By Jordan Volino, Contributor – With the advent of horizontal drilling and the ability to stack lateral wells, it is becoming increasingly more common to look for older production, likely from shallower plays or wells, with the intent to drill in deeper formations. Because of this, the trend of both top-leasing and lease cancellation suits are becoming more common. In the event of a lease cancellation suit, or an action to determine the productivity and validity of a held-by production lease, the courts will analyze whether or not the subject well was “producing in paying quantities.” Although states treat this requirement of production differently, requiring either actual production or just the capability of production, the production must be “in paying quantities.” Typically, that must mean the production of quantities of oil and gas sufficient to yield a profit to the lessee in excess of the operating expenses of the subject well.
Recently, in Hall v. Galmor, 2018 OK 59 (Okla. 2018), the Oklahoma Supreme Court provided some direction on this production in paying quantities mystery, as well as addressing numerous other topics. In Hall, the Court rejected a rigid definition of “capability” in regards to production in paying quantities, and instead analyzed whether a well is capable of production in paying quantities on the day it is shut-in (emphasis added). The Court determined that a well capable of production on the day it is shut-in is considered capable of producing throughout its entire shut-in period. This is of paramount importance to both landowners and operators alike, in that this holding shifts the paradigm from an analysis of how long a well has been producing, or the marginality of said production, towards a determination of whether it was capable of producing in paying quantities when it was shut-in, if the well in question was shut-in.
In 2017, the Texas Supreme Court provided much-needed guidance in Texas for production-in-paying-quantities cases in both BP America Production Co. v. Laddex, Ltd., 513 S.W.3d 476 (Tex. 2017) and BP America Production Co. v. Red Deer Resources, LLC, 526 S.W.3d 389 (Tex. 2017). These cases analyzed the respective lease shut-in clauses and whether production from the wells were in paying quantities prior to the time the wells were shut-in, in addition to addressing top lease concerns. These cases confirm that although the contracting parties are free to define what is considered a “reasonable” period of time for determining production in paying quantities and may present arguments regarding said reasonableness in court, the Court cannot define that period of time to a jury, rather, the standard of reasonableness of the time period must be determined based on the facts at hand. In addition, these opinions seem to suggest that “production in paying quantities” does not hold a literal meaning in terms of measuring dates from production to a lack of production, but rather a consideration of the reasonableness of the period of time given the surrounding circumstances.
These cases, as well as present market forces, suggest that there will be a continuing trend towards reviewing older production and shut-in well clauses and analyzing the capability of production of older, marginal wells, all while top-leases are present, on the leasehold being scrutinized.
See Jordan’s prior post from 2017 on this topic. Click HERE