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Potts: How to determine whether to hold or terminate an oil and gas lease

Morgen Potts Attorney

Morgen Potts is an attorney in the Energy & Natural Resources Practice Group. She represents both privately-owned and public companies in a wide variety of oil and gas matters, with a strong emphasis on oil and gas title examination.

When a landowner leases property to an energy company, the lease agreement typically contains a held-by-production provision, also known as a habendum clause. In Oklahoma, habendum clauses in oil and gas leases establish that after the primary lease term has ended, the lease shall remain in force as long as the land is capable of producing a minimum amount of oil or gas. But how do courts decide whether to hold or end such a lease?

Habendum clauses typically describe the lease term as, “from the date hereof and as long thereafter as oil or gas … is produced from said land.” When the term “produced” is used in a “thereafter” provision of the habendum clause, it has been determined by courts to mean production in “paying quantities.”

However, “paying quantities” is not determined by a specific dollar amount. Rather, it is defined as an amount of production sufficient to yield a profit to the lessee beyond lifting expenses, which include costs of operating the pumps, gross production taxes and electricity.

To determine whether a lease is commercially producing and, therefore, may be held by production, there are four factors that courts take into account: the accounting period, revenue during that period, expenses during that period, and equitable considerations.

The accounting period chosen for any production analysis varies and is determined by examining facts and circumstances specific to the lease. Accounting periods can make or break a case when trying to ascertain whether there was production in paying quantities. Thus, to reflect the production status, it is crucial to determine a sufficient amount of time that would provide information that would allow a “reasonable and prudent operator” to decide whether to continue or cease operation.

For example, in Hoyt v. Continental Oil Co., the accounting period was 14 months. In Smith v. Marshall Oil Corp., the accounting period was 35 months.

Once an accounting period is established, all revenue generated by the lease during that period is considered. Next, lifting expenses are considered and compared against revenue to see which is greater. However, this consideration does not include overriding royalties, overhead, and depreciation.

Lastly, if the lease is unprofitable, the court will examine any equitable considerations to determine if any justify maintaining the lease. These considerations are very specific to the circumstances of the lease that may affect profitability, which could include market conditions, changes in public policy, pipeline access, and conflict resolution activity.

If, after examining all factors, it is determined that the lease is returning a profit over lifting expenses, the lease will not be vulnerable to termination and shall be allowed to continue beyond the primary lease term.

Morgen D. Potts is an attorney with Phillips Murrah in the Energy and Natural Resources Practice Group.

Gavel to Gavel: Who should define the terms of an oil and gas lease?

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on May 30, 2019.


Molly Tipton

Molly Tipton is an attorney in the Energy & Natural Resources Practice Group. She represents both privately-owned and public companies in a wide variety of oil and gas matters, with a strong emphasis on oil and gas title examination.

By Phillips Murrah Attorney Molly E. Tipton

Whose job is it to determine which expenses can be deducted from royalty payments under the terms of an oil and gas lease? Is it the lessee or the operator? People argue both positions and all parties desire clarity in who bears this burden.

Unfortunately, there are many interpretations of the differing forms of deductions language in leases, and the courts have not had the opportunity to make a decision. Many operators have recently requested input from the lessee on royalty valuation, but some lessees may balk at this idea because current practice typically provides that the operator cuts the checks.

Pursuant to 52 O.S. § 570.8(A), a working interest owner in a gas well shall furnish to the operator the name, address, royalty interest, taxpayer identification number, and payment status of royalty interest owners for whom they hold a lease. While this language does not place the burden on the working interest owner to tell the operator how royalty proceeds should be valued under the terms of the lease, it is understandable that an operator wishes for input from the lessee, as they are a party to the lease.

However, when an operator asks a lessee to determine how royalty proceeds should be valued under the terms of the lease, the lessee may fear liability to the royalty interest owner in the event that the operator is paying the royalty contrary to how the lessor interprets the terms of the lease.

The lessee should take comfort in the language in 52 O.S. § 570.9(D), which states that any working interest owner that pays or causes to be paid royalty proceeds for gas production in accordance with the Production Revenue Standards Act valued according to the terms of such working interest owner’s lease shall be relieved of all liability to the royalty interest owners for any further payment of proceeds from such production.

The valuation of royalties will affect both the royalty owner and the lessee, and without any guidance from the courts, there is no definitive answer as to who should define the exact terms of the lease. One can understand why neither the operator, nor the lessee, wants the burden of defining the lease terms, as they affect royalty deductions. Only time will tell whose job it is after all.

NewsOK Q&A: Mineral owners should be informed about leasing, selling options

Zac Bradt

Zac Bradt is an attorney in the Energy & Natural Resources Practice Group. He represents both privately-owned and public companies in a wide variety of oil and gas matters, with a strong emphasis on oil and gas title examination.

In this article, Oklahoma City Oil and Gas Title attorney Zachary K. Bradt discusses the advantages mineral owners have when taking action with their mineral interests.

Q: What options are mineral owners faced with in today’s market?

A: As oil and gas activity in the state remains strong, mineral owners are seeing more opportunities related to their mineral interests. Some are being approached about signing new leases, while others are receiving calls and letters about selling their mineral interests. Whether leasing or selling, mineral owners are being presented with options that create certain advantages to an informed mineral owner.

Q: What advantages can leasing provide over selling?

A: The obvious answer is that the mineral owner will get to keep their mineral interest. By signing a new lease, the mineral owner will receive a bonus payment that is calculated based on the number of mineral acres owned, and a royalty on any production occurring during the term of the lease. The bonus and royalty can be negotiated with the lessee, but mineral owners should be aware of the inverse relationship between the two. A higher bonus will offer a lower royalty, whereas a lower bonus will provide for a higher royalty.

Q: What advantages can selling provide over leasing?

A: Selling mineral interests presents a financial advantage over leasing. If a mineral owner is financially incentivized, they may feel comfortable selling their interests away to a third party. Much like the bonus payment, mineral owners will receive a price per mineral acre offer to buy from third parties. The difference with selling is that there is a direct correlation between the royalty and purchase price. Minerals with a higher lease royalty will bring in a higher price per acre from potential buyers.

Q: How can a mineral owner decide what is the best option?

 

Published: 9/25/18; by Paula Burkes
Original article: https://newsok.com/article/5609461/qa-with-zac-k.-bradt-mineral-owners-should-be-informed-about-leasing-selling-options

Q&A: Medical Marijuana and the Construction Industry

Sam Newton

Samuel D. Newton is an attorney practicing in Construction, Health Care, and Oil and Gas Law.

In this article, attorney Samuel D. Newton discusses procedures Oklahoma construction industry employers need to develop with the legalization of medical marijuana.

With the passage of State Question 788 and the decision by the Governor not to call a special session, many of the ancillary questions regarding the impact of medical marijuana will remain unanswered until the next legislative session in 2019. But, in jobs where safety is key, such as construction, employers will need to develop procedures now to ensure that they are complying with safety rules and regulations as well as not stepping on an employee’s rights.

Q: How does the passage of State Question 788, medical marijuana, affect my safe work site and drug free policies?

A: The provisions of State Question 788 provide that an employer can take action against an employee who uses or possesses medical marijuana at the place of employment or during work hours. Thus, a contractor’s safe work site policy that prohibits the use of drugs or alcohol on the job is allowable under the law. However, unless an employer can show an imminent risk of losing a monetary or licensing benefit under federal law or regulation, an employer cannot refuse to hire, terminate, or otherwise discriminate against an employee simply because the employee has a medical marijuana card.

Q: If one of my employees with a medical marijuana card is “high” on the job can I still terminate him or her?

A: Maybe. Contractors will need to carefully differentiate between being impaired at work (ie, under the influence of marijuana and its attendant effects) and testing positive for marijuana although the employee may not be impaired. Unlike alcohol, scientific research has not been able to put a specific number on the THC levels (the compound in marijuana that makes one “high”) that impairs a person’s ability to drive or work safely—and THC may appear in a blood or urine screen well after it is consumed. So, unless the legislature choses a legal level of THC, the key will likely be whether, based on an objective observation, the employee was able to safely function.

Q: My company is working on federal projects, how can I mesh the state law requirements and federal law requirements?

A: Federal law still considers marijuana to be a Schedule I Narcotic under the Controlled Substances Act. Thus it is against federal law to consume or possess marijuana, medical or not. Additionally, most, if not all, federal projects are subject to the federal Drug Free Workplace Act which requires employers to have a drug free work place policy prohibiting the unlawful possession or use of drugs in the workplace and make an ongoing good faith effort to maintain a drug free workplace. These policies include requiring the employee to report to the employer and the employer to report to the contracting agency any workplace criminal drug conviction. However, the distinctions are fine and the interplay between federal law and the imminent risk of losing federal contracts or licensing has yet to be defined by Oklahoma or Federal courts and not by the federal or state government.

NewsOK Q&A: Surface owners have rights regarding oil and gas development

Zac Bradt

Zac Bradt is an attorney in the Energy & Natural Resources Practice Group. He represents both privately-owned and public companies in a wide variety of oil and gas matters, with a strong emphasis on oil and gas title examination.

In this article, Attorney Zachary K. Bradt discusses protections land owners have in regards to surface rights in oil and gas exploration.

Q: Why should surface owners be concerned about the development of oil and gas?

A: In Oklahoma, courts have ruled that the mineral estate is superior to the surface estate for purposes of oil and gas development. Oil and gas operators have the right to enter upon your property and make reasonable use of the surface to explore for oil and gas.

Q: As a surface owner in Oklahoma, what laws are in place to protect my interests?

A: In an effort to better protect the rights of surface owners throughout the state, the Oklahoma Legislature passed the Surface Damage Act that went into effect on July 1, 1982. Prior to July 1, 1982, operators had the right to enter upon a surface owner’s property and make reasonable use of it to conduct their operations without paying any damages. With the passage of the Surface Damage Act, surface owners were afforded more protections and operators were required to follow procedural steps as defined under the act before entering upon the property.

Q: What procedural requirements does an operator have to meet?

A: Operators are first required to send a letter by certified mail providing notice of their intent to drill and informing the surface owner of the proposed location of the well and the approximate date drilling will commence. Within five days of delivery, the operator must engage in good-faith negotiations with the surface owner. If the parties agree upon damages, a written contract is executed, damages are paid, and drilling operations can commence.

Q: What if the surface owner and operator don’t reach an agreement?

A: If the good-faith negotiations don’t result in an executed damages contract, the operator must petition the court for the appointment of appraisers. Then, an operator may enter the property and commence its operations. Although drilling may be commenced, the determination of surface damages will remain before the court. The three appraisers (one from each party, who then choose a third) will inspect the property and submit a report to the court estimating the surface damages. Once the report is submitted, you can accept the suggested amount or challenge in court. Before you demand court consideration, you should make yourself aware of the related costs.

 

Published: 5/22/18; by Paula Burkes
Original article: https://newsok.com/article/5595368/surface-owners-have-rights-regarding-oil-and-gas-development

The U.S. Oil and Gas Boom: Drilling Down on Issues, Risks and Opportunities for the Construction Industry

 


Click here to view the story in PDF format:  “The U.S. Oil and Gas Boom: Drilling Down on Issues, Risks and Opportunities for the Construction Industry” (Jul 9, 2014)

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THE U.S. OIL AND GAS BOOM: DRILLING DOWN ON ISSUES, RISKS AND OPPORTUNITIES FOR THE CONSTRUCTION INDUSTRY