Boulder County presented its case to end mineral rights leases when oil and gas operators do not produce oil and gas to the Colorado Supreme Court on Tuesday.
The board of county commissioners filed a case against Crestone Peak Resources Operating in 2017, arguing that two oil and gas leases over lands in the eastern county had expired due to a lack of oil and gas production. Both the district court and court of appeals held that the leases did not expire, but the Colorado Supreme Court granted Boulder County’s petition for certiorari review.
While Crestone did not produce oil and gas on these leases for 122 days in 2014 due to pipeline maintenance by a third party, the district and appeals courts applied the “commercial discovery rule.” Their decisions agreed that oil and gas production occurs when the resources are discovered and a well is capable of producing them regardless of what is or is not extracted.
Senior Assistant County Attorney Katherine Burke presented the case that oil and gas operators must actually produce oil and gas to maintain their leases or pay stoppage royalties, which Crestone did not do. She framed the court’s two choices as a plain language interpretation of the word “production” or adjusting the definition in favor of the oil and gas industry.
Fred Yarger, representing Crestone, argued that defining production statewide would automatically terminate thousands of leases overnight as maintenance often pauses oil and gas production. He said that Crestone’s contract with the county allowed for such pauses.
The court asked Burke if it was fair to terminate a lease because of an issue outside the control of the oil and gas producer. The leases did not specify this type of situation, according to Burke, so it cannot be exempted.
“That’s the way the lease is written,” Burke said.
Yarger argued that these types of delays are common in the oil and gas industry. Unlike the county, Crestone did not think a statewide definition of production necessary and asked for the court to consider the relevant leases only.
“Boulder wants this rule so it can terminate two proven commercially productive leases operated by a prudent operator simply because a decade ago, a downstream gas pipeline required a shut-in for a shorter period of time than the shut-in royalty clause provides,” Yarger said.
If the leases are found to have expired, the county would have full control over the mineral rights. Justice Monica Márquez questioned whether the lease termination was more of a “gotcha” by the county to adjust the intent of the clause to halt oil and gas operations where possible.
“Boulder County has the reputation it has, and it has the interests it has,” Burke said. “It shouldn’t matter to your analysis what Boulder County’s intention is with these mineral rights.”
She argued that the county could do anything it wanted with the property, as any mineral rights owner could, which is why the Colorado Association of Mineral Rights Owners filed a brief in support of the county.
It was also noted that despite the county’s belief that the lapse in operation meant that the lease was terminated, the county continued to collect royalties from Crestone.
Yarger emphasized that this situation did not qualify as a cessation of production.
“I don’t think you need to do anything more than read this lease,” he said.
A decision will not be expected from the Colorado Supreme Court for several months.