Production in Paying Quantities Flashcards
Definition of Production
production is occuring as long as there is a profit, no matter how small, over operating costs, even if the venture as a whole may prove to be unprofitable
Mathematical Profit Test
if operating revenues are greater than operating costs, the well is profitable and there is no termination. Drilling sots are not included, as a lessee is entitled to recoup as much of those as possible. If this test is failed, the court considers the RPO test
Reasonable Prudent Operator Test
Would a reasonably prudent operator, under all relevant circumstances, continue to operate a well in the same manner in question?
Rule on Depreciation Costs
Texas does not include depreciation costs of drilling equipment in operating costs because they believe it is simply a measure of accounting for drilling equipment, which has already been purchased.
Oklahoma includes it, as the value of drilling equipment continually decreases over time with continued use
Clifton v. Koontz
Texas
A gas well was drilled and after continuation into the secondary term, no drilling or reworking operations were carried out for a considerable time. Plaintiffs claimed the lease cancelled due to cessation of production, alleging there was apreiod of time where operating costs exceeded profits
The court did not include depreciation and found the well to be producing in paying quantities after using the RPO test.
Stewart v. Amerada Hess Corp.
Oklahoma
The court found that the Hess lease had expired, as it failed the first test outright, and then failed the second test as it was found to have been held for a period of time longer than reasonable.
A cessation in OOQ does not ipso facto terminate the lease. There is a reasonable amount of time in which to reestablish PPQ. Operting costs were included in operating costs.
Ipso Facto
By the fact itself
Temporary Cessation of Production Doctrine
A temporary cessation of Production in paying quantities does not terminate a lease that provides it will remain in force and effect as long as oil and gas is produced. Applicability must be decided based upon the facts of the case.
Permanent Cessation of Production Rule
upon permanent cessation of production in paying quantities any time after the end of the primary term, a mineral lease automatically terminates.
Baytide V. Continental
Oklahoma
The court held that it is not the court order that terminates the lease. Rather, it is the failure to produce in paying quantities under the habendum clause during the lease’s secondary term.
Ridge v. Guinn
Texas
Ridge and Guinn owned an oil and gas lease covering two tracts, including a seperate possibility of a reverter. Only the Ridge tract had a producing well on it. Ridge moved to terminate the lease as to both tracts by shutting in its well for a period longer than 90 days. Ridge then formed a new lease with the owners and resumed production.
The court found that the lease had expired, as they found the cessation was permanent. The only way to view cessation as any way other than permanent would be if Guinn had achieved actual production by the end of the 90 day period, which it had not.
