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Energy & the Law

What Can I Get From My Lessee if I Ask the Court For It?

Posted in Lease Disputes

pleadingCo-author Sandra L. Mazan

It s been said that if you don’t ask for what you want you’ll get what you deserve.  Mr. Hooks took that truism to heart.

Hooks v. Samson is about more than the discovery rule (See last week). Here are the other claims at issue:

Most Favored Nations Clause

In royalty suits the court must rely on the language of the agreement at issue. Nevertheless, general principles of oil and gas law inform the court’s decision.

The “most-favored nations” clauses required Samson, if it paid higher royalties on nearby leases, to pay matching royalties to Hooks. Hooks alleged that Samson paid a higher effective royalty rate to the state of Texas. Samson responded that the higher effective rate was not the result of a higher royalty, but rather was the result of increasing the State’s “unit royalty interest” in order to induce the State to agree to a pooling agreement.

The court applied the “primary legal consequence” of pooling to resolve the issue: Production anywhere on a pooled unit is treated as production on every tract in the unit. The court reached way back to Montgomery v. Rittersbacher:

Pooling “effects a cross conveyance among the owners of minerals under the various tracts of royalty or minerals in a pool so that they all own undivided interests under the unitized tract in the proportion by contribution bears to the unitized tract”.

Royalty owed on production from the whole unit is necessarily tied to the royalty owed on production from the lessor’s tract. To increase one is increase the other.

Samson’s increase of the State’s royalty on unit production meant that the State’s 25% lease royalty was really 28.28896%.

Score a run for Hooks. (Humor me. Spring training is on.)

Formation-Production Clause

Each lease said:

“For the purposes of calculating all royalties payable under Article III herein, it is expressly provided that all such calculations shall be based on formation production as reported on Texas Railroad Commission Forms P-1 and P-2.”

The issue was gas that left the reservoir as gas and produced at the surface as condensate. When reporting the total volume removed from the reservoir, Samson would convert the volume of condensate at the surface to its equivalent volume as a gas. Samson paid royalties on proceeds from sales rather than on total amount of formation production. Hooks claimed this clause required that a royalty be paid on liquid condensate, which must then be converted to its equivalent in gas volume so that another royalty must be paid on it. Samson responded that such an interpretation imposed a double royalty by requiring that Samson pay royalties on condensate twice. The court agreed.

Score a run for Samson.

Wrongful Pooling

 Samson pooled the Hooks leases into a unit, effective as of first production. Samson amended the unit designation and notified Hooks that the name was changed. The amendment also significantly altered the unit boundaries.

Hooks claimed that Samson did not have the unilateral right to “unpool” Hooks’ leases. The Court invoked ratification and waiver. Because Hooks did not deny the validity of the new unit, which existed only after Hooks was notified that the old unit was being amended, he could not later assert that he should also receive royalties from the old unit.

Score a run for Samson.

Offset Well Obligation

Two of Hooks’ leases required that if a well were completed within 1,320 feet of Hooks’ lease line but not unitized with Hooks’ acreage, then within 90 days Samson must either drill an offset well, pay royalties, or release the offset acreage. Because the statute of limitations did not apply to the compensatory royalties that might have been owed within the preceding four years, the court remanded for the court of appeals to consider the merits.

Score a runner on third for Hooks. This contest will go to extra innings.

Texas Supreme Court Relaxes Its Grip on the Discovery Rule

Posted in Lease Disputes
grip2Co-author Sandra L. Mazan

The Texas Supreme Court – that elephants’ graveyard of claims and causes of action – has sided with a lessor-plaintiff who relied on the discovery rule to defeat a limitations defense.  For the many with low expectations when the court agreed to review this case, this result is a welcomed surprise.

We discussed Hooks, et al. v. Samson Lone Star, Limited Partnership in a prior post, wondering if the Court would actually allow a plaintiff to invoke the discovery rule, something it has been loath to do ever since HECI Exploration v. Neel.

The Lie and Its Aftermath

Hooks sued Samson, alleging fraudulent inducement arising out of three oil and gas leases from Hooks, as lessor, to Samson, as lessee, in 1999.  (Other claims will be discussed in a future post.)  A Samson landman had submitted a plat to the Railroad Commission which misrepresented the bottomhole location of a well. It took Hooks a long time to discovery the fraud, and Samson argued that Hooks should have had acquired knowledge of the true bottomhole location from earlier RRC records (a directional survey and its associated plat). The Supreme Court disagreed.  Where the most-recent record show an inaccurate location, “reasonable diligence” does not require a review of earlier records.

Who Decides?

The jury determines whether a mineral owner, in the exercise of reasonable diligence, discovered or should have discovered the fraud foisted upon him.  But the existence of information in the public record may, as a matter of law, establish a lack of diligence in the discovery of fraud. This is because the public record gives everyone constructive notice of its contents, even records the plaintiff doesn’t examine. but that is not the case where the records themselves are tainted by fraud.

Earlier cases ruled that reasonable diligence requires sophisticated lessors to acquaint themselves with “readily accessible and publically available information” from RRC records.  As a matter of law the lessor is bound by the knowledge he would have obtained had he investigated the records. (Don’t be misled by that language: The royalty owner doesn’t have to be sophisticated to be done in by the rule. See HECI).

In Shell Oil Co. v. Ross, it was an oil and gas attorney; in BP America Production Co. v. Marshall it was a sophisticated plaintiff who “understood the oil and gas industry”.  A well log and plugging report that contained, in the words of the court, “highly technical information”, resulted in a ruling that as a matter of law Marshall would have been able to discover BP’s fraud through the use of reasonable diligence.

The difference was that in those cases the public record was not itself tainted by fraud.

Is This a Game-Changer?

Probably not.  We detect nothing in the opinion suggesting the Court intends to relax the basic rule: Royalty owners overlook, or naively ignore, the contents of public records at their peril.  With this musical interlude defendants remind the Supreme Court that it is their sweet and special friend against populist juries and disobedient appellate courts inclined to side with the royalty owner-plaintiff.

Louisiana Lessee Could be Liable for Withholding Information

Posted in Lease Disputes

Jesus Heals LSU QB, Les and Cam Approve

Co-author Brooke Sizer

A Quiz

You are in Louisiana and are described as having a “lesion beyond moiety”. What do you do?

A.  Contact your primary care physician for an appointment;

B.   Be relieved that the blessed end is near and you won’t have to endure another season of inferior quarterback play;

C.   Recall that Jesus healed the leper. Everything will be alright;

D.   Proceed directly to the court of appeal.

The Lessons

  • Lessees who buy minerals and royalties from your lessor: Be aware that when you use your superior knowledge of what’s coming, your duties to your lessee can cause problems.
  • Mineral and royalty buyers who are not lessees: This case should not affect you.
  • Don’t panic. There has not been a trial. This decision is about claims a plaintiff should be allowed to bring.

The Facts

In McCarthy v. Evolution Petroleum Corp., the McCarthys owned mineral interests that had been leased and operated continuously for 60 years. Evolution, the current operator, agreed to sell its working interest to Denbury Resources for $50 million. Denbury had estimated that by a CO2 flood they could recover an additional 30 to 40 million barrels. Evolution then made unsolicited offers to the McCarthys to purchase their royalty rights. Evolution did not mention the agreement with Denbury, but instead used figures from the past 16 years to propose a selling price, not taking into account the enhanced value.

The McCarthys alleged:

  • Evolution’s ownership and operation of the leases led to knowledge that Evolution used to obtain an advantage over them;
  • Evolution knew that the price offered was substantially below the true value;
  • Evolution ceased to operate in good faith;
  • Evolution breached its obligation under Mineral Code Article 122, allowing for rescission of the lease.

The Law

Civil Code Art 1953: “Fraud is a misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other. Fraud may also result from silence or inactions.”

Civil Code Art. 1954: Fraud does not vitiate consent when the party against whom the fraud was directed could have ascertained the truth without difficulty, inconvenience, or special skill. This exception does not apply when a relation of confidence has reasonably induced a party to rely on the other’s assertions or representations.

Mineral Code §122: A mineral lessee is not under a fiduciary obligation to his lessor, but he is bound to perform the contract in good faith and to develop and operate the property as a reasonably prudent operator for the mutual benefit of himself and his lessor.

What the Court Said

The trial court stated that this case was ultimately a claim of “lesion beyond moiety” and rescission in the sale of mineral rights is prohibited by Mineral Code §17. But the trial court failed to distinguish between rescission based on fraud (a vice of consent) and rescission based on deficiency as related to market price.

Factors That Count

  • The McCarthys had no expertise concerning evaluation of proven and undeveloped resources,
  • They were not aware of the proposed Denbury project
  • They did not have the skills or knowledge as landowners.
  • Evolution as the mineral lessee gained special knowledge about the property.
  • There was a great disparity in the bargaining position of the parties.

Fraud by Misrepresentation

Evolution’s price for the royalty interest emphasized past production, the only numbers the McCarthys had access to. The speculative nature of minerals generally does not cause legal error, but here Evolution had knowledge that gave it access to determination of future reserves and values.

Fraud by Silence

Louisiana law views the refusal to speak in the face of an obligation to do so as not only unfair, but fraudulent.

Conclusion

Evolution had a duty under Mineral Code §122 to further develop. The McCarthys could not be precluded from asserting a claim of fraud by silence. They had a right to prove that Evolution carried a duty to reasonably develop, and remaining silent may breach its obligation to be a reasonably prudent operator. What’s worse, Evolution was not completely silent but was misleading.

Musical interlude

In case you were wondering, here is the difference between Cajun and Zydeco.

Answer to the Quiz: D, but if Jesus would only heal the quarterbacks …

 

A Scourge Worse than Fracking!

Posted in Hydraulic Fracturing

Allen Gilmer of DrillingInfo.com warns us about a threat to the nation’s health and safety that makes hydraulic fracturing look like a kindergarten cupcake party (if there were still such a thing).  What’s worse is this scourge is not limited to communities where there is oil and gas production. The young seem to be most afflicted. See the link to Allen’s blog post:

http://info.drillinginfo.com/whats-more-dangerous-puppies-or-fracking/

As long as we are educating, let’s have a lesson on that music genre known as Swamp Pop.  Imagine mixing roughly equal portions of Zydeco, Cajun, N. O. R&B and Country in a musical Cuisinart. The result will be a certain, recognizable rhythm. Throw in horns and an accordion sometimes, and there you have it.

Cookie and the Cupcakes

Slim Harpo

Johnnie Allen.   This one is so easy a Texas  musician can do it, if you know what  I  mean.

Operator Can’t Recover Drilling Costs For Affiliate’s Expensive Rig

Posted in Contract Disputes, Operating Agreements

Co-author Alexandra Crawley

In Elm Ridge Exploration Co., LLC v. Engle we are reminded of a little-used provision in the 1989 Model Form Operating Agreement. Article VI.D.1 allows the operator to use its own equipment, but his charges may not exceed prevailing rates in the area, and the rates must be agreed to in writing before drilling commences.

Breach of the JOA?

A New Mexico Operator sued the majority working interest owner/non-operator for recovery of well costs. The AFE for the well specified a 24-hour rig.  The majority owner alleged that Operator breached the Operating Agreement by drilling the well with a more expensive daylight rig of Operator’s affiliate, instead of a 24-hour rig. He claimed that the excess cost of the daylight rig should reduce the amount he owed for his share of well costs.  Use of the daylight rig was without the majority owner’s consent. A 24-hour rig would have cost less to operate than the daylight rig.

Operator argued that the BLM drilling permit would have expired had it waited, leading to an even costlier re-permitting process to finish drilling the well and that by not waiting, Operator saved money.

The Testimony

Operator testified that they were lucky to get the rig they did because another rig was not available. However, he also testified that the permits were satisfied when the Operator spudded some time between October and January, and that an Application for Permit to Drill (“APD”) that was extended to November 2008 meant that Operator had until then to spud the well. Nevertheless, he went ahead and spudded the well in August 2008.

In testimony likely to negatively impact his chances for career advancement, Operator’s district superintendent testified that an APD deadline no longer matters once surface pipe has been set to 250 to 300 feet or, at the very least, the well has been spudded by setting a conductor pipe. Possibly seeking another reason to dust off his resume, he then testified that Operator would initially use smaller rigs (like the one used) on deep wells to put pipe down to 250 or 300 feet to “hold [the] wells, or get them where the permits would be good,” and they could come back later, when a larger rig was available, to finish drilling.  The court noted that 24–hour rigs were available by the beginning of 2009.

The Result

The jury found, and the appellate court agreed, that a reasonably prudent operator would have used the less expensive rig and reduced the defendant’s share of costs by the amount attributable to the breach. Operator was not entitled to judgment for the more expensive rig. The permit would not have been jeopardized by waiting for a less expensive rig. Problem for the non-operator:  Operator was entitled to foreclose because other costs the non-operator failed to pay were justified.

Enough About Extravagance 

My wife and I drink “affordable” wine during the week. That way, when we drink good wine on the weekend we appreciate it more. And so it is with music. Today’s musical interlude is not one but two of the most vapid, lame and treacly musical offerings ever. Quaff a little Phantom 309 and Teen Angel and  you will be blown away by just about any tune you will ever hear from this moment forward.  Don’t laugh. Patches is next.

Meanwhile in Texas … Who Should Decide About Fracking?

Posted in Energy Policy, Hydraulic Fracturing

Who should decide when, where, how, and even if, hydraulic fracturing should occur?

The locals: “You hypocrites Our good public servants in Austin want ‘local control’ when its against Washington, but deny us the same right.  We know better than you about what’s best for our community. To hell with catastrophic litigation exposure and declining tax revenuesIf you didn’t get a regular royalty check and had to Live next door to a loud, stinky, dangerous industrial operation and then tell me how you’d vote”.

The Lege: “A few ignorant and misguided socialists well-meaning local leaders, abetted by left-wing, Gore-ite, out-of-town agitatorsdispense lies are misinformed, deprive the state of much-needed revenues, and steal private property rights from our campaign contributors brave and visionary explorationists. What’s next, plastic bags?

Austin Doing What It Does – Legislation

Rep. Phil King has introduced two bills relating to fracking. House Bill 539 would add requirements for municipalities that propose petitions or ordinances that will affect oil and natural gas production. The Bill would require cities to make up for any lost revenue as a result of passing a municipal oil and gas ordinance affecting production. Cities would also have to provide a fiscal impact note and an equalized education funding impact statement detailing all associated lost revenue and would be required to reimburse the state for the cost of the measure for a five year period.

Not everyone is enchanted with the bill, especially the Texas Municipal League, who says the bill essentially precludes local governments from regulating oil and gas activities.

House Bill 540 would require a municipality to send any proposed petition that would enact or repeal an ordinance to the Attorney General for review. The AG would determine whether any portion of the proposed measure violates the Texas or federal Constitution, a state statute, a rule, or if it would be considered a governmental taking of private property. If a violation exists, then the petition would not be placed on the ballot.

Even Gov. Abbott has stepped into the fray, admonishing municipalities who have exerted local control over not only fracking, but tree-cutting, bag-banning and gun control.

In Denton – Amending the Drilling Ordinance

The City of Denton has published proposed amendments to their drilling ordinance.

Proposed changes include:

  • Require inspections to be performed by a third party to determine if equipment is properly functioning;
  • Grant authority to the city to map gas pipelines in Denton and its extraterritorial jurisdiction;
  • Increase disclosure requirements of the location of the pad site, existence of wells, possibility of new wells, possibility of more hydraulic fracturing and/or drilling, and possibility of re-working;
  • To minimize surface impact, an operator would be required to select the optimum surface site location within a leased acreage, then capitalize on technological advances to utilize co-location of multiple wells on a single site. Afterwards, the land would be reopened for other development; and leased acreage would be restricted from future gas well drilling;
  • Increase insurance coverage requirements for operators.

The City Council has added this recommendation to their priority legislative issues agenda, aimed at resolving the issue of “vested rights”: “support legislation that would clarify that the state’s vested rights law does not apply to subsurface mineral development as it relates to permits issued by the municipality for oil and gas development activities”.

Which Side Are You On?

An unscientific sample of Dallas Business Journal readers believe, by a 76% to 23% vote, the legislature should be able to limit a city’s ability to regulate oil and gas drilling in its local jurisdiction.

Here is today’s Musical Interlude.

Consider The Retained Acreage Clause

Posted in Lease Disputes, Pooling

Exclusive: Referees gather after Cowboys – Packers

Have you ever wondered about the original purpose of the retained acreage clause? According to Professor Kramer, it was “to prevent the lessee from losing those portions of a lease that had productive wells thereon if the rest of the lease terminated”. The term has been expanded “to include clauses that require the release of all acreage that, at the end of the primary term, is not within a drilling, spacing, or proration unit.”*

To the Point – The Lessons

  1. Lease clauses evolve over time. Before you march off to the courthouse armed with righteousness, mean lawyers, and a full head of legal steam, read the lease carefully to determine what it says about your problem. An old case addressing, for example a retained acreage clause, might not yield the same result if yours is written in a different way.
  2. A position based on an interpretation of a lease that is not consistent with the plain language will fail. If the parties intended a certain purpose they would have said so, but if they didn’t, it’s not up to the court to rewrite the lease.
  3. Inequitable or not, the language of the lease controls.

Chesapeake Exploration L.L.C. v. Energen Resources Corporation involved the retained acreage clauses of two oil and gas leases.  According to the leases, when continuous development ends, the lease terminates, except as to acreage for “each proration unit established under … [the] rules and regulations [of the RRC … ] or upon which there exists (either on the above-described land or on lands pooled or unitized therewith) well capable of producing oil and/or gas … “.

Under the pooling clauses, drilling and production anywhere on pooled acreage is treated as if it were on the land described in the lease, regardless of where the well is located.

The two leases covered Section 25, 80 acres of which was pooled with 560 acres in adjacent Section 18 to form the Cadenhead No. 1 Pooled Gas Unit. The well was drilled and completed on Section 18 and has continually produced. The Cadenhead No. 2 Pooled Gas Unit consisted of 560 acres in Section 25 and 80 acres in Section 18. That well was also on Section 18. The operator designated all of Section 25 as the proration unit for No. 2. Two months later continuous development ended on the leased premises. The No. 1 continues to produce, the No. 2 was P&A’ed. Energen drilled a well on the 560 -acre portion of Section 25 that had been pooled with the 80 acres of Section 18.

The Issue and the Result

Did the leases remain in effect as to all of Section 25 or only as to an 80 acre portion? The court concluded that the leases remained in effect for all of Section 25. Because the Cadenhead No. 2 was capable of producing, the lease was preserved as to its designated proration unit, all of Section 25, a portion of which had previously been pooled with Section 18.

The plain grammatical language of the retained acreage clauses do not provide for rolling termination of non-producing proration units, as argued by Chesapeake. Instead, production anywhere on Section 25 or land pooled was sufficient to maintain the leases as to the entirety of Section 25 as long as a well capable of producing was on the land or land pooled therewith. Under the __ clause, the leases continued as to all the leased land beyond the primary term as long as oil or gas was being produced from anywhere on the property.

Chesapeake argued that the parties could not have intended for production on a single unit to maintain the entire lease indefinitely after continuous development ceased. The court acknowledged the equitable appeal of this argument, but it was refuted by the language of the lease. Operations anywhere in the unit are treated as if they have taken place on each tract within the unit.

Is This Ruling Correct?

I’m not so sure it is, but this post is already too long. I might revisit it in the future.

I admire lawyers who make it look easy. Stevie Ray Vaughn had a way of doing that with a guitar.

*Bruce M. Kramer, Oil and Gas Leases and Pooling: A Look Back and A Peek Ahead, 45 Tex. Tech L. Rev. 877, 881 n.28 (2013)

5th Circuit Blocks Punitive Damages in Maritime Case

Posted in Litigation

Co-author Shannon Thorne

In McBride v. Estis Well Service, LLC, the federal 5th Circuit Court of Appeals determined that punitive damages are not available to seamen under the Jones Act or under general maritime law. In those cases, recovery is limited to pecuniary losses.

The Drill Barge Accident

Estis Well Service owned and operated Estis Rig 23, a barge that supported a truck-mounted drilling rig operation in Bayou Sorrell, Louisiana. The truck and rig toppled and capsized, killing Estis crew member Skye Sonnier and injuring three others.

Sonnier’s personal representative and the injured crew members sued Estis, alleging negligence under the Jones Act and unseaworthiness under general maritime law. They sought compensatory and punitive damages under both.

Trial and Appeal

The trial court granted Estis’ motion to dismiss the punitive damages claim and certified it for immediate appeal.

A three-member panel of the Fifth Circuit concluded that the Supreme Court’s holding in Atlantic Sounding Co. Inc. v. Townsend should be read broadly, meaning that punitive damages would be available to the injured seamen and their survivors.

The Rehearing

The Fifth Circuit granted an en banc (“by the full court”) rehearing, reversed the three-member panel’s decision, and reinstated the district court’s dismissal of the punitive damages claims.  Dismissal was not unanimous.

Judge Davis based the majority opinion on the Jones Act and the Supreme Court’s decision in Miles v. Apex Marine Corp., 498 U.S. 19 (1990). In Miles, the court denied recovery for damages of loss of society because the Jones Act and the general maritime law of unseaworthiness limited recovery to pecuniary loss.

Judge Davis distinguished Townsend by noting that it involved maintenance and cure, not unseaworthiness. Finally, Justice Davis applied Miles to the personal injury claims of the surviving seamen, rationalizing that “no one has suggested why [Miles] would not apply to an injury case.”

Several judges questioned whether Miles should preclude punitive damages for surviving seamen’s injury claims.  In a dissent, Judge Higginson focused on Townsend’s principle that if a maritime cause of action and remedy were established before the Jones Act, and the Jones Act did not specifically address that cause of action or remedy, then that remedy would remain available. Judge Higginson broadly argued that “maintenance and cure” could be replaced with “unseaworthiness,” thus allowing the court to award punitive damages.

Our Takeaway

This case provides an historical discussion of the availability of punitive damages in Jones Act and unseaworthiness causes of action. Should other circuit courts conclude differently, this issue will need to be clarified by the Supreme Court.

Joe Cocker RIP

Frackers v. Anti’s – Scoring update

Posted in Energy Policy, Environmental Policy, Hydraulic Fracturing

The box scores after election day showed frackers 4, anti’s 4. Courtesy of a gubernatorial grand-slam by Gov. Andrew Cuomo, hydraulic fracturing is now banned throughout the entire state of New York.

In this ballgame within a ballgame, it’s

Yoko and Shawn, the likes of Moveon.org , and wealthy Manhattanites: 1

Mineral owners, asthmatics, underemployed up-staters, and cash-starved municipalities: 0

Producers are safe at home. They will take their bonus money, royalty payments, and jobs elsewhere, such as to other producing states, or just over the border to Pennsylvania.

Why did he do it?

A cynic would say it’s a political decision: He needs the environmentalists for his next election more than the citizens who actually live where production would occur. The professed rationale is that health concerns outweighed economic benefits.

The New York Times reported:

  • The governor said, “I have never heard anyone say to me “I believe fracking is great” . . . “What I get is ‘I have an alternative but fracking’”.
  • The move seems “likely to help repair [Gov. Cuomo’s] ties to his party’s left wing.” (Did we say “cynic”?)
  • In announcing the report, Health Commissioner Dr. Howard Zucker said there was “insufficient scientific evidence to affirm the safety of fracking.”
  • “We can’t afford to make a mistake”, he said. “The potential risks are too great, in fact they are not even fully known”.

Decide for yourself what those explanations really mean, or if they are plausible, but the long and short of it is that unless and until fracking is proven beyond any doubt to be safe in all circumstances, at least under the current thinking there will be no fracking – and thus minimal oil and gas production – in New York. Given the propensity of certain groups to make up what they want out of the available scientific evidence, that is not likely to happen.

Here is the 184-page report if you want to read it. Jillian Kay Melchior of National Review Online summarizes:

  • At his news conference Cuomo said that the commissioners made the decision and “I think I don’t even have a role here”.
  • The first draft of the report, under then-Governor David Patterson, concluded that New York should allow fracking to proceed. Patterson asked for do-over that was followed by years of intensive environmental lobbying.
  • There was a suggestion that prosperity itself poses a public health risk (see p. 6).
  • The report focused on what it referred to as “significant uncertainties about the kinds of adverse health outcomes that may be associated with fracking”.
  • Absolute scientific uncertainty of fracking is unlikely to ever be attained.

What could he have done?

Here is what comes immediately to mind:

  • For communities that might want the economic benefits of oil and gas production, let the  voters decide for themselves.
  • Impose reasonable regulations, as producing states have done.
  • Pay attention to the long and safe history of hydraulic fracturing.

Natural Gas is Evil Because …

It’s cleaner?

The protestors in the Times photo gathered in Manhattan, where air pollution is the lowest it’s been in 50 years thanks to, among other efforts, more natural gas for home heating.

It’s the preferred fuel?

New York City’s Pollution Control Code revisions announced in April by Mayor deBlasio will require certain targets, such as mobile food trucks and char broilers, to be run on natural gas and renewables in order to clean up the atmosphere.

You can count on this

Citizens where the process is legal thank the governor for helping keep the production at home, and for affirming New York’s hostile business environment.

Today’s musical interlude – a big Christmas thank you from the Far Left to the Guv for his Kris Kringle moment.

 

A Little-Used Doctrine Saves a Lease

Posted in Lease Disputes

Would this scenario keep you up at night? Your lease does not produce from May through August because a leak in a heater-treater makes it impossible or impractical to produce the well. Problems such as access to the site during rainy weather make repairs difficult. You are beyond the primary term. The top- lessee lurks.

The Lease

“If at the expiration of the primary term oil and gas is not being produced on said land but Lessee is then engaged in drilling or re-working operations thereon, the lease shall remain in force so long as operations are prosecuted with no cessation of more than thirty (30) consecutive days, and if they result in the production of oil and gas so long thereafter … .”

The Question

Did the lease automatically terminate due to cessation of production from the only well on the property?

The Answer

Go ahead and admit it.  You either don’t know or have forgotten the “necessarily implied” temporary cessation of production clause for a Texas oil and gas lease. The “ … automatic termination rule is relaxed if the lessee can prove that the cessation of production was temporary and due to sudden stoppage of the well, some mechanical breakdown of the equipment used in connection therewith, or the like.”

In Landover Production Company, LLC v. Endeavor Energy Resources, L. P.Endeavor had the lease in Borden and Dawson Counties. Landover held the top lease.  The jury, trial court, and court of appeal all agreed with Endeavor that cessation of production was excused in accordance with the implied doctrine.

The lease clause is a savings clause. The lease would remain in effect if the lessee is then engaged in operations and there was no cessation of more than 30 consecutive days. If production was obtained thereafter the lease would continue. But this clause never came to fruition because there was production at the end of the primary term. The court reasoned that the savings clause applied only if, at that time, oil and gas was not being produced. In order to avoid the harsh result of automatic termination, the court impressed the temporary cessation of production clause upon the lease.

Endeavor had to prove that the cessation of production after the primary term was temporary and due to sudden stoppage of the well, and that it acted with diligence and remedied the cause of a temporary cessation and resumed production within a reasonable time.

The court determined that there was evidence in the record to support the jury finding. The court recited examples of the temporary nature of the cessation and Endeavor’s attempts to make repairs and turn the well back on. This procedure ultimately resulted in resumption of production. Thus, there was no termination.

If you’ve dealt with cessation of production you are no doubt wondering about the myriad cases addressing continuous drilling and reworking operations. Those cases address typical explicit savings clauses in modern leases. but those provisions apply to the secondary term. Typical examples are shut-in royalties, continuous operations, and drilling operations. There was no such clause in this case.

Just to be sure Landover got the message, the court also declared that even if Landover had won, Endeavor held title to the leasehold estate by adverse possession.

Merry Christmas