Operating without a valid lease

Law & Legal
21

In the end it may cost hundreds of dollars for us, for which we will get nothing but the advice to “sign and return them”. If that’s how it ends, well, that’s how it ends. But there is just something that goes against the grain of a person to be asked “out of the blue”, to be asked to sign a paper agreeing to something which your not sure of what the real implications are. And oh by the way, would you mind also agreeing to allow the recorded date of this be put back 13 years ago?

Try that one at the license bureau the next time you let your drivers license expire… Good luck with that one

22

I do not keep up regularly with the forum but occasionally check in. I am a board certified oil and gas attorney, including title issues and lease termination issues, and have had the Texas Supreme Court "case of the year (per our atty gossip sheet newspaper, "Texas Lawyer") one year in the past 20, and in another year, a top 10 "most watched" oil and gas and title case at the Supreme Court, and have argued before the Supreme Court on another case that was later voted case of the year for that year on the question of whether particular oil and gas leases have terminated.

I have read the string on this lease situation, and unfortunately, there is a lot of information being shared that is just flat wrong on various legal issues, application of various legal principles, etc.. Too much to respond to to take the time now (and I am right in the middle of working on another title and lease ownership case involving whether certain lease rights have continued or not) involving some leases in West Texas.

But to shorten up this discussion for the moment, the owners of the executive rights cannot afford to sit and "wait" to see what happens. There are generally most always time limits running as we speak on protecting rights, recovering proceeds of production for various causes of action, etc., and the burdens have been continually shifted over the past 10-20 years to landowner mineral owners to proactively seek out and protect their rights, find out relevant information from sources such as the Railroad Commission, county records etc.. (Chalk that one up to alleged "tort reform", and cases decided by Supreme Court judges who champion that "cause", which, even though I often work for oil companies, and sometimes landowners, has by most experienced oil and gas attorneys I know, been considered an excuse to favor larger oil companies in court cases, even when they are clearly in the wrong, sometimes purposely or intentionally. We now have some situations where as a practically matter, landowner mineral owners face an almost impossible task sometimes to find out the real information. And last year, believe it or not, the Texas Supreme Court conceded in an opinion in BP v Marshall, that the oil company had committed fraud in lying to the landowner about whether the company had actually drilled a well in time to keep an old lease going after its primary term, but despite that fact, the mineral owner lessors waited too long to sue (and were held to have an extremely difficult burden to check various obscure Railroad Commission records that would likely require hiring technical oil and gas personnel that of course mainly work for oil companies, to ferret out the lies being told to them by the oil company about the conduct of their operations. You can read what the Supreme Court said in the case about what records were "available" and "should have" been checked, etc..

Anyway, you really need to have an in depth conversation with a knowledgeable oil and gas and title attorney who also has litigation experience either directly or within his firm, so that you figure out what your rights are, the potential or likely defenses (that the Supreme Court now sometimes allows) by which the oil company may be able to stay out there holding the lease even though it may have terminated sometime in the past, etc.. And there are various technical requirements that the oil companies must meet under various limitations statutes in order to win on that basis, despite the fact they may have been in possession of the leases for various periods of time (we have a 3 year statute - almost never applies, 5 year statute - often not applicable 10 year and two 25 year statutes, all with different requirements. I have litigated all of them up to the Supreme Court, but I am not the only one of course.)

For a separate example of another case (and yes, my cases got tied up with this one also), see Neel v HECI, in which an 86 year old guy (if I remember correctly), in a nursing home, lost large amounts of royalty, because an oil company had a lease on his land, and another oil company was illegally drilling under the land and taking the oil (slant hole illegal well case). The oil company on the nursing home guy's land went to the Railroad Commission to get the illegal well shut in, obtained millions in damages from lost stolen production, did not inform the lessor in the nursing home or his reps about the Railroad Commission hearings or results, and kept all the money, including his royalty share under their lease with him. Austin Court of Appeals ruled for the lessor landowner to get his back royalty, but the Supreme Court reversed, and said he waited "just a little too long", and even though it might be "unfair" in a particular case (i.e., in that one), the great principle of "tort reform" meant we have to rule against all these types of cases to avoid these "frivolous" lawsuits, etc.. That's my political comment on it, but what the Supreme Court actually said was that, despite our State Constitution provision which basically says someone damaged should have a reasonable time to sue after discovering their damage injury (and still not sure how the 86 year old guy ever even found out about the illegal well, since there was nothing on the surface to show it was happening, even if he could have left the nursing home to go check it out far away from civilization), the "policy" for limiting these inconvenient landowner mineral owner claims meant that all mineral owners should basically automatically be aware of anything the oil company does on or under the land in its operations (even as in the case last year when the oil company lied and covered it up), so the mineral owner does not need any "extra" time to find out his rights and injuries before the particular limitations statutes cut off his rights to sue.

That's all the time I have right now, and there is so much more to say. Not sure I will have any idea if there is anyone who actually reads this or responds. Hope it helps all of you to be careful about what you take as "truth" about any analysis of your legal rights and title and ownership situations, especially under our more difficult Texas law. There is a reason we have "6 Flags over Texas" amusement parks, since all those different govts have affected our oil and gas rights historically, in some really unusual ways, and that is why giving real and meaningful opinions about these issues, and who will win in particular circumstances (which matter very much to the process) is never easy or totally a foregone conclusion.

23

Hmmm, That’s a lot to take in and digest. I’m working on finding an experienced attorney now. It’s been suggested we might have a hard time finding an attorney willing to take on a local producer in Midland. We are really getting tired of this , ( as I’m sure some readers of this forum are too ), so we will see who we can find.

24

Wow! That certainly is a lot to digest. Looks like more of a David and Goliath scenario than we ever imagined.

25

Operator might have a “held by production” clause in the existing lease.

26

I have seen many, many oil and gas leases but I have never seen one that did not have an HBP clause, or terms that would hold the lease beyond the primary term for as long as oil and gas is produced. The lease in the circumstances you are describing would be held by production.

27

David,

Only as an informational point, I know of two leases that were granted with a term specific. Both in Louisiana .. one was for a 40 year term and the other was for a 60 year term. Sadly, Gulf thought that could produce it all before the term expired. The Lessor's heirs did negotiate a new lease to them at the term end.

Buddy Cotten



David Ruppert said:

I have seen many, many oil and gas leases but I have never seen one that did not have an HBP clause, or terms that would hold the lease beyond the primary term for as long as oil and gas is produced. The lease in the circumstances you are describing would be held by production.

28

Yes, there is an HBP clause in our lease. The bottom line is this, you can't take poooling back to the date of first production. The well in question had NO production in paying quantities for 8-9 months of 2013. Unless someone can give me a real good answer how they still have a valid lease i'm simply noy buying it. This operator is simply trying to trick us into signing a ratification to revive a dead lease. Back to the original question. What are the ramifications if it was found the lease actually terminated in 2003? Mr. Cotten you seem to be well educated in oil and gas. Can you answer this question?

29

Can't remember the original facts, but if you are the only lease and only owners of the minerals, and the well is on your mineral property, and the lease has terminated, and you are not doing or saying (and have not been doing or saying) things contrary to that position, then absent any other facts or documents we don't know about, you own it and they are trespassers producing your oil and gas.. If there are other mineral owners and other leases, then you are an unleased mineral co-tenant, and entitled te a percentage share of net production after the deduction of certain expenses of operation for the well or wells on your mineral property.

Cannot remember if and what the oil co said to you as to why they want a ratification from you. Would be interested in that.

30

I believe that Mr. Larman is being told it's just paperwork clean up, something that should have been done long ago but which does not really matter.

Mr. Baxter, it appears the well had a lapse of production of 8 months, the lease may have terminated and the operator wants a ratification for pooling effective to the date of first production more than a decade ago. Also Mr. Larman has said that the well appears to have run it's course and the operator wants to pool this well/lease with other producing well/s. This is what I have gathered from the thread.

I almost forgot, there was a buy offer also I believe, something like $1,500 per acre.

The operator has offered nothing for the ratification, says that it changes nothing. My take is that if it changes nothing, then they don't need it and there is no need to sign it.

Robert P Baxter Jr said:

Can't remember the original facts, but if you are the only lease and only owners of the minerals, and the well is on your mineral property, and the lease has terminated, and you are not doing or saying (and have not been doing or saying) things contrary to that position, then absent any other facts or documents we don't know about, you own it and they are trespassers producing your oil and gas.. If there are other mineral owners and other leases, then you are an unleased mineral co-tenant, and entitled te a percentage share of net production after the deduction of certain expenses of operation for the well or wells on your mineral property.

Cannot remember if and what the oil co said to you as to why they want a ratification from you. Would be interested in that.

31

I agree with our general comment and so advise my clients to the effect that a ratification ALWAYS means something and is wanted for some purpose, usually to confirm a title or get the oil company out of a hole it is in, give the oil co. a right or title it does not have, that is usually worth some money, etc.. So agree with you. Unless and until you can figure out why they want it, if they say it means nothing, then why sign it? Sometimes a ratification can entitle a mineral owner to something he would otherwise not be entitled to, but that depends on the facts, and is usually in the case where a well is not on the property you own, but on another property. All that to say, it is important to know not only what is going on on your property, but also the ones next door, to have the proper context to evaluate what is best for the person in this situation.

32

One thing I’ve come to learn from all of this, it can be very complicated and confusing. A 320 acre Unit composed of two tract’s. A horizontal gas well drilled between the two. I would have thought the 2 needed to be pooled in order to get a permit. I guess not. No p-12 filed, the 160 acres in our section is a proration unit. The RRC drill permit application asked " is this Pooled". Checked NO. We aren’t sure if they were supposed to file once the well started producing and didn’t, or if this is just their attempt to revive the lease. I believe the latter, because the more I read maybe they never had to pool those tract In the beginning because of allowances the RRC made.

Anyway, I think we are going to get some help getting to the bottom of all this from a very reliable and interested source. My brother contacted Thursday the other operator who is listed as holding 16 of the 32 Leasehold Interests and named in the EXHIBIT A of the DESIGNATION OF POOLED UNIT that was filed by our operator. They were very interested in what this operator is up to and seem willing to help explain to us our options. We shall see.

33

I am not taking on any responsibility for this discussion and where you end up, but I pretty much never suggest that a landowner/mineral owner choose another interested oil company involved in the deal as its source of accurate information for what is actually going on in the situation. Good luck with that. I assume you folks are wanting to do whatever it is you are going to do on the cheap, without independent advice, or paying any attorneys. Happens all the time, but often with sad results, and too late to correct. Not looking to step in, but did not want to get caught not responding and having someone think what you are planning to do is "ok", or will actually get you some "independent", non-interested or non-biased advice.

Also, your attempted summaries of what might have happened with the Railroad Commission filings is not necessarily correct, and does not take into account certain things that are currently in process at the Commission, and being fought over between landowner mineral owners, and competing oil companies, as to when it is necessary to obtain Rule 37 exception permits, whether Production Sharing Agreements will be allowed without formal rulemaking instead of just on a case by case basis or ad hoc, and certain other administrative guidelines being used, some without having been tested in court. Would take some review of all the facts and circumstances to come up with a more definitive idea of what is actually happening on your property.

I can sympathize with you about lawyers being expensive, without using any plumber jokes. But sometimes you lose a whole lot more by not paying to get the advice you need. Starting with an independent landman who represents landowners (there are some), and is less expensive than an experienced oil and gas attorney, is one way to get into a better information place to allow you to know what the proper questions and issues are, and the good ones know when to suggest you need an attorney to assist.

34

Mr Baxter, thank you for the time and interest you’ve already given. It is much appreciated. I’m going to take as solid advice what you’ve said about accepting “accurate information” from the “other” operator involved. Probably need to rethink that. It is true, we have tried in many ways to get a handle on what’s going on without the expense of an attorney. What really holds us back, at least for the moment, is knowing we could spend the cost of several hours with an OIL & Gas attorney, only to be told that it is just a formality. I don’t believe that is the case, but the uncertain cost of determining what’s really going on adds a little hesitancy.

This has all given me a real appreciation for what oil & gas attorneys do and the knowledge and expertise they have. I’d say we are just days from hiring one.

35

Dear Mr. Larman,

Since you asked me...

There could be several answers to your question, depending on the terms and conditions of your lease. There is likely (pretty standard in all forms) a "cessation of operations" clause, or shut in provisions. Just pulling several at random from the same commercial lease, the various savings clauses state:

"If, at the expiration of the primary term or at any time or times thereafter, there is any well on said land or on lands with which said land or any portion thereof has been pooled, capable of producing oil or gas, and all such wells are shut-in, this lease shall, nevertheless, continue in force as though operations were being conducted on said land for so long as said wells are shut-in, and thereafter this lease may be continued in force as if no shut-in had occurred."

This clause is the shut in clause from the same lease, where there are no operations:

"If, at any time or times after the expiration of the primary term, all such wells are shut-in for a period of ninety consecutive days, and during such time there are no operations on said land, then at or before the expiration of said ninety day period, lessee shall pay or tender, by check or draft of lessee, as royalty, a sum equal to one dollar ($1.00) for each acre of land then covered hereby. Lessee shall make like payments or tenders at or before the end of each anniversary of the expiration of said ninety day period if upon such anniversary this lease is being continued in force solely by reason of the provisions of this paragraph. "

Then there is the typical cessation of operations provision:

"If, after the expiration of the primary term of this lease and after oil, gas, or other mineral is produced from said land, or from land pooled therewith, the production thereof should cease from any cause, this lease shall not terminate if Lessee commences operations for drilling or reworking within 60 days after the cessation of such production, but shall remain in force and effect so long as such operations are prosecuted with no cessation of more than 60 consecutive days, and if they result in the production of oil, gas, or other mineral, so long thereafter as oil, gas, or other mineral is produced from said land, or from land pooled therewith."

And then there is the catch-all savings clause:

"If after the expiration of the primary term, Lessor considers that operations are not at any time being conducted in compliance with this lease, Lessor shall notify Lessee in writing of the facts relied upon as constituting a breach hereof, and Lessee, if in default, shall have sixty days after receipt of such notice in which to commence the compliance with the obligations imposed by virtue of this instrument."

You made a reference to paying quantities. That is a moving target based on what a prudent operator would do under same or similar circumstances.

Mr. Larman, your whole issue is going to be fact based. First, what does your lease say? Second, what is the factual situation concerning operators actions or lack of actions that apply to the various savings clauses in the typical lease?

Sometimes I go overboard on answering lease related questions, but there are no simple answers until the whole truth of a situation is determined. Even then, the answer might need be found out in a court of law.

Best

Buddy Cotten

chris larman said:

Mr. Cotten you seem to be well educated in oil and gas. Can you answer this question?

36

Tony, good for you. Like the Lone Ranger, it looks like my work is done here and I can ride off into the sunset (shouting something or other.) As Buddy Cotton has confirmed, these things are fact specific, and the more experienced the person helping you to figure things out, whether attorney or landman, the better and more accurate the advice and more helpful the solution(s) suggested. Your situation does sound interesting, so I expect when you talk to that lawyer or landman, there will ilkely be some ramifications and consequences from past history, and alternative courses of action for you to consider. Hope it works out for you,.

37

Once more I’d like to say “thanks” for your help and direction given. I’ve had some conversations with a Houston attorney by the name of Richard Merrill. I’m going to contact him this afternoon and see about getting the ball rolling. If anything is going to be accomplished, it’s only going to be done with the help of an experienced oil and gas attorney. It’s time. If anything of interest develops, I will keep you posted. Thanks

38

Dear Tony,

Richard Merrill is a very good title attorney. You are in good hands.

Buddy Cotten

39

You are most welcome. Even though I most often but not always work for oil companies, I believe things generally work out better the more people on both sides know about the facts and purposes being sought by both sides. Looks like you are on your way.

40

Interesting. Good to know.

Buddy Cotten said:

David,

Only as an informational point, I know of two leases that were granted with a term specific. Both in Louisiana .. one was for a 40 year term and the other was for a 60 year term. Sadly, Gulf thought that could produce it all before the term expired. The Lessor's heirs did negotiate a new lease to them at the term end.

Buddy Cotten



David Ruppert said:

I have seen many, many oil and gas leases but I have never seen one that did not have an HBP clause, or terms that would hold the lease beyond the primary term for as long as oil and gas is produced. The lease in the circumstances you are describing would be held by production.