If a lease states a well must produce at least 2,400 barrel of oil each year and it produces less than that for 3 consecutive years at which time they notice and they get the mineral owner to sign an amendment which only states that production each year only needs to be 1500 (which it now produces) is the lease still valid? Five sections are supposedly being held since 1999 by the lease and the one well in Colorado. Can an invalid lease (invalid because lack of production quantity) be amended making the old lease valid again?
Depends on the language of the requirement, whether a condition or covenant was created. If it is determined to be a covenant and breached, that will not necessarily terminate the lease.
If it is determined to be a condition, then, like my old law professor said, "You can't breathe live back into a dead horse."
Mr. Cotten,
Thanks, I appreciate your expertise.
That breathing life back into a dead horse is really not what I wish to do, it is the future that I wish to breath more life into, in particular the 5 permitted horizontal Niobrara wells at the old 1/8th royalty and one section sitting for perhaps another 12 years doing nothing as it has for the past 12 years.
It looks to me to be a condition to maintain a valid lease
Here is what the lease says, well on the pretence it could speak,
Without reference to commencement, prosecution or cessation at any time of drilling or other development of operations, and/or to the discovery, development or cessation at any time of production of oil or gas and without further payments than the royalties herein provided, and not withstanding anything else herein contained to the contrary, this lease shall be for a term of eighteen (18) months from this date (called "PRIMARY TERM") and as long thereafter as oil and gas is produced from said land or land with which said land is pooled hereunder, or drilling or reworking operations are conducted thereon.
"Producing, production and produced" shall be construed to mean during the first year of this lease at least 200 barrels of oil or an equivalent value in natural gas and during subsequent years of this lease at least 2,400 barrels of oil or an equivalent value in natural gas.
I took it that the operator believed the lease would expire if production fell below 2,400 barrels during a given year as it had for 3 years and hence him wanting an amendment, but would the lease have already expired or be invalid since production was less than the required amount for several years and that the amendment is therefore also invalid and therefore open for lease? The amendment just says the definition of "Producing, production and produced" contained in the lease is deleted in it's entirety and the following substituted and then they then used the same phrase but change the 2,400 to 1,500
Dear MJ,
I think that the operator is in trouble and they know it. If wells are permitted, it is likely that a title attorney reviewed the leases involved and spotted the problem. No matter how sophisticated we try to be, a requirement like that would be hard to plug into a computer accounting system.
If it were me, I believe that I would try to play nice at first and have the royalty kicked up with a well commitment. I might also pull out my pencil and try to figure the operator's net on existing production and get a royalty increase where you both win.
Mineral Joe,
The question is probably worth the hour or so of legal time you would have to pay to get a lawyer to look it all over. I'm no legal expert, but contracts can't be amended without both parties agreeing, in essence, to a new contract. The ball is likely in your court and you have become a participating mineral owner.
Mr. Cotten's advice on trying to find something that is mutually beneficial hits the nail on the head. Something we sometimes forget is we are business partners with the operator as long as they operate the wells/leases. It sounds like you've been put in a situation where you can likely get your lease terms much closer to the current market rates.
Best of luck,
p.s. We usually send a letter to the operator when negotiations on leases begin. We say something along the lines of where we stand and that we look forward to PROFESSIONAL discussion and negotiation. Don't fall into the trap of arguing with the operator. Leave that to a lawyer.
How did this turn out for you?
Wow, that's a fascinating question. I have never seen a clause like that in a lease, requiring a minimum level of production for the life of the lease. And I am very surprised that any operator agreed to it, because at some point, presumably, the well could not maintain that level of production. I think Buddy's dead on, the operator is in trouble and he knows it. I would want a significantly higher royalty.
I called and spoke to the operator, Diamond Operating, Inc., he said all of you Oklahoma people try to make something out of nothing and we are all dishonest people. I got busy and Continental drilled a 1280 spaced well and dry holed it so I never got around to doing anything. To me the lease had already expired 3 years prior to them doing an amendment therefore there was no valid lease to amend. 5 sections being held by a 40 acre spaced well and he says we are crooks. Noble is drilling all around it so it would still be nice to have the other sections released if I am correct and the lease amendment is invalid.
I believe the Lease has expired on its own terms. Even if it hasn't, the Lease amendment is not valid without YOUR consent! Make sure to include a Pugh Clause in your next lease, which would prevent a situation like the one you described wherein one 40-acre spaced well can hold five sections. That is ridiculous.
The previous owner signed the lease and years later the amendment and then I purchased right after that, I signed nothing. I need to get all the owners together that have the same lease and see what a judge says as you can not amend a lease that already expired. Colorado law allows for everything in the lease to be held by any production on any one of the tracts. You could have 1000 sections held by a 40 acre space well. I think the law makers also ran an oil company or they were high on something.
Mineral Joe, you situation sounds like it may be similar to a recent case in Texas where the court decided that the lease had expired and that operations and the lease from that point on were, at will and the lessor could terminate the lease at any time, might be worth looking for.
As for the laws, they are written and interpreted by lawyers so they don't have to make sense. I have a sneaking suspicion that the laws of Colorado are silent on your matter, and that your predecessor in title could agree to anything in the lease, including the holding by production of half the state from a single 40 acre spaced well. As for making an amendment to a lease that has expired according to it's own terms, I don't see how that would work, I'd run it past a good lawyer. Was the amendment even notarized?
Wow, that is unbelievable. I have worked in six different states but never heard of something like that, something that basically makes a Pugh Clause illegal! I guess you can get around that by just signing one lease for each quarter section or one lease for some other subset of your land. The oil-and-gas companies won't like that, but hey, that's the price they pay for having bought off the state legislators!
Mineral Joe said:
Colorado law allows for everything in the lease to be held by any production on any one of the tracts. You could have 1000 sections held by a 40 acre space well. I think the law makers also ran an oil company or they were high on something.
Mineral Joe,
Whether the amendment is good or not may not be your only arguement. A lack of prudent developemet may be the case. I have seen leases or at least portions of them released for this reason.
Joan,
In Colorado you've seen a court force a release from lack of development or what state are you referring to?
I am fighting a similar battle with Samson in Oklahoma over a well not producing in paying quantities and hasn't for years and they refuse to release or develop it.
r.w., it was notarized.
A Lessee/Operator does not have to execute and file a formal Release unless the Oil and Gas Lease or some other legal document that you both agreed to requires it. From my experience, the vast majority of Oil and Gas Leases do not have such a requirement in the text of the document.
You, or if you have a lawyer friend he, could send a certified letter to the Operator requesting a formal Release (or demanding it if the Oil and Gas Lease had required it) and notify them that absent receipt of that instrument you will (1) consider the Oil and Gas Lease to have terminated by its own wording, (2) file an Affidavit of Non-Production in the public record stating that their Lease was no longer valid, and (3) be free to lease your minerals to another interested party. THAT ought to get their attention, especially if the drill site is on your tract!
Yeah, my attorney did that basically to 2 different companies, one laughed about it and said he was wrong and they would not release it and the other wouldn't reply but stopped paying royalties. Some companies are fair and will record a release if asked after it expires or well is plugged and others could care less what is right or wrong and mineral owners are below them and just in their way.