Production In Paying Quantities And Lease Termination Disputes
A well that is still producing oil or gas can still put its lease at risk. Most oil and gas leases last only “as long as” the well produces, and Texas courts read that to mean production in paying quantities, not just any production. If a well’s revenue no longer justifies the cost of running it, landowners may question whether the lease has ended, and operators may worry that declining output or a shutdown threatens their rights.
At McCarn, Weir, & Sherwood Attorneys at Law, we represent landowners and operators throughout Texas, North Dakota, Colorado, New Mexico and Oklahoma from our Amarillo office. Our attorneys have more than 120 years of combined experience. Three are board-certified in oil, gas and mineral law by the Texas Board of Legal Specialization, including one who is also board-certified in civil trial law.
Understanding PPQ Under Texas Law
Texas courts apply the test from Clifton v. Koontz to decide whether a well produces in paying quantities (PPQ). The analysis has two parts:
- Profitability over a reasonable period. Does the well’s revenue exceed the costs of operating it and marketing its production? Courts generally look at a reasonable stretch of time rather than a single bad month, and drilling and equipment costs are typically left out of the comparison.
- The prudent operator question. If the well is not profitable, would a reasonably prudent operator still keep operating it in order to make a profit, rather than merely speculating that it might become profitable someday?
Courts weigh all the surrounding circumstances, so we review production records, expenses and operating history to assess whether a well meets this standard. Other states, including North Dakota, Colorado, New Mexico and Oklahoma, may apply different standards, so the analysis depends on where the lease is located.
Challenging Lease Termination For Low Production
If a well no longer produces in paying quantities, a landowner may have grounds to challenge the operator’s lease rights. Whether the lease has terminated depends on its terms and any provisions that may keep it in effect.
We review:
- Production and revenue records
- Texas Railroad Commission filings and well reports
- Operating costs and reasons for declining or stopped production
This evidence helps us assess whether the well meets the PPQ standard and whether the lease may have terminated.
Defending Oil And Gas Lease And Operating Rights
Declining production or a temporary shutdown does not automatically mean an operator has lost its lease rights. Depending on the lease and circumstances, possible protections include:
- Shut-in royalty clauses: Terms that may allow an operator to maintain the lease through required payments when a capable well is temporarily shut in.
- Temporary cessation of production: A doctrine that may protect certain temporary interruptions while an operator works to restore production.
- Force majeure clauses: Terms that may address specified events preventing an operator from meeting certain obligations.
These protections do not automatically apply. We examine the lease and circumstances to assess potential defenses.
Protect Your Oil And Gas Lease And Mineral Rights
A dispute can affect a landowner’s ability to lease mineral rights to another operator or an operator’s ability to continue under an existing lease. Delays may also make production and financial records harder to preserve.
Our oil and gas lawyers can review your lease and production history and help you understand your options. Contact McCarn, Weir, & Sherwood Attorneys at Law at 806-223-0960 or contact us online to discuss your situation.