ARTICLE III
Risks In the Unilateral Reduction of Lease/Unit Oil Production By Terry E. Hogwood, Attorney-At-Law
PREMISE – Oil has decreased from $55/bbl to $15+/bbl AND there is a glut of oil in the world market.
a legitimate, valid lease/unit oil production rate such that the validity of the underlying lease(s) is not at risk? Absolutely! In fact, if land and legal professionals are not involved in the decision-making process, oil company management may well make a decision or set of decisions regarding reduced oil production which could result in the loss of multiple leases/units. Unalterable Rule : Whether an individual lease review or pooled unit review, each oil and gas lease covering lands within the lease/unit must ALWAYS be reviewed FIRST. That means that all provisions of each lease, including riders, must be reviewed to determine if the parties have agreed to any term(s) which may override the common law rules identified herein regarding what is/ is not production is paying quantities. See Skelly Oil Co. v. Archer, 356 S.W.2d 774 (Tex. 1961) for a case where a rider specifically defined production in paying quantities. It will be very important for the landman/attorney to determine if any of the leases which contributes acreage to a unit is the drillsite or the non-drillsite tract. In the case of horizontal wells, every tract through which the productive portion of the horizontal well passes is a drillsite tract ( Browning Oil Co., Inc. v. Luecke, 38 S.W.3d 625 (Tex.App. —2000)). It becomes especially important to review each lease covering each drillsite tract to confirm what lease provisions, if any, pertain/do not pertain to production in paying quantities.
FACTS – A management decision has been made:
1. 1. On leases/units with multiple oil wells, to shut in all but one oil well; or 1. 2. On leases/units with multiple oil wells, to uniformly reduce production from all producing wells by a given percentage; or 1. 3. On leases/units with only one oil well, to substantially reduce the production from such well.
1. 4. None of the underlying oil and gas leases at issue contain a shut-in oil royalty provision.
This is not just a premise or hypothetical set of facts; it is the precise state of affairs the oil industry finds itself in today. The decrease in the oil price the industry is experiencing today is not new. The most precipitous oil price drop the author can remember occurred in 1986 resulting in some very difficult, and more importantly, sometimes incorrect management decisions relating to how much oil (and gas) production could be cut back and not subject the lessee to lease termination due to a failure to produce oil and/or gas in paying quantities. ( Garcia v. King , 164 S.W. 2d. 509 (Tex. 1942); Clifton v. Koontz , 325 S.W. 2d. 684 (Tex. 1959)) This paper will look at one aspect that must be considered by management before it elects to shut in some of its individual lease/unit oil production – at what point does the lease/unit cease to produce oil in paying quantities and thus subject the lessee to loss of the lease/unit for failure to produce in paying quantities?
What this paper will not cover but the author may address in companion papers:
1. 1.
Shutting in of gas wells with high oil/ gas ratio. The shutting in of gas wells, regardless of their oil/gas ratio, involves additional (and significant) analysis of the gas shut in royalty provision (and/or whether one was even included in the underlying oil and gas lease(s)). For an introductory article on this issue see “Shut-In Royalties: Is Your Lease in Full Force & Effect” by the author and which appeared in the December
QUESTION – Is there a way that land/legal professionals can assist their management in arriving at
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G r o w t h T h r o u g h E d u c a t i o n - A p r i l / M a y / J u n e 2 0 2 0
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