Demand to drill: O&G co. appeals precedent-setting ruling

By Carolyn Roy – bio|email|Twitter

MANSFIELD, LA (KSLA) – A natural gas exploration company drilling in the Haynesville Shale is appealing a judgment made against them in a case that could have far-reaching implications for other landowners with old mineral leases in shallow zones.

DeSoto Parish landowner Santo Ferrara owns 47 acres in DeSoto Parish. His first lease was in 1988 with a company that was acquired in the mid 1990s by Questar Exploration and Production Company. Since 2001, Questar has only drilled one well: an alternate for the already-producing Hosston unit, drawing natural gas from a shallower layer of tightly-packed sands 7,500 to 8,500 feet down.   

Ferrara sued Questar in October 2008, arguing his lease with the company should be canceled because of their failure to develop the deeper (10,500 – 13,000ft) Haynesville Shale formation.

During the two-day trail in May, Questar claimed that Ferrara failed to prove his case, because at the time the lawsuit was filed, the shale had not yet been proven and it was unreasonable to expect the company to proceed with development.

In June, Judge Charles B. Adams ruled in Ferrara's favor, canceling the lease with Questar to all depths and formations below the Hosston formation, and ordering the company to pay Ferrara more than $70,000 in fees and expenses.

Adams took particular issue with "the lack of response by Questar to the initial demand, inaction in response to Ferrara initial demand to develop, failure to defend itself at trial, and hiding behind the "suspension doctrine,'" by citing the lawsuit as reason not to pursue further Development of the lease.

At trial, Ferrara presented what Adams described as "significant evidence" regarding the shale and Questar's knowledge of its "economic viability."  Questar has drilled 70 Haynesville wells since October 2008, and proclaimed the Haynesville Shale as a "world class asset" in news releases and to shareholders, citing the shale as part of their "large inventory of unbooked reserves and resource potential."

In a 2009 report, it listed the potential volumes of gas in the shale verified by independent examiners. "Obviously in June of 2008, Questar understood the value of the Haynesville Shale," Adams' court ruling states.

Adams found the defendants were "holding on to the property under lease for purely speculative reasons, and as a consequence, were not in good faith."  In his sometimes scathing ruling, Adams wrote, "All of this, it is clear to this court, was in an effort to stall or buy time to allow as many wells to be drilled before this suit could be heard.  Clearly, Questar has been attempting to hold plaintiffs' lease for its own benefit until someone else came forward to unitize and drill. This is not developing the property for the mutual benefit of Questar and the Ferraras, it is delaying for the benefit of Questar."

"It is clear to this court that Questar has never had any intention to develop the plaintiffs' deep rights. Much of Questar's drilling in the Haynesville Shale appears to be in Bienville Parish some 60 miles away. Questar offered no evidence of any intention to develop. Now they hope to maintain their leasehold upon the coattails of another operator after having denied the plaintiffs' demands for a year and a half," Adams concluded.

If the ruling stands, oil and gas companies could be forced to give up or re-lease hundreds of thousands of acres held under old mineral leases, under new terms.  Ferrara's attorney Randall Davidson said, "I think there are a lot of landowners who are similarly situated," says Ferrara's attorney, Randall Davidson.  '"If they thought they could force further development under an old oil and gas lease, they would do so.  There's not very much precedent out there and this case may provide some.  Either way," Davidson says, "It will be guidance, for how lawyers advise clients in that way in the future, and what landowners' rights are in the future."

Questar's appeal, filed late last week, will be heard in the 2nd Circuit Court of Appeal in Shreveport. Davidson says he remains confident Adams' ruling will be upheld.

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