ensuring that the landowner's resources are not unfairly depleted by activity on adjacent properties.

• Scenario: Active Neighboring Production

  Imagine a rancher, Ms. Elena, leases her land to "Prairie Energy Co." for oil and gas exploration. Prairie Energy drills a few wells, but a year later, a neighboring property owner, Mr. Chen, leases his adjacent land to "Frontier Drilling," which drills a highly productive well very close to the boundary with Ms. Elena's ranch. Geological surveys suggest that Frontier Drilling's well is drawing oil not just from Mr. Chen's land but also from the reservoir extending under Ms. Elena's property.

  This situation illustrates the protection covenant because it would likely obligate Prairie Energy Co. to drill an offsetting well on Ms. Elena's property, near the boundary with Mr. Chen's land. This action would be considered necessary to prevent the oil and gas under Ms. Elena's property from being "drained" away by Frontier Drilling's well. A reasonably prudent operator would recognize the economic loss and take steps to protect the shared resource.

• Scenario: New Discovery and Potential Drainage

  "Desert Sands Exploration" holds a long-term lease on Mr. Ben Carter's desert property. They have several producing wells. Recently, a competitor, "Oasis Oil," drilled a new, very deep well on an adjacent parcel and discovered a previously unknown, rich oil reservoir. Geological data shared publicly indicates this new reservoir likely extends under a portion of Mr. Carter's leased land, and Oasis Oil's well is producing at a very high rate.

  The protection covenant would compel Desert Sands Exploration to evaluate this new discovery. If a reasonably prudent operator would conclude that Oasis Oil's high-producing well is draining oil from the newly identified reservoir under Mr. Carter's property, Desert Sands would be expected to drill an offsetting well to capture Mr. Carter's share of the oil and prevent its loss to Oasis Oil.

• Scenario: Declining Production and Nearby Activity

  "Mountain Peak Resources" has been operating a successful gas well on Ms. Sarah Jenkins' mountain property for several years. Recently, the production from Ms. Jenkins' well has significantly declined. At the same time, a new, large-scale fracking operation commenced on an adjacent property, operated by "Valley Gas Corp.," very close to the boundary. Expert analysis suggests that Valley Gas Corp.'s operations are creating a pressure differential that is causing gas to migrate away from Ms. Jenkins' well and towards Valley Gas Corp.'s wells.

  Here, the protection covenant would require Mountain Peak Resources to investigate the cause of the declining production. If their analysis, consistent with a reasonably prudent operator's assessment, confirms that Valley Gas Corp.'s activities are draining gas from Ms. Jenkins' property, Mountain Peak Resources would be obligated to drill an additional well or take other appropriate measures to protect Ms. Jenkins' gas reserves from being lost to Valley Gas Corp.