Colorado Supreme Court Clarifies the Law Applicable to Oil and Gas Leases

By: Diana S. Prulhiere, David R. Little

Published: January 16, 2024

The Colorado Supreme Court on November 20, 2023, issued a long-awaited decision that reversed a 2021 panel of the Colorado Court of Appeals by rejecting the universal application of the “commercial discovery rule” to Colorado oil and gas leases. The announcement stems from Board of County Commissioners of Boulder County v. Crestone Peak Resources Operating LLC.

Rejecting the application of any universal definition of the word “production” (such as the commercial discovery rule), the Supreme Court held that “each oil and gas lease” in Colorado should be interpreted “on its own terms” and the goal of parties and the courts should be to “determine the parties’ meaning within the context of the lease.”

 As background, in 2021, a panel of the Colorado Court of Appeals held that an oil and gas lease in Colorado only terminates in its secondary term under a cessation-of-production clause if wells on leased or pooled lands are incapable of producing oil and gas in commercial quantities. The panel also rejected arguments that cessation-of-production clauses are triggered whenever production ceases from leased or pooled lands during the secondary term regardless of whether such cessation is temporary or permanent.

Among the many other important observations of the Supreme Court in reversing the decision are the following:

For assistance or questions concerning the above, please contact the authors or any member of the Steptoe & Johnson Energy Team.

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