ARTICLE II
The Force Majeure Clause In A Time of Economic Downturn (Texas)
1. 2. The drilling of new, profitable shale play wells, on new or HBP leases, requiring more than $55/bbl upwards to be profitable, can no longer be justified. 1. 3. Existing producing wells are having their oil and associated gas sold at severely reduced rates from initial, earlier prices. 1. 4. Management has debt to service from the sale of oil and gas as well as a duty to the companies’ owners/shareholders to maximize profits/return on investment.
XYZ Oil Company’s landmen, attorneys and management attend a specially called meeting to address the present oil pricing crisis as it relates to the company’s on-going activities in several shale plays. The landmen are requested to coordinate an investigation into several land and legal issues specifically pertaining to postponing drilling operations as well as reducing production from HBP leases to await a price turn around. Among numerous questions raised during the meeting, one specific question addressed at the meeting is whether the “standard” force majeure clause will allow the company to legally prevail on the issue of whether: (1) a force majeure event (the severe market downturn in oil prices) has taken place and (2) for the duration of the force majeure event, drilling operations required under the company’s oil and gas leases (end of primary term issues and/or continuous drilling obligation issues) located in the Texas shale oil plays may be delayed. The answer may surprise you.
1. 5. Oil companies are facing:
a. a. Expiration of the primary terms of their leases a. b. Delay rental payments becoming due and owing
Factual Setting
a. c. Minimum royalty payments becoming due and owing
The factual premises for this article is today, 2020. This is not the first time the oil and gas industry has experienced a severe downturn in oil and/or gas prices. “……Delhi’s expert, Charles A. Moore, former general counsel for the Federal Energy Regulatory Commission, testified that the general resale gas market and particularly the market for “tight sands gas” broke down in April or May of 1982; that an unprecedented combination of factors--a general economic recession, a plummeting crude oil price, weather conditions, and a decline of the drilling market, caused a general market failure that had its most significant impact on high price “tight sands gas”; that this drastic decline in the market continues even today. Delhi’s gas contracts administrator testified substantially the same testimony as Charles A. Moore above outlined.” 1. 1. Generally, oil has fallen from approximately +$60/bbl to around $10-$20/ bbl.
a. d. Continuous development clauses in their oil and gas leases requiring the drilling of additional wells to retain acreage under the leases a. e. Financial decisions relating to continued sales at severely reduced prices OR reducing production awaiting a return to higher commodity prices.
Texas Law
Texas law regarding the use of the force majeure clause (“Clause”) originates in oil and gas lease controversies as well as gas sales contract controversies. The early cases identify principles of the common law which define the application of the Clause to various situations occurring in the oil and gas industry. Two
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