1. 3. Part I of the PPQx test was enlarged and a second part of the PPQx test was added: even if a profit is not established over a reasonable period of time established by the trier of fact, a lease/unit will still be deemed to be producing oil in paying quantities if a reasonably prudent operator would, for the purpose of making a profit and not merely for speculative purposes, continue to operate the lease ( Clifton v. Koontz , 325 S.W. 2d. 684 (Tex. 1959)) (“Part II” of the PPQx test). 1. 4. If a well is profitable under Part I of the PPQx test, Part II is not taken into consideration. Evans v. Gulf Oil Corp , 840 S.W.2d 500 (Tex.App. — 1992) Part I and Part II of the PPQx test and their impact on the continued viability of oil and gas leases, where oil production is severely curtailed, will be reviewed below filtering into such rules the new, modern cases so identified which will assist in developing a unified and safe plan for the reduction of oil production during the pendency of the current oil pricing crisis.
v. Koontz, 160 Tex. 82, 325 S.W.2d 684 (1959); and Skelly Oil Company v. Archer, 163 Tex. 336, 356 S.W.2d 774 (1961). Garcia rejected the notion that production will keep a lease in force indefinitely under the habendum clause regardless of the profitability of the production. Instead, said the Court, production means production in paying quantities. Garcia was followed by Clifton v. Koontz, supra, which refined the profitability test of Garcia and enunciated what is now considered a two-step test for determining a well’s profitability: (1) does the production yield a profit after deducting operating and marketing costs, 325 S.W.2d at 692 [3] and (2) would a prudent operator continue, for profit and not for speculation, to operate the well as it has been operated. 325 S.W.2d at 691. [4] Central to the Koontz decision is the philosophy that fixed or periodic cash expenditures incurred in the daily operation of a well (sometimes called out-of-pocket lifting expenses) are to be classified as operating expenses, while one time investment expenses, such as drilling and equipping costs are to be treated as capital expenditures.” Pshigoda v. Texaco, Inc. , 703 S.W.2d 416, 418 (Tex.App. — 1986) 1. 3. Stated another way, the word “produced”, as typically found in a Texas lease form habendum clause, has been defined as being equivalent to the phrase “production in paying quantities.” Dreher v. Cassidy Ltd. Partnership, 99 S.W.3d 267 (Tex.App. — 2003) 1. 4. Part I of the PPQx test should be utilized as an analytical tool prior to reducing oil production to confirm the pertinent lease/ unit was PPQx on the date of oil production reduction as well as a monthly analytical tool after oil production reduction to insure that the lease/unit continues to produce oil in paying quantities. SUMMARY – A lessee wishing to analyze whether it can reduce its production of oil (or whether its lease/unit is presently producing in paying quantities) will have to initially apply the two fold PPQx test to the oil production
Part I of the PPQx Test– General Principles
1. 1. The question of whether or not an oil well is producing in paying quantities is usually a question of fact for the jury. ( Skelly Oil Co. v. Archer , 356 S.W.2d 774 (Tex. 1961)). Likewise, the matter of the allocation and calculation of expenses for PPQx purposes is also generally a fact question. The exception to this rule is if the lessee can establish that the well is and has, over the time period utilized and judicially accepted in the particular case, continuously produced oil at a profit. ( Evans v. Gulf Oil Corp , 840 S.W.2d 500 (Tex.App. — 1992))
1. 2. The generalized test for Part I is:
“Although no Texas case is precisely in point, the controversy can be resolved within the framework of three cases: Garcia v. King, 139 Tex. 578, 164 S.W.2d 509 (1942); Clifton
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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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