there are potentially additional expenses that have not yet been judicially identified as includable or excludable expenses for PPQx calculation purposes (such as internal marketing expenses charged by a subsidiary). Unfortunately, management will have to make semi-educated guesses as to what is an expense that should be included in the PPQx calculation.
the well under the circumstances. The appellate court was thus left with no choice but to find that the lessor had failed to establish that PPQx had ceased and that the lease had terminated. The case was thus reversed and remanded back to the trial court. This case was followed by the case of BP America Production Co. v. Laddex, Ltd., 458 S.W.3d 683 (Tex.App. - 2015) which further defined what was a reasonable period of time to evaluate whether a lessee was producing oil and/or gas in paying quantities. In the Laddex case, the production from the one lease well slowed over approximately fifteen months. At the expiration of the fifteen month period of time, the well resumed producing in quantities comparable to those before the slowdown. The Texas Supreme Court went back to the case of Clifton v. Koontz, 325 S.W.2d 684 (Tex. 1959) to re-emphasize in this case that “…there can be no limit as to time, whether it be days, weeks, or months, to be taken into consideration in determining the question of whether paying production from the lease has ceased.” ( Clifton v. Koontz, 325 S.W.2d 684, 690 (Tex. 1959)) In this case, the trial court limited the jury’s consideration of the PPQx issue to the fifteen months during which production was reduced and did not allow the jury to consider the well’s return to profitability thereafter. Even though the trial court limited the time period over which the jury could consider the PPQx issue, evidence of well production and profitability was admitted for both before and after the fifteen month period but only the fifteen months prior to the well’s return to profitability could be considered by the jury due to the court’s limiting jury instruction. This time period limitation by the trial court was held by the Texas Supreme Court to be error. The court’s rationale was that the choosing of a time period (fifteen months) by the trial court could (and probably did) significantly influence the jury’s verdict on the PPQx issue. Therefore, the jury should not have been limited via jury instruction in its PPQx inquiry. Rather, it was proper for each party to the litigation to attempt to focus the jury’s attention to the “reasonable” time period to be considered via their respective presentations of evidence and argument. The time period that is reasonable is determined by each fact finder in each case. In this case, the court remanded the case back to the
PPQx Time Period Calculation
As detailed in Part I – General Principles, this part of the PPQx test involves a calculation of the lease/ unit costs and expenses of operating and producing the well(s) over a reasonable period of time. Perhaps even more important than the expense/revenue calculation is the period of time over which such costs and expenses are calculated. Obviously, a lessor will attempt to choose that time period where lease/unit expenses clearly exceed lease/unit revenues, thus throwing the issue to Part II of the PPQx test (would a reasonably prudent operator continue to operate the lease/unit with the expectation of making a profit and not for speculative purposes). A lessee will want to choose that period of time where lease/ unit expenses are exceeded by lease/unit revenues and thus cutting off further PPQx inquiry. Both lessor and lessee will probably have different starting and ending dates as well as potentially acceptable rationales for the choosing of such dates. Hence, the choosing of the time calculation period for PPQx purposes is one for the jury as the trier of fact ( Morgan v. Fox, 536 S.W.2d 644 (Tex.App. — 1976); Clifton v. Koontz , 325 S.W. 2d. 684 (Tex. 1959); M. K. Bales v. Delhi-Taylor Oil Corp., 362 S.W.2d 388 (Tex.App. – 1962, ref ’d n.r.e.); Fick v. Wilson, 349 S.W.2d. 622 (Tex. App. – 1961); Ballanfonte v. Kimbell , 373 S.W.2d 119 (Tex.App. – 1963, ref ’d n.r.e.)) The case of Dreher v. Cassidy Ltd. Partnership, 99 S.W.3d 267 (Tex.App. — 2003) reviewed the underlying evidence in a PPQx case where the lessor failed to meet its burden of proof: (i) as to Part I of the PPQx test, the lessor introduced evidence that over an eight (8) month period of time the lease was not profitable BUT it failed to introduce any evidence why the eight (8) month period of time was a reasonable period of time and (ii) as to Part II of the PPQx test, the lessor failed to introduce any evidence, such as expert evidence, that a reasonably prudent operator would not have continued to operate
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