With the flurry of both drilling and leasing currently permeating the SCOOP/STACK/MERGE plays of Oklahoma, some of the biggest questions asked by all involved usually are as follows: (1) Are the minerals leased? (2) If so, are they held by production? and (3) If older production or an older well, how much production?
It is a common misconception that if any oil or gas is being produced from the specific tract or unit, that such production is enough, even if minimal. But, this is not always the case as recent lease cancellation lawsuits have proliferated as of late. Oklahoma law, which actually follows a minority rule as opposed to other jurisdictions, holds that discovery of oil or gas is sufficient—no physical production of the hydrocarbons are actually necessary—to extend an oil and gas lease beyond its primary term.[1] But, any well must be completed and capable of production.[2] To determine whether a well sufficiently satisfies being “capable” of producing oil and/or gas in commercially paying quantities, various expenses are carefully deducted from the gross revenue of the well’s production. These deductions can include production taxes, pumping expenses and other well costs deemed lifting costs by a court if evaluating commercial productivity of a well. The phrase “in paying quantities” signifies a return to the lessee beyond its “lifting expenses,” which has been deemed to mean those costs associated with lifting the oil from the ground after the well has been drilled. If the expenses of the well are greater than the revenue from the well, it could be reasonably determined that the well is non-commercial in nature, and as such, the lease would expire by its terms.
But in order to meet the production-in-paying-quantities standard, the law in Oklahoma does not require that the Lessee actually market or sell the oil or gas produced from the leased lands. Actually, Oklahoma law expressly rejects the requirement of marketing the oil or gas to propel the lease into the secondary term.[3] Production in paying quantities, therefore, is then defined as production of quantities of oil and gas sufficient to yield a profit to the lessee over operating expenses, even though the drilling costs or equipping costs are or may never be recovered. Oklahoma Courts have held that is not a court that terminates the lease, but rather, it is the failure to produce in paying quantities under the habendum clause during the lease’s secondary term that terminates the lease.[4]
If you believe a well or leasehold is non-commercial in nature, a title opinion or an ownership report is usually required to determine who owns the non-commercial oil and gas lease holding the minerals. Then, if attempted negotiation or discussion with the parties identified in the title opinion or ownership report does not result in a release of lease or a plugging of the non-commercial well, a mineral interest owner may file a suit quieting title, seeking to extinguish the older lease under the legal theory that the older lease is no longer held by production in commercially paying quantities because the well is non-commercial due to the operating expenses exceeding the wells revenue. If the presiding court determines that the well is non-commercial in nature, or a release of oil and gas lease is provided, then that mineral acreage is deemed open of record and may be leased with new provisions including bonus, royalty, depth clauses, or other lease addendums.
General Factors to Consider in Evaluating Production:
- Amount of production
- Length of production
- Profitability/economics of well
- Expenses of the Lessee/Operator
- If cessation of production:
- Length of time for cessation
- Reason for cessation
- Diligence of Lessee/Operator in resuming operations
- Other lease saving clauses
- And immeasurable other factual considerations
When in doubt in a determination of whether leases or a unit of land is held by production in Oklahoma, an experienced title attorney can assist all parties interested and involved. If there are any other topics/issues you would like to discuss with the energy community, or myself, please mention your ideas and thoughts in the comment section or email me at volino@hampton-milligan.com.
[1] See McVicker v. Horn, 322 P.2d 410 (Okla. 1958).
[2] Pack v. Santa Fe Minerals, 869 P.2d 323 (Okla. 1994).
[3] Id.
[4] Baytide Petroleum, Inc. v. Continental Resources, Inc., 231 P.3d 1144 (Okla. 2010).
Jordan D. Volino is an attorney at Hampton and Milligan practicing in Oklahoma City, Oklahoma, who specializes in mineral title examination, oil and gas law, property law, as well as federal and Indian title and leasing. Jordan is a member of the Oklahoma Bar Association and the Oklahoma City Association of Professional Landmen. Jordan also is a published scholar, national champion in energy negotiations, and frequently lectures over Oklahoma oil and gas matters.
Adjunct Professor J. David Hampton joined the College of Law faculty in 2008 and the Price College of Business faculty in 2015. Professor Hampton teaches Mineral Title Examination and Real Property Law. After graduating from the University of Oklahoma College of Law in 1980, he founded Hampton and Milligan, a 30-year-old Oklahoma City law firm specializing in oil and gas law title examination, oil and gas litigation, environmental law, and real estate title examination. Currently, Professor Hampton is a lecturer for the American Association of Professional Landmen, as well as the Oklahoma City Association of Professional Landmen.
Compiled and Published by GIB KNIGHT
Gib Knight is a private oil and gas investor and consultant, providing clients advanced analytics and building innovative visual business intelligence solutions to visualize the results, across a broad spectrum of regulatory filings and production data in Oklahoma and Texas. He is the founder of OklahomaMinerals.com, an online resource designed for mineral owners in Oklahoma.
