About the Author:
Martin Gibson | 512-305-4743 |
Martin Gibson is Of Counsel in Locke Lord’s Austin office where his practice concentrates on energy law, with a particular focus on the exploration and production activities of independent oil and gas companies and individuals, both domestically and internationally. He is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization and has deep experience in equity and debt financing of oil and gas related entities. mgibson@lockelord.com
Maintaining an Oil and Gas Lease Beyond the Primary Term
the primary term by engaging in “reworking operations.” Under the terms of the lease, Hunt was required to file a written instrument releasing all non-productive acreage within 30 days of the expiration of the primary term. During the primary term of the lease, “Hunt did not commence drilling on any new wells, convert any of the legacy wells (wells that were in existence prior to execution of the subject lease) into injection wells, nor recomplete any of those legacy wells in a new production zone.” Id. , at *12. In July 2011, just before the expiration of the primary term, Hunt began reworking operations on 10 legacy wells. Hardin-Simmons asserted that the lease should be released because the lease terminated due to non-production. Hunt, however, refused to sign a release, and argued the entire lease remained in force and effect due to the reworking clause. The Court explained that “’[p]roduction in paying quantities means ‘the production is sufficient to pay the lessee a profit, even small, over the operating and marketing expenses, although the cost of drilling the well may never be repaid.’” BP Am. Prod. Co. v. Red Deer Res., LLC, No. 15-0569, 2017 Tex. LEXIS 410, at *8 (Tex. April 28, 2017) (quoting Hydrocarbon Mgmt., Inc. Tracker Expl., Inc ., 861 S.W. 427, 432 n.4 (Tex. App.- Amarillo 1993, no writ)). The Texas Supreme Court has developed a two-pronged analysis to determine “whether a well has ceased to produce in paying quantities depends on (1) whether the well shows a profit, even small, over operating expenses, and (2) if not, whether,
In Hardin-Simmons Univ. v. Hunt Cimarron L.P., No. 07- 15-00303-CV, 2017 Tex. App. LEXIS 6934 (Tex. App.- Amarillo July 25, 2017), the court evaluated the terms of an oil and gas lease to determine to what extent the oil and gas lease remained in effect, if at all, due to a lack of production in paying quantities. In the late 1950s several producing wells were drilled on the leased premises, but production declined. In 1967, the leased premises were included in the Buckshot Unit, a 13,000 acre waterflood unit. In the 1990s, the leased premises fell out of the Buckshot Unit and the owners of entered a new lease that was subsequently assigned to United Oil and Gas (the “United Lease”). At the conclusion of the primary term of the oil and gas lease to United, the lease was released as to all of the leased premises, except for 700 acres, which lease was acquired by Hunt Cimarron LP (“Hunt”). In 2006, lessors executed an oil and gas lease covering 4,960 acres of land in Cochran County, Texas to Hunt, including the 700 acres held by the United Lease. The 2006 Hunt lease provided for a primary term of five (5) years and included a retained acreage clause and a Pugh clause. The Pugh clause gave Hunt the right to maintain the lease by engaging in a “continuous development program” prior to the end of the primary term. The retained acreage clause gave Hunt the right to maintain the lease as to certain acreage and depths included in a “production unit.” The lease also contained a “reworking” clause that permitted Hunt to maintain the lease beyond
G r o w t h T h r o u g h E d u c a t i o n - O c t o b e r / N o v e m b e r / D e c e m b e r 2 0 1 7 19
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