The Implied Marketing Covenant in Oil and Gas Leases: Some Needed Changes For the 80's

Abstract

Following a period of governmental policies aimed at stimulating drilling and production in the mid to late 1970's, producers of natural gas experienced a prolonged downturn in demand which has continued to date. In 1984 it was estimated that the surplus of natural gas in the United States has now reached seven trillion cubic feet per year. This surplus represented about thirty percent of the nation's productive capacity. The forecast for 1986 reflects a deliverability surplus in excess of four trillion cubic feet. A natural effect of this current glut is that an increasing number of wells are being shut-in. On those wells not shut-in, producers find that they are often unable to market the permitted levels of production. In either situation, shut-in or marketing of only a percentage of production, lessors are unlikely to receive the royalty payments they expect. It is probable that the above-described scenario will precipitate an increase in litigation predicated on the lessee's duty to market natural gas which has been discovered on the leasehold. This article, anticipating such an increase, attempts to review the lessee's obligation under the implied covenant to market.