Legal Definitions - reasonable-development covenant

A reasonable-development covenant is an unwritten, assumed agreement that is part of an oil and gas lease. It places an ongoing obligation on the company leasing the land (the "lessee") to actively and diligently continue exploring for and extracting oil and gas from the property. This duty arises once initial production has been successfully established.

Essentially, this covenant prevents a lessee from simply holding onto a valuable lease by maintaining minimal existing production. Instead, it requires them to act like a responsible and efficient operator would, making further efforts to fully develop the land's potential for oil and gas extraction.

Here are some examples illustrating how a reasonable-development covenant applies:

• Undeveloped Acreage: Imagine a landowner leases a large 600-acre parcel of land to an oil company. The company drills one successful well that produces a steady amount of oil. The reasonable-development covenant would require the oil company to conduct further geological surveys or drill additional wells on the remaining undeveloped acreage if a reasonably prudent operator would believe there's a good chance of finding more oil or gas. They cannot simply operate the single well indefinitely while ignoring other promising areas on the same leased property.

• Enhanced Recovery Methods: An oil company has been operating a well on a leased property for several years, and its production has started to decline naturally. If new, economically viable technologies become available—such as advanced fracking techniques or secondary recovery methods like waterflooding—that a prudent operator would use to increase production from the existing reservoir, the reasonable-development covenant would obligate the oil company to consider and potentially implement these methods rather than just letting the well's output dwindle.

• Deeper Formations: A lessee successfully drills a well that produces natural gas from a relatively shallow geological formation. However, seismic data indicates there might be a much larger, untapped oil reservoir at a significantly deeper level beneath the same property. The reasonable-development covenant would compel the lessee to investigate and potentially drill into the deeper formation if a prudent operator, considering the costs and potential returns, would undertake such an effort. They cannot simply be content with the shallow gas production if there's a reasonable expectation of more significant resources below.