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NADOA N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s G R O W T H T H R O U G H E D U C T I O N

Volume MMXX • No 2

www.NADOA.org

Contents Feature

NADOA 2020 Officers President Luanne Johnson, CDOA

Articles

1st Vice President Lewis Box, CDOA 2nd Vice Presiden t Michele Lawton Treasurer Jennifer Kegans

Cybersecurity and Working Remotely............................. 5 Unclaimed Property Legislative Updates........................ 7 Navigating PSA and Advanced Title Calculations......... 8 North Dakota Legal Update......................................... 11 Lease Maintenance Analysis......................................... 13 I Temporary Cessation................................................ 14 II Force Majeure......................................................... 18 III Reduced Production. ............................................. 23 Wyoming Legislative Update........................................ 32

Corresponding Secretary Michelle Harris, CDOA Recording Secretary Vicki Danielson, CDOA

The NADOA News Magazine is a quarterly publication of the National Association of Division

In This

Order Analysts PO Box 1656 Palm Harbor, FL 34682

Issue

Subscription: By membership to NADOA, at $75.00 per year. News Magazine Editor Rona L. Erickson, CDOA Kaiser-Francis Oil Company Ronae@KFOC.net 918.491.4319 Associate Editors April Luedecke, CDOA aprilluedecke@yahoo.com Cheryl Hampton champton@limerockresources.com

President’s Corner. .................................................1 Decimal Points.......................................................3 Division Order $al.................................................3 2021 Candidates Needed........................................4 Certification...........................................................5 New Members.......................................................31 Counterpart Connection.......................................34 Sympathies – Sharon Baugh.................................38 2020 NADOA Board/Committee Chairs...............40 Calendar of Events. ..............................................41

Graphic Design Paul Beach

On the Cover: Fireworks on the River Courtesy of Shreveport Visitor’s Bureau.

All rights reserved. No part of this publication may be reproduced/copied without written permission. Editorial disclaimer: The contents of this newsletter are intended for member use only and any other use without permission from the NADOA Board of Directors is strictly prohibited.Articles published herein represent the view of the authors; publication neither implies approval of the opinions expressed nor accuracy of the facts stated and NADOA accepts no liability for misprints.

President’s

Corner

Luanne M Johnson, CDOA, CPLTA 2020 NADOA President

Who would have thought when I wrote my last letter for the magazine that the world would be in the state it is in? I knew we would see a lot of changes in this new decade but did not think we would see them as fast we did. I know many of you are now working from home or have worked from home and either are starting to go back to the office or are not sure when that date will be. During this time, we as a board had to make a difficult choice in cancelling the 2020 Institute. We felt with the state of our industry and the state of the COVID-19 virus this was the best thing to do for our organization and for you, our members. With this decision, we also knew we still needed to make sure NADOA provided education, which is one of the most important reasons to come to Institute. So, we are in talks with our speakers and we are working out who would be interested in presenting their class via a webinar. We anticipate having more details about this soon. We know a webinar is not the same as being there at Institute with your friends and the new friends you make while attending, but we hope this will be helpful for continuing your education.

We will miss you this year, but we know that we will be back better than ever next year!

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NADOA

Decimal Points

Regional Reporters

Rona Erickson, CDOA Editor

April Luedecke, CDOA Associate Editor

Cheryl Hampton Associate Editor

ABADOA

Steptoe & Johnson PLLC dan.swiger@steptoe-johnson.com Donna King, CDOA donna.king@flywheelenergy.com

CAPDOA

Third Quarter. .......................August 21 Fourth Quarter................. November 13 2020 NADOA Article Deadlines

DADOA

OPEN

DALWORTH Lewis Box, CDOA

lbox@comstockresources.com

HADOA

OPEN

NADOA Directory Remember to keep your NADOA directory information updated. Due to all of the changes taking place in our industry and the world, it is more important than ever to maintain professional contacts and receive the educational benefits of membership in NADOA.

MAADOA

Angie Coady, CDOA

acoady@vessoil.com

PBADOA

Nicki Scoggins

nicole.scoggins@pxd.com

SADOA

Jane Green, CDOA

jmgreen@cimarex.com

Arkansas

Jackie Clotfelter, CDOA jclotfelter@hannaoilandgas.com

North Dakota Kimberly A. Backman

kbackman@crowleyfleck.com

New Mexico

Zachary P. Oliva

zoliva@kolawllp.com

Louisiana

OPEN

If you have a suggestion for someone to act as a Regional Reporter to help NADOA keep abreast of current legislation and legal issues for your region, please submit the name or the name of the firm.

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NADOA IS LOOKING FOR A FEW GOOD OFFICER CANDIDATES!! By Liz Fajen

e) shall coordinate activities to recruit new members, and f ) shall be chairperson of the Membership Committee. The Treasurer a) shall be a member of the Board of Directors; b) shall account for all revenues and maintain an accurate, current and auditable record thereof; the NADOA Administrator prepares and makes the deposits and provides a report to the Treasurer to report on at the Board Meetings. c) shall pay all expenses of the Association when such payment shall have been first duly authorized or approved by the Board of Directors, and d) shall prepare an annual financial statement stating the current financial condition of the Association or at any time when so directed by the President or Board of Directors. The quarterly and annual reports are prepared by the NADOA Administrator which are reviewed by the Treasurer and reported to the President and/or the NADOA Board of Directors. You must be an Active member of NADOA in good standing and are required to attend at least 3 of 4 scheduled meetings. Electronic attendance is allowed for one meeting per year per the by-laws. Meetings are typically held in January, June, prior to the Annual Institute and the last meeting is scheduled at a date chosen by the President before the end of the year. This is your chance to make a difference in NADOA. New and fresh ideas are always welcome. The fellowship with the members of the board and your local associations is invaluable. Please carefully consider running for office. If you have questions regarding any of the positions or rewards of holding office and are interested in running for office, please contact me at lfajen@me.com or (405) 990-6240.

NADOA is looking for candidates to fill our slate of offices for 2021! What a great opportunity for you to participate in a strong organization and get to know members from all over the country! You have the opportunity to develop new Leadership Skills that will benefit you for the rest of your career – and it is a rewarding and fun experience!

Elections will be held in September, 2020 for the following offices:

Second Vice-President a) shall be a member of the Board of Directors; b) shall, upon election, become Second Vice-President- elect with automatic advancement to First Vice- President without re-election unless he is unable or unwilling to serve the office of First-Vice President, in which case, an election shall be conducted to fill the position; c) shall, in the absence of the President and First Vice- President, succeed to the duties and responsibilities of the President, and in the absence of the First Vice- President, succeed to the duties and responsibilities of the office of First Vice-President, and d) shall be chairperson of the Site Selection Committee. The Recording Secretary a) shall be a member of the Board of Directors; b) shall maintain a current list of the officers and committee chairpersons, and c) shall record attendees, date and file reports and minutes of all regular and special meetings and make distribution at the direction of the President. The Corresponding Secretary a) shall be a member of the Board of Directors; b) shall reply to the Association’s correspondence at the direction of the President; c) shall coordinate notices of meetings to all members; d) shall maintain a current record of the full names and addresses of the members;

Please express your interest to me by July 15, 2020. Thank you!!

N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s

CANDIDATES FOR CERTIFICATION Publication of the following “Certified Division Order Analyst” applicant(s) fulfills the requirement as stated in the Voluntary Certification Policy, III C.2 which states: “…applicant’s name will be published in the NADOA Newsletter or other official publication of NADOA.” This allows the NADOA membership an opportunity to present objections to the certification of the applicant. Any objection to the certification of the applicant must be in writing and signed by a NADOA member or non-member who qualifies his knowledge and objection of the applicant. All such letters will be considered confidential and must be received by the NADOA Certification Committee at the following address within thirty (30) days following the last day of the month in which the Newsletter or other official publication of NADOA was published: NADOA Certification Committee P O Box 1656 Palm Harbor, FL 34682 If the objection warrants denial of the certification or temporary withholding of certification, the applicant will be notified by Certified Mail.

CANDIDATES FOR CERTIFICATION

Jacquelyn M Avery - Fort Worth, TX

Evelyn M Kastner – Denver, CO

CANDIDATES FOR RECERTIFICATION

Scott R Hill – Oklahoma City, OK

Cynthia Lancaster – Spring, TX

Cybersecurity and Working Remotely Over the last decade, the importance of protecting businesses from cybersecurity attacks has risen. Companies have increased budgets to protect their data, but attackers continue to try to break through our virtual walls. Due to the COVID-19 pandemic, millions of people now work from their homes. The closure of non-essential businesses and the recent “Stay at Home” order in effect for Pennsylvania has forced businesses to transition their employees to remote work. The switch to a predominantly remote workforce can pose increased risks to businesses unless they focus attention on needed cybersecurity protocols. Taking a few introductory steps can ensure a strong foundation for maintaining cybersecurity during this unprecedented time. First, businesses should provide basic guidance for staff on how to create a more secure remote work environment. A key initial step is to ask employees to look for the devices in their homes that are connected to the wireless home network and to ensure that those devices are secure and password-protected. Importantly, some of these devices – like cell

phones, gaming devices, tablets/iPads, and wireless assistants, such as Alexa, Google Home, and Siri, can be triggered to “listen” to and record conversations. This poses a business risk, if confidential discussions are inadvertently recorded. The best way to ensure these devices are not “listening” is to remove them from all office spaces. Keeping these devices updated and making sure they are all secured with unique passwords provides another layer of protection.

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Likewise, adding a required password to a home wireless network, or updating the default administrator password, is another key step to prevent unauthorized users from connecting to an employee’s personal network. Second, companies should advise their employees about the increased risks of phishing and spam attacks, which become more prevalent when employees work remotely. As guidance regarding COVID-19 changes daily, scammers’ targeting becomes more sophisticated and cyberthreats arrive more frequently by email. Scammers love to take advantage of the headlines, by sending emails about coronavirus updates with links to click, which send unwary computer users to fraudulent websites. These sites trick victims into revealing sensitive information, providing unauthorized access to computer systems, or donating to fraudulent charities or causes. Employees should be reminded to: • exercise caution in handling any email relating to COVID-19. • avoid clicking on links in unsolicited emails and be wary of email attachments. • use trusted sources such as legitimate, government websites for up-to-date information regarding COVID-19. Third, businesses should verify that their remote, online meetings are being conducted securely. According to the National Cyber Security Centre (NCSC), multiple criminal groups have ramped up activity since January. As meetings, conferences, and other events are moved online, companies face increased risks of exposure to malware and ransomware. Moreover, because most businesses have moved to online meetings via platforms such as Zoom, WebEx, Microsoft Teams, Avaya Spaces, and Skype Business, heightened protections are required to ensure the privacy of business and customer data. Chiefly, security measures must be put in place while businesses use these virtual platforms. In cases where confidential corporate information or sensitive data (like personal health information) must be discussed, it’s important to remember that laws on protecting data still apply. Utilizing free accounts during this time can expose a business to a variety of negative consequences if that data is breached and/or misused. Some of these virtual platforms have reported that hackers can tap into a webcam and/or microphone without the user’s

knowledge, exposing secret information. To enhance security during online meetings, companies should: • use a password, not just a log-in for access to meetings. • require the “host” to admit meeting attendees. • set up the meeting to always encrypt the discussion “traffic.” • consider whether meetings need to be recorded, record only when necessary, and delete recordings when no longer needed. Fourth, employers should stress the need to restrict confidential information to the company’s computer network and not to personal computers or devices not connected to the company’s network. While protecting data comes at a cost, some affordable measures to implement include double authentication for signing into work systems through the use of passwords, and the use of RSA tokens or similar means of access to the company’s network. Some systems require a password and a code that is sent via text, while others call an employee’s phone to provide the security of double authentication. Finally, the most important thing a business can do is to create a “see something, say something” culture by encouraging employees to report any suspicious emails so that others may be on the lookout as well. Sending test emails to employees to make sure they follow proper procedure is another way for a company to protect itself. As we navigate these new remote ways of working and conducting business, it’s important to review applicable policies, procedures and protocols to ensure that you are keeping information secure. Our Cybersecurity Team, led by Shawn Morgan, understands data privacy and cybersecurity laws and regulations, and the need for robust corporate compliance. This team can assist businesses navigating these uncharted waters by helping companies to revamp their data privacy policies, by addressing security incidents and data breach responses when those circumstances arise, and by ensuring that businesses fulfill their compliance obligations.

Authors: Gillian Flick and Shawn Morgan, Steptoe & Johnson PLLC.

This article originally appeared in the PIOGA newsletter and is reprinted here by permission.

N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s

Unclaimed Property Unclaimed Legislative Updates By Karen Anderson KPMG, LLP Colorado (effective 7-1-2020) • Decreases certain dormancy periods (including mineral interest property) to 3 years 1 and adopts the “current to pay” concept. 2 • Due diligence specifications will change such that the due diligence minimum will be reduced to $25 from $50 3 , specific language will be required in the due dili- gence notice 4 , the due diligence timing will be modified to 180 days to 60 days before report filing 5 and email will be an option for notice delivery if the owner has consented to receive email from the holder. 6 Maine (effective 10-1-2019) • Due diligence specifications have changed such that specific language is required in the due diligence notice, 7 the due diligence timing was changed to 180 days to 60 days before report filing 8 , and the notice must be sent via both 1st class USPS mail AND email if the owner has consented to receive email from the holder. 9 Nevada (effective 7-1-2019) • Reporting parameters have been modified by eliminat- ing the aggregate limit 10 and by mandating that the holder deliver the report via a portal established by the unclaimed property administrator. 11 • Due diligence specifications have changed to require the notice to be sent via both 1st class USPS mail AND email if the owner has consented to receive email from the holder. 12 Texas (effective 6-20-2019) • Reporting parameters have been modified to require consolidated reporting. More specifically, if a holder that is required to file a property report is part of an affiliated group, the holder must file one report for the entire affiliated group. 13 Also, the reporting require- ments now require that if a holder is required to file a report in any report year, the holder must file a report in each successive year even if it has no unclaimed property to report. 14

Vermont (effective 1-1-2021) • This new law will cause the mineral interest dormancy periods to accelerate to 2 years (from the typical 3 years) if the holder imposes a charge against the owner’s ac- count due to owner inactivity or failure to claim the property within a specific period of time OR if the holder has reason to believe the owner is deceased. 15 • Due diligence specifications have changed such that specific language is required in the due diligence notice 16 , the due diligence timing was changed to 180 days to 60 days before report filing 17 , and the notice must be sent via both 1st class USPS mail AND email if the owner has consented to receive email from the holder. 18 For more information on the topics covered in this article, please contact: Karen Anderson , Director KPMG, LLP / State & Local Tax / Unclaimed Property karenanderson@kpmg.com Ph: 303-382-7020 KPMG Disclaimer: The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.

1 2019 Colorado Senate Bill No. 88, Colorado First Regular Session of the Seventy-Second General Assembly, 2019 Colorado Senate Bill No. 88, Colorado First Regular Session of the Seventy-Second General Assembly, § 38-13-201(m) 2 Id. at § 38-13-209 3 Id. at § 38-13-501(1)(b) 4 Id. at § 38-13-502

5 Id. at § 38-12-501(1) 6 Id. at § 38-13-501(2) 7 Me. Rev. Stat. tit. 33, § 2102 8 Id. at § 2101 9 Id. 10 Nev. Rev. Stat. Ann. § 120A.560 11 Id. at§ 120A.560(11) 12 Id. at § 120A.560(8)(b) 13 Tex. Prop. Code Ann. § 74.105(b) 14 Id at § 74.106

15 2019 Vermont House Bill No. 550, Vermont 2019-2020 Legislative Session, 2019 Vermont House Bill No. 550, Vermont 2019-2020 Legislative Session, § 1473 16 Id. at § 1502

17 Id. at § 1501 (a) 18 Id. at § 1501 (b)

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Navigating PSA and Advanced Title Calculations for Texas Wells By: Eli Murray, CDOA, CPLTA

Lateral-based PSA: For a lateral-based PSA, the revenue decimals will be calculated on a well-by-well basis, and the tract factors will be identified on an as-drilled plat. Each tract under a lateral-based PSA will be identified on an Exhibit to the PSA, and an owner will receive revenue proportionate to the amount of the well which traverses his or her tract. As a restatement, a tract may be either an unpooled interest or a properly pooled unit, and the exact methodology of calculating the participation factor can vary to cover 1) productive wellbore, 2) perforations, or 3) penetrated zone. For example: 1. Productive wellbore: The portion of the lateral that crosses a tract from either a) first take point to the boundary line of the next tract, b) tract boundary line to tract boundary line, or c) tract boundary line to last take point, is the “ Tract Productive Length .” The distance of a wellbore from first take point to last take point is the “ Total Productive Length .” For a productive-lateral PSA, the Tract Productive Length will be the numerator, and the Total Productive Length will be the denominator. 2. Perforations: The number of perforations under a given tract is the “ Tract Perforations .” The total number of perforations included in a wellbore is the “ Total Perforations. ” For a perforation-based PSA, the Tract Perforations will be the numerator, and the Total Perforations will be the denominator. 3. Penetrated zone: The portion of the lateral that crosses a tract from either a) penetration point to the boundary line of the next tract, b) tract boundary line to tract boundary line, or c) tract boundary line to the bottom hole location, is the “ Tract Lateral Length. ” The distance of a wellbore from penetration point to bottom hole location is the “ Total Lateral Length .” For this PSA, the Tract Lateral Length will be the numerator, and the Total Lateral Length will be the denominator. For a lateral-based PSA, regardless of the methodology, the revenue decimal an owner receives will differ on a well-by-well basis. In instances where a tract is a pooled unit, the participation factor is an additional calculation

In decades past, determining the expense and revenue decimals for an owner in an oil or gas well was standardized across the industry and through either case law or statutory rulings. By the early-2000s, horizontal drilling had flourished, and wellbores began crossing multiple contract areas. Unfortunately, the methodology used to handle these longer laterals was left open to interpretation due to a lack of case law or statutory ruling. Accordingly, this paper discusses the methods which have been utilized by oil and gas companies in an attempt to comply with the language of the contracts in the wake of this technological revolution. The two methods and variations discussed are Production Sharing Agreements and Allocation Wells. Production Sharing Agreements: There are two standard approaches to calculating a Division of Interest which are subject to a Production Sharing Agreement (“PSA”), and the calculation is, generally, based on either surface acreage or lateral length. For methods using the lateral of the wellbore, there are a few variations, being: 1) productive wellbore, 2) perforations, or 3) penetrated zone. The PSA is used to govern revenue payments for wells which will traverse either multiple pooled units or unpooled mineral interests. For instances where a well will cross multiple Pooled Units which have been properly designated in the county records, the PSA tract factor will be applied to each revenue owner under the Pooled Unit as an additional participation factor. For the PSA that covers unpooled interests, the participation factor will take the place of a normal tract factor under a pooling agreement. Acreage-based PSA: For an acreage-based PSA, the tracts will be identified in an Exhibit under the PSA. Each tract will include an acreage designation and the sum of all tracts will be the total PSA area. Wells drilled under an acreage-based PSA will have a consistent revenue decimal. These are treated as super-units, and each tract will be a numerator and the total PSA area will be the denominator. Again, for every well drilled under an acreage-based PSA, the revenue decimal for each owner should not change.

N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s

applied to their final pooled decimal. Whereas, this lateral-length allocation would take the place of the usual tract factor for unpooled interests. Allocation Wells: Allocation wells are drilled across multiple tracts which have neither been pooled nor been included in a production sharing agreement. Without certainty regarding the proper payment of revenue under this circumstance, payments are generally based on lateral length. Additionally, only the owners whose tracts are traversed by a wellbore will receive revenue payments. In allocation wells, the acreage under a given tract is irrelevant, and the proportionate lateral length is used in lieu of a traditional acreage-based tract factor. As with PSA wells, the exact methodology for measuring the wellbore can vary, but the standard method is based on the productive wellbore from first take point to last take point. The formula for royalty and overriding royalty owners will be their traditional royalty interest on a tract basis, but instead of applying a tract participation factor based on acreage, the allocation factor is determined by the lateral length of the wellbore which traverses the tract divided by the total lateral length of the wellbore. The decimal interest of royalty and overriding royalty owners will change on a well-by-well basis; however, the working interest calculations under an allocation well can be on a fixed or floating basis. Please note, this terminology should not to be confused with the classification of non-participating royalty interests as “fixed or floating” in the traditional sense as defined through years of Texas jurisprudence. While the terminology is similar, the context is quite different. Fixed Working Interest: Working interest owners may choose to have a consistent expense decimal by contractually pooling their working interest under a Joint Operating Agreement. For a fixed working interest, the gross working interest will be computed in the traditional manner and will be stated in the Exhibit A to the JOA, and nonoperators will be responsible for paying drilling and completion costs, even if the well doesn’t cross a tract under which they own. As such, the owners must agree on the allocation of revenues. This is especially important if there are variations to the contributed burdens or if the working interest owners do not have an interest in all tracts under the contract area. A separate agreement or a provision in Article XVI

of the JOA can memorialize the understanding of the parties, and each working interest owner should receive the proportionate share of each wellbore’s burdens. Under this style of JOA, the expenses are constant for any wells drilled under the contract area, but the revenues will change on a well-by-well basis. Floating Working Interest: Working interest owners may choose to pay only when a well crosses their tract. For working interest owners who decide not to contractually pool their interest, they may choose to enter into either a JOA which covers only the wellbore or a JOA where the Exhibit A is updated upon the completion of successive wells. In this case, the gross working interest will be based on the record title interest of each leasehold owner in a tract multiplied by the lateral length allocation factor, and the net revenue interest will be proportionate to the burdens which they contributed. For a floating working interest, the expenses and revenues will change on a well-by-well basis.

PSA Examples:

Acreage-based PSA Pooled Unit Foxtrot (comprised of 640 acres) is Tract A under the All-American PSA, and Pooled Unit Whiskey (comprised of 641 acres) is Tract B under the All- American PSA. The participation factor will be calculated as follows: • 640 acres (Tract A) / 1,281 acres (All-American PSA) = 49.96096% participation factor • 641 acres (Tract B) / 1,281 acres (All-American PSA) = ‭50.039032% participation factor ‬‬ Productive Wellbore PSA Pooled Unit Foxtrot is Tract A under the Screaming Eagle PSA, and Pooled Unit Whiskey is Tract B under the Screaming Eagle PSA. The Army #1 well is drilled under the Screaming Eagle PSA. The as-drilled plat shows 7,500’ from first take point to last take point, with 5,000’ from first take point to boundary line of Tract A and 2,500’ from boundary line to last take point under Tract B. The participation factor will be calculated as follows: • 5,000’ (Tract A) / 7,500’ (Total Productive Length) = 66.666667% participation factor • 2,500’ (Tract B) / 7,500’ (Total Productive Length) = 33.333333% participation factor ‬

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Perforation PSA Pooled Unit Foxtrot is Tract A under the Big Red One PSA, and Pooled Unit Whiskey is Tract B under the Big Red One PSA. The Army #1 well is drilled under the Big Red One PSA. The as-drilled plat shows 24 perforations from first take point to last take point, with 10 perforations from first take point to boundary line under Tract A and 14 perforations from boundary line to last take point under Tract B. The participation factor will be calculated as follows: • 14 perforations (Tract A) / 24 perforations = 58.333333% participation factor • 10 perforations (Tract B) / 24 perforations = 41.666667% participation factor ‬ Penetrated Zone PSA Pooled Unit Foxtrot is Tract A under the Tropic Lightning PSA, and Pooled Unit Whiskey is Tract B under the Tropic Lightning PSA. The Army #1 well is drilled under the Tropic Lightning PSA. The as-drilled plat shows 7,900’ from penetration point to bottom hole location, with 5,250’ from penetration point to boundary line under Tract A and 2,650’ from boundary line to toe under Tract B. The participation factor will be calculated as follows: • 5,250’ (Tract A) / 7,900’ (Total Lateral Length) = 66.455696% participation factor • 2,650’ (Tract A) / 7,900’ (Total Lateral Length) = 33.544304% participation factor

Floating Working Interest Royalty Owners • 1/8 Roy * 100% MI * 2,115’ Tr1 Lateral / 9,883’ Tot Lateral = ‭0.02675048 (Murphy RI) • 1/5 Roy * 100% MI * 2,640’ Tr2 Lateral / 9,883’ Tot Lateral = ‭0.05342507‬ (Johnson RI) • 3/16 Roy * 100% MI * 5,128’ Tr3 Lateral / 9,883’ Tot Lateral = ‭0.09728827‬ (Arthur RI) Overriding Royalty Owners • 5% ORR * 100%WI * 2,115’ Tr1 Lateral / 9,883’ Tot Lateral = ‭0.01070019‬ (Patton ORRI) Working Interest Owners • 100%WI * 2,115’ Tr1 Lateral / 9,883’ Tot Lateral = ‭0.21400384‬‬ (Powell GWI) • 82.5% NRI * 100%WI * 2,115’ Tr1 Lateral / 9,883’ Tot Lateral = ‭0.17655317 (Powell NWI) • 100%WI * 2,640’ Tr2 Lateral / 9,883’ Tot Lateral = ‭0.26712537‬‬‬ (MacArthur GWI) • 80% NRI * 100%WI * 2,640’ Tr2 Lateral / 9,883’ Tot Lateral = ‭0.21370030‬ (MacArthur NWI) • 100%WI * 5,128’ Tr3 Lateral / 9,883’ Tot Lateral = ‭0.51887079‬ ‬‬ (Moore GWI) • 81.25% NRI * 100%WI * 5,128’ Tr3 Lateral / 9,883’ Tot Lateral = ‭0.42158252 (Moore NWI) Fixed Working Interest JOA – The contract area contains 640 acres, being 160 acres in the NW/4 of Section 23, 160 acres in the SW/4 of Section 23, and 320 acres in the W/2 of Section 27. Exhibit “A” of the JOA H Moore Exploration 50.0000% Gen Powell Exploration 25.0000% D MacArthur Drilling 25.0000% __________________________________________ Total 100.0000% Royalty Owners • 1/8 Roy * 100% MI * 2,115’ Tr1 Lateral / 9,883’ Tot Lateral = ‭0.02675048 (Murphy RI) • 1/5 Roy * 100% MI * 2,640’ Tr2 Lateral / 9,883’ Tot Lateral = ‭0.05342507‬ (Johnson RI) • 3/16 Roy * 100% MI * 5,128’ Tr3 Lateral / 9,883’ Tot Lateral = ‭0.09728827‬ (Arthur RI)

Allocation Examples:

Section 23 – Audie Murphy owns all the mineral interest in the NW/4 (Tract 1), and leases to GS Patton Leasing at a one-eighth (1/8) royalty. GS Patton Leasing assigns all of the working interest to Gen Powell Exploration save and except a five percent (5%) overriding royalty. Henry Johnson owns all the mineral interest in the SW/4 (Tract 2), and leases to D MacArthur Drilling at a one-fifth (1/5) royalty. Section 27 – Bea Arthur owns all the mineral interest in the W/2 (Tract 3), and leases to H Moore Exploration at a three-sixteenths (3/16) royalty. Navy #1 well – The as-drilled plat shows the surface hole location in the NW/4 of Section 23 and the bottom hole location in the SW/4 of Section 27. The lateral measures 9,883’ from first take point to last take point, and the following lateral lengths cover each tract: 2,115’ in Tract 1, 2,640’ in Tract 2, and 5,128’ in Tract 3.

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Overriding Royalty Owners • 5% ORR * 100%WI * 2,115’ Tr1 Lateral / 9,883’ Tot Lateral = ‭0.01070019‬ (Patton ORRI) Working Interest Owners ‭0.17746382‬ (Total RI Burden) + 0.01070019 (Total ORRI Burden) = ‭0.18816401‬ (Total Burdens) 1 – 0.18816401 (Total Burdens) = ‭0.81183599‬ (Wellbore Net Revenue Interest) • 25%WI under the JOA‬‬ (Powell GWI) • 81.183599%WB NRI * 25%WI = ‭0.20295900 (Powell NWI) • 25%WI under the JOA (MacArthur GWI) • 81.183599%WB NRI * 25%WI = ‭0.20295900 (MacArthur NWI) • 50%WI under the JOA ‬(Moore GWI) • 81.183599%WB NRI * 50%WI = ‭0.40591799 (Moore NWI)

variations to calculating divisions of interest for allocation and production sharing wells. Until common law, the regulatory body, or legislature creates a consistent method for companies to follow, the industry will continue to face uncertainty of whether the methods will be standardized. In the meantime, the industry will continue to calculate the interests of allocation wells and production sharing wells to the best of its ability.

About the Author:

Eli Murray Eli Murray is currently a Landman with Dorchester Minerals, LP. She has held various positions at other companies ranging from File Clerk to Property Administration and Division Order Manager. She is a Certified

Division Order Analyst and Certified Professional Lease and Title Analyst. She has a B.A. from Texas A&M University and a M.L.S. from the University of Oklahoma, and she is a veteran of the United States Army Reserves.

In conclusion, there isn’t a clear-cut formula for navigating this uncharted territory, and there are many

Legal

Update

These materials reflect only the personal views of the authors and are not individualized legal advice. It is understood that each case is fact-specific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation. Thus, the authors and their law firm cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney-client relationship with the authors or their law firm. While every attempt was made to insure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.

North Dakota

North Dakota Clarifies Allocation of Oil & Gas Proceeds Between Life Tenants and Remaindermen & Adopts the Open Mines Doctrine

In 2005, Dennis and Tia Reese-Young, co-owners of a tract of land in Mountrail County, North Dakota, executed an oil and gas lease covering their interest. Oil production was obtained on the leased lands in 2007. In 2008, Dennis and Cheryl Reese quitclaimed their entire mineral interest in said tract to Tia Reese-Young, reserving a joint tenancy life estate. However, the quitclaim deed did not address how proceeds from the production of oil and gas were to be allocated as between the life tenants and remaindermen. Dennis died later that year, leaving Cheryl Reese as the sole remaining life tenant.

In Reese v. Reese-Young, 938 N.W.2d 405 (N.D. 2020), the Supreme Court of North Dakota provided long overdue guidance on the allocation of oil and gas proceeds as between life tenants and remaindermen. Formerly, practitioners were relegated to the “general rules” that had emerged from legal treatises and the laws of other states. The statutory guidance provided only that the owner of a life estate must “do no act to the injury of the inheritance,” and must prevent “ordinary waste.” See N.D. Cent. Code §§ 47-02-33, 34. In addressing these successive estates, the court also formally adopted the Open Mines Doctrine.

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Due in part to the quitclaim deed’s silence on the matter, a dispute arose between the life tenant and remainderman as to how the oil and gas proceeds were to be allocated. The life tenant argued that under the so- called “Open Mines Doctrine” she was entitled to all of the royalty payments because the lease had been executed and production obtained prior to the creation of the life estate. Conversely, the remainderman argued that the Open Mines Doctrine was not the law in North Dakota, having never been formally adopted. The district court sided with the remainderman in holding that the Open Mines Doctrine did not apply, and that no statutory law indicated that it was the legislature’s intent to follow the Doctrine. In North Dakota, it is common for a conveyance creating a life estate to specifically address the allocation of bonus, rentals and royalties under an oil and gas lease. In the absence of such a provision, the majority of jurisdictions require a life tenant to hold the corpus of such payments in trust. To prevent a devaluation of the property, the life tenant is entitled only to income generated from such corpus during her life. Upon the life tenant’s death, this corpus vests in the remainderman. The North Dakota Supreme Court affirmed this general rule that a life estate owner has a duty not to act in a manner that causes the market value of the remainderman’s interest to diminish (i.e., commit “waste”). However, the Open Mines Doctrine creates an exception to the general rule that a life tenant cannot commit waste. It allows a life tenant to deplete the value and resources of a parcel of land “without impeachment for waste.” The Doctrine states that if a lease was in effect or a well was producing at the time a life estate was created, the life tenant can continue the use even though continuing the use causes the market value of the future interest holder’s interest to diminish. In reversing the district court, the Supreme Court of North Dakota held that the Open Mines Doctrine is part of the law in North Dakota and applies unless it conflicts with any statutory law. The court also noted that if the instrument creating the life estate provides for an allocation of proceeds, it may “contract around” and exclude application of the Doctrine. In this case, the plain language of the deed conveyed from the Reese’s to Reese-Young reserved a life estate interest in the minerals. The two parties had previously entered into an oil and gas lease for the property in 2005 and oil was being produced by November 2007, which was prior to the creation of the life estate at issue. In addition, the deed contained no language excluding the application of the Open Mines Doctrine. The Supreme Court thus concluded that where

no North Dakota statute specifically addressed how the proceeds from the sale of minerals or other payments under a mineral lease should be allocated between life tenants and remaindermen, and the instrument creating the life estate did not exclude application of the Open Mines Doctrine, the Open Mines Doctrine clearly applied and the life tenant is entitled to the proceeds from production. The Supreme Court added that “[a] life estate in mineral interests alone is nearly worthless except for mining or oil and gas production purposes and, without application of the Open Mines Doctrine, the result would be that the entity holding the life estate could have the responsibility of being the trustee for the remainder interest with little or no benefit therefrom.” Thus, the Supreme Court of North Dakota has made clear that the Open Mines Doctrine is clearly applicable in North Dakota law as it applies to oil and gas interests in land. This case confirmed the suspicion of many practitioners that the Open Mines Doctrine should apply in North Dakota, and affirmed the default rules regarding allocation between a life tenant and remainderman. It underscores the importance of carefully reading the deed creating the life tenancy, and being aware of the point of time the life estate was created in relation to leasing and production. We note that in the absence of a clear indication of the distribution of proceeds as between the life tenant and remaindermen, it is often prudent to have the parties stipulate as to allocation prior to disbursement. About the Author: D. Bradley Gibbs Partner bgibbs@kolawllp.com

D. Bradley (Brad) Gibbs is a partner with Kiefaber & Oliva LLP. Brad advises clients on due

diligence, complex mineral titles, pooling issues, lease analysis, joint operating agreements, surface use issues, title curative and general upstream matters. He is licensed to practice law in Texas, North Dakota,

Kansas and Wyoming. Brad is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization.

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Lease Maintenance Analysis During the Present Over Production of Oil (2020) in Texas – A Focused Guide

Although not at all unheard of in the history of the U. S. gas market, the worldwide glut of oil is causing, or will be causing, a reassessment of the lease maintenance of oil leases/units in Texas, especially in light of the involuntary shutting in of wells where the oil purchasers, who get their oil via pipelines or tankers, refuse to take any additional oil due to low demand. This low demand is caused in part by the apparent oil production war between Saudi Arabia and Russia coupled with low demand for gasoline and aviation gas due to a significantly lower amount of travel due to the Corona Virus. Following are three articles which look at specific aspects of lease maintenance where wells: (i) are shut involuntarily in some cases, or (ii) forcibly shut-in (to the extent that no purchaser will take the oil) in other cases, or (iii) production is voluntarily or involuntarily curtailed to meet current market demand. The three articles look at three different aspects of lease maintenance given the diminished, if not non-existent oil market depending on the location of the pertinent leases/units.

Specifically:

Article I , Temporary Cessation of Production Doctrine As Applied To A Lack Of A Market , addresses the very limited issue of whether a Texas oil and gas lessee, under an oil and gas lease which does not contain a savings clause dealing with drilling/re-working operations in the secondary term of the lease, may avail itself of the Temporary Cessation of Production Doctrine to maintain its lease(s) while oil production is shut-in due to a lack of a market for the oil.

Article II, The Force Majeure Clause In A Time Of Economic Turndown , reviews the status of the caselaw in Texas addressing the use of ‘force majeure’ as a method of lease maintenance.

Article III, The Precipitous 2020 Oil Price Drop – Risks In the Unilateral Reduction of Lease/Unit Oil Production , reviews the Texas caselaw regarding production in paying quantities so that an impacted Texas lessee can assess what and how much of its lease/unit production can be curtailed BEFORE it risks losing its individual lease(s) and/or the leases comprising a unit. This Guide is limited in coverage as more particularly explained in each of the three articles. It is intended as an introduction to the legal principles regarding each of the three topics. Reliance on any of the principles should only be made after submitting the particular factual setting and principles of law to the reader’s individual attorney and receiving independent advice from such attorney.

© 2020 Terry E. Hogwood About the Author: Terry E. Hogwood is a Texas licensed oil, gas and title attorney who has been in the legal practice for over 47 years. His CV and other background information can be found at his website: terryehogwoodattorney.com.

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Lease Maintenance Analysis Guide

ARTICLE I

Temporary Cessation of Production Doctrine As Applied To A Lack Of A Market

gas lease containing a habendum clause similar to that set out above but without any savings clause governing operations(re-drilling or workover operations) necessary to keep the oil and gas lease in full force and effect after the expiration of the primary term of the lease. The purpose of the paper is to negative the application of the Temporary Cessation of Production Doctrine to: (i) the present forced shutting in of oil wells due to lack of a market and (ii) the attempted application of the cessation of production doctrine as a faux implied force majeure doctrine (See Article II by this author) where production is shut in for lack of a market and not because the well(s) are physically incapable of producing.

Introduction

Early Texas oil and gas leases typically contained significantly fewer provisions governing the relationship of the lessor and lessee as well as the continuing viability of the oil and gas lease than today’s leases. As was discussed in a related paper ( THE PRECIPITOUS 2020 OIL PRICE DROP - RISKS IN THE UNILATERAL REDUCTION OF LEASE/UNIT OIL PRODUCTION, by the author ) : “First, and foremost, a Texas mineral lease grants a fee simple determinable interest in the oil and gas to the lessee. The lessee’s fee simple determinable estate may continue for so long as the lessee uses the leased premises for its intended purpose ie production of oil and gas. A lessee’s mineral/leasehold estate will automatically terminate if the event upon which it is limited occurs ie cessation of production of oil and gas. An oil and gas lease habendum clause defines the mineral/leasehold estate’s duration. For example, a typical habendum clause may provide: “Subject to the other provisions as contained herein, this lease shall be for a term of ??? years from this date (“the primary term”) and for so long thereafter as oil or gas of whatsoever nature is produced from the leased premises.” In Texas, such a habendum clause requires actual production in paying quantities . More significantly, although the habendum clause generally controls the mineral estate’s duration, other clauses found in an oil and gas lease may extend the habendum clause’s term. The issue of when a lease terminates is always a question of resolving the intention of the parties based upon all of the terms and provisions contained in the oil and gas lease.”

The Law Regarding the Temporary Cessation of Production Doctrine

The development of the law regarding the Temporary Cessation of Production Doctrine (“TCPD”) commenced early in Texas jurisprudence and continues to this date. The following is a review of the legal principles which govern the imposition/non-imposition of the TCPD to oil and gas leases today.

Factually:

1. Due to a precipitous drop in the price of oil, oil purchasers are refusing to take delivery of lease production, causing the lessee(s) whose leases are in their secondary term, to have to shut-in their oil wells. None of the impacted oil and gas leases contain a shut-in oil royalty provision. Thereafter, oil is not produced, on a lease or unit basis, in paying quantities for a period of time (30, 60, 90 ??? days). NOTE: If the wells being shut in are gas wells with a high GOR content, additional lease research must be conducted to determine if there is a shut-in gas royalty provision and/or a savings clause in the lease. This article is specifically directed at lease/unit oil production only.

This paper will analyze a typical Texas oil and

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