from the bookkeeping entry) as a legitimate charge to lifting expense. For example, in a pumping well the lessee may be using some equipment which has been “written off ” completely and on which lessee is no longer taking any depreciation. Still that piece of equipment may have a current salvage value. To some extent continued operations are wearing out that equipment and reducing its salvage value. The proof may be difficult and the reduction in value may be slight, but the fact remains that there is “physical depreciation” which is properly chargeable to lifting expense.” Evans v. Gulf Oil Corp , 840 S.W.2d 500, 504 (Tex.App. — 1992)
were allocated to this well and which were used on this well in order to produce or keep it producing. You shall not consider any costs or one-time investment expenses incurred in connection with the original drilling or any reworking of the wells on the lease.” ( BP America Prod. Co. v. Red Deer Res., LLC, 66 S.W.3d 335, 348 (Tex. App. - 2015)) “In answering this question, you must take into consideration all matters which would influence a reasonably prudent operator. Some of the factors are: - the depletion of the reservoir and the price for which the lessee is able to sell his produce; - the relative profitableness of other wells
in the area;
- the operating and marketing costs of the
well;
- the operator’s net profit; - the lease provisions; - a reasonable period of time under the
a. g.
Expenses of installing pipeline facilities ( Skelly Oil Co. v. Archer, 356 S.W.2d 774 (Tex. 1961))
circumstances; and
- whether or not the lessee is holding the lease merely for speculative purposes.” ( BP America Prod. Co. v. Red Deer Res., LLC, 66 S.W.3d 335, 350 (Tex.App. - 2015))
a. h.
Electric bills for production operations ( Fick v. Wilson, 349 S.W.2d. 622 (Tex.App. – 1961))
SUMMARY – Calculating PPQx is a fact-based exercise that must be accurately carried out when attempting to set an oil production limit for a lease/unit that does not place the lease/unit in jeopardy of being declared terminated due to a failure to PPQx. Initially, a PPQx investigation must be carried out to determine if the lease/unit is producing in paying quantities PRIOR to the anticipated oil production reduction. That same PPQx must thereafter be conducted on a monthly basis AFTER the oil production reduction to continually affirm that the lease/unit is producing in paying quantities. How an oil company accounting department treats certain expenses is NOT necessarily determinative of the correct legal classification of a particular expenditure for PPQx calculation purposes. As can be seen from the above summary of what lease/unit production and marketing expenses are to be included in the PPQx calculation,
a. i.
A jury instruction in a recent case set forth numerous items which should be taken into account when trying to determine if production from a lease/unit has complied with Part I of the PPQx test. Although reversed on other grounds ( BP America Production Co. v. Red Deer Resources, LLC, 526 S.W.3d 389 (Tex. 2017)), the items identified in the case as potential expense items should, in the author’s opinion, be considered when analyzing whether a lease/unit is PPQx. “You are further instructed that ‘operating and marketing costs’ include expenses such as taxes, overhead charges, labor, repairs, and ordinary periodic expenditures which
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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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