## Facts

- Two lessors (Robert Post Johnson and A.V.M., Inc.) executed separate but similarly worded oil-and-gas leases covering mineral interests in eight spacing units in McKenzie County, North Dakota.
- Each lease had a three-year primary term and a habendum clause extending the lease beyond the primary term “as long thereafter as oil or gas is produced” from the leased premises or pooled acreage.
- Each lease included a form continuous drilling/reworking operations clause that purported to keep the lease in force beyond the primary term if operations were continuously prosecuted when production was not then occurring.
- Each lease also included an added Pugh clause providing that, after the primary term, the lease would terminate as to any part of the property not included in a well unit producing oil or gas in paying quantities.
- At the end of the primary term, production in paying quantities existed in only three of the eight units; five units had no production in paying quantities.
- The lessors asserted the leases terminated as to the five nonproducing units under the Pugh clauses; the lessee and other interest owners asserted continuous operations preserved the leases across all eight units.
- The district court granted summary judgment for the lessee and aligned defendants, concluding the continuous operations clause extended the leases for all units; the lessors appealed.

## Issues

1. Whether the continuous drilling operations clause extended the leases beyond the primary term for all eight units notwithstanding the Pugh clauses when five units lacked production in paying quantities.
2. Whether the Pugh clauses conflicted irreconcilably with the habendum and continuous operations clauses, and, if so, which provisions controlled under North Dakota contract law.

## Decision

- The North Dakota Supreme Court reversed the summary judgment for the lessee and remanded.
- The court held the Pugh clauses, as negotiated “original” provisions, conflicted irreconcilably with the form habendum and continuous operations clauses as applied to the disputed units.
- Applying North Dakota’s rule that original language controls over form language when provisions conflict, the court gave effect to the Pugh clauses.
- The court concluded the leases terminated at the end of the primary term as to the five units without production in paying quantities, regardless of drilling or development activities elsewhere.

## Legal Principles

- Oil and gas leases are construed to ascertain the parties’ intent from the written instrument when possible; construction is reviewed de novo.
- Summary judgment is appropriate only when no genuine dispute of material fact exists and the movant is entitled to judgment as a matter of law.
- When contract provisions conflict irreconcilably, North Dakota law provides that purely original (negotiated) language controls over copied form provisions.
- A Pugh clause that expressly limits post-primary-term leasehold to acreage within producing units cannot be read as nullified by a continuous operations clause that would otherwise perpetuate the lease on nonproducing acreage.

## Conclusion

Because the leases’ negotiated Pugh clauses limited post-primary-term continuation to acreage in units producing in paying quantities, the leases expired as to the five nonproducing units at the end of the primary term, and the district court’s contrary summary judgment was reversed and remanded.


Johnson v. Statoil Oil & Gas LP, 2018 ND 227, 918 N.W.2d 58 (N.D. 2018)