## Facts

- The Alexanders were royalty owners/lessors under oil and gas leases in the Hastings, West Field, a sloping water-drive reservoir in Brazoria County, Texas; their tracts were downdip.
- Amoco was the lessee/operator on the Alexanders’ downdip leases and also held extensive updip leases in the same field, controlling most of the field’s production.
- In a water-drive reservoir, production causes the oil-water contact to rise; downdip wells typically water out first, and increased updip production can accelerate downdip water-out.
- The Alexanders alleged Amoco favored its updip interests by overproducing updip tracts and failing to reasonably develop and protect the Alexanders’ downdip leases, causing loss of recoverable reserves through field-wide drainage and premature water-out.
- The Alexanders asserted Amoco should have taken protective measures such as drilling additional or replacement wells, reworking wells, or seeking regulatory exceptions to allow protective drilling.
- Amoco relied on Railroad Commission spacing and density regulations (including Rule 37) to argue additional drilling was restricted and that it had no duty to pursue exceptions.
- A jury found for the Alexanders on breach of implied covenants measured by the reasonably prudent operator standard; the trial court awarded actual and exemplary damages.
- The intermediate appellate court affirmed liability while reforming damages; the Texas Supreme Court reviewed and modified the judgment.

## Issues

1. Whether an oil and gas lessee owes an implied duty, under the reasonably prudent operator standard, to protect a lessor’s lease from field-wide drainage in a water-drive reservoir.
2. Whether the implied covenant to protect against drainage can require the lessee to seek Railroad Commission regulatory relief (including Rule 37 exceptions) when protective drilling would otherwise be barred.
3. Whether exemplary damages are recoverable for breach of implied covenants in an oil and gas lease absent an independent tort.

## Decision

- The court held Amoco owed the Alexanders an implied duty to act as a reasonably prudent operator to protect the downdip leases from field-wide drainage, not only tract-to-tract drainage.
- The court held that, depending on the circumstances, a prudent operator’s duty may include applying for Rule 37 exceptions or other administrative relief to permit protective wells.
- The court upheld liability and actual damages based on the jury-supported finding that Amoco failed to take reasonable protective measures.
- The court eliminated exemplary damages, treating the wrong as a contractual breach of implied covenants rather than an independent tort.
- The judgment was affirmed as modified (actual damages maintained; exemplary damages deleted).

## Legal Principles

- Oil and gas leases carry implied covenants requiring the lessee to act as a reasonably prudent operator to develop and protect the lease.
- The implied covenant to protect against drainage extends to field-wide drainage dynamics when reservoir conditions and development practices can foreseeably harm the lessor’s tract.
- Regulatory spacing and density rules do not categorically excuse nonprotection; a prudent operator must consider, and when warranted pursue, administrative exceptions or alternatives.
- Breach of implied covenants is contractual; absent an independent tort, remedies are compensatory rather than punitive.

## Conclusion

The Texas Supreme Court held that a lessee operating multiple tracts in a water-drive field must act as a reasonably prudent operator to protect a lessor’s downdip lease from field-wide drainage, which can include seeking Rule 37 regulatory relief, but punitive damages are not available for breach of these contractual implied covenants alone.


Amoco Prod. Co. v. Alexander, 622 S.W.2d 563 (Tex. 1981)