a. 1. Is the lease/unit still actually physically producing oil?
‘merely for speculation’ means continuing to operate based on subjective hope that something might develop to make operations profitable, as opposed to a prudent operator’s reasoned belief based on applying accepted industry standards to the relevant circumstances that the odds of the lease becoming profitable justifies continued operations. BP America Prod. Co. v. Red Deer Res., LLC , 66 S.W.3d 335, 351 (Tex.App. - 2015). It is the burden of the lessor to introduce evidence that a reasonably prudent lessee would not have continued to operate the lease/unit under the circumstances demonstrated in the case. To negative continued operation/ production from the lease/unit, a lessee will usually have to introduce expert opinion testimony showing the various elements that lead to the expert’s conclusion that a reasonably prudent lessee would not continue to operate the lease/unit with the expectation of making a profit. Utilizing the above definition of speculation, the expert will also have to testify which facts lead to, in the expert’s opinion, the reason(s) why continued operation of the lease/unit would only be ‘speculative’ and not based on a reasonable expectation of making a profit. ( Cannon v. Sun-Key Oil Co., Inc., 117 S.W.3d 416 (Tex.App. — 2003)) A lessor’s failure to introduce any evidence on whether a reasonably prudent lessee would continue to operate the lease/unit for a profit and not merely for speculation, even if coupled with a fact finding over the time period selected by the finder of fact that revenues were exceeded by expenses, can subject the lessor to a summary judgment based on its failure to establish lease/unit termination under Part II of the PPQx test. ( Dreher v. Cassidy Ltd. Partnership , 99 S.W.3d 267 (Tex.App. — 2003)) It would seem equally appropriate that a lessee should also be prepared to introduce its own evidence that a reasonably prudent lessee would continue to operate the lease/unit with the expectation of making a profit via expert opinion testimony. This second part of the PPQx test thus assures a “battle of the experts” and leaves the issue of PPQx squarely in the hands of the trier of fact in each case. Prediction of each case outcome based on Part II of the PPQx test would be at best a 50/50 proposition.
a. 2. What do the individual leases or collection of pooled leases each contain, if anything, regarding production in paying quantities? This is the first step in the analysis that is undertaken to determine at what level wells should be shut in or production curtailed. It cannot be skipped without potential serious repercussions. a. 3. If there is no specific time period provided for in any pertinent lease, the lessee must first initially pick a time period to look at such production from an expenses/revenue perspective ie 6 – 24 months. a. 4. Do revenues exceed expenses for each and every month for the period of time selected by the lessee? If so, the lease is producing in paying quantities, at least for that period of time. The unanswered question is what period of time will the lessor(s) choose to determine if the lease/unit was producing in paying quantities prior to shutting in the well(s) or curtailing the production of oil? a. 5. A prudent lessee will always look to at least the last 24 months to see if there was any period of time where revenues do not exceed expenses. The result of this review will expose the risk in going forward with lease/unit oil well(s) being shut in or oil production curtailed. This PPQx review only confirms that the lease/unit was producing in paying quantities prior to the anticipated oil production reduction. a. 6. If there is at least a period of time consisting of at least six (6) months where expenses were not exceeded by revenues, then there is risk in shutting in/curtailing oil production that must be further analyzed by management. That risk assessment is beyond the scope of this article.
PPQx Query Sheet
Preliminary Analysis – Pre-Production Reduction Analysis
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N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s
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