## Facts

- Jimmie Cook owned a federal oil and gas lease on the W½ of Section 29 in Eddy County, New Mexico, and in 1964 assigned it to Phillips Petroleum Company while reserving a 5% overriding royalty interest.
- Phillips later assigned an interest in the same lease to El Paso Natural Gas Company.
- The federal lease contained a potash stipulation restricting drilling where it would endanger potash deposits or interfere with potash mining.
- El Paso also held a lease on the adjoining E½ of Section 29 and, in 1973, completed a gas well (Mobil Federal Well No. 1) on the E½.
- The well’s proration unit was set at the E½ of Section 29, and El Paso sought to enlarge the unit to 640 acres to include both the E½ and the W½.
- In 1974, the U.S. Geological Survey determined that drilling to test the Morrow formation on the W½ would cause undue waste of potash and pose hazards to potash mining, and it prohibited such drilling.
- Cook claimed the E½ well drained gas from beneath the W½, reducing the value of her overriding royalty, and sought a compensatory royalty for breach of the implied covenant to protect against drainage.
- After removal to federal court, the district court (bench trial) awarded Cook a compensatory royalty; El Paso and Phillips appealed.

## Issues

1. Whether a governmental prohibition on drilling on the burdened tract relieves lessees/assignees of liability for breach of the implied covenant to protect the leasehold against drainage.
2. Whether an overriding royalty owner has standing to sue to enforce obligations based on implied covenants in the underlying lease, including protection against drainage.

## Decision

- The Tenth Circuit affirmed the judgment for Cook.
- The court held that the drilling prohibition did not, by itself, extinguish or excuse the lessees’ obligation to protect against substantial drainage under the reasonably prudent operator standard.
- The court held that Cook, as the holder of an overriding royalty carved from and dependent on production from the lease, had standing to seek relief for drainage impairing her interest.
- The court upheld the award of a compensatory royalty as an appropriate remedy for the drainage-related loss.

## Legal Principles

- Oil and gas leases commonly include an implied covenant requiring the lessee to act as a reasonably prudent operator to protect the leasehold from substantial drainage to adjacent lands.
- Governmental restrictions on drilling are relevant circumstances in judging prudent-operator conduct, but they do not automatically eliminate implied-covenant duties or defeat liability where the leasehold suffers uncompensated drainage.
- An overriding royalty interest derived from the lease may support standing to sue the operator/assignee for breach of lease-based obligations when the interest is directly harmed.
- A compensatory royalty may be awarded to measure the royalty-equivalent value lost due to actionable drainage.

## Conclusion

The court affirmed a compensatory royalty award for drainage, ruling that a federal drilling prohibition did not categorically excuse performance of the implied covenant to protect against drainage and that an overriding royalty owner may sue to enforce lease-based protection duties when drainage diminishes the value of the reserved interest.


Cook v. El Paso Nat. Gas Co., 560 F.2d 978 (10th Cir. 1977)