I am currently recieving royalty payments for a couple of small oil wells that are on some farm property my dad owned. He has passed away and the I have inherited the property. The original lease was signed by my great grand parents back in the late 30’s. The Oil company has told me that the lease never expires and is non negotiable. I plan to contact an attorney to get some legal advice but was wondering if anyone out there could shed some light on this type of situation.
I don’t think you can change a contract after the fact, unless both parties agree. Anything else would be chaos.
A lease that never expires, that's what most companies wish for but that is not always the case. Yours are in Oklahoma so it will depend on the terms of the lease and production of those wells. I am pushing a couple companies to drill another well because the present ones are not producing in paying quantities, one is producing only 40mcf per month.
a lessee has implied obligations and failure to comply with this duty can result in termination of the lease.
Be glad your minerals are not in Colorado as I think all the legislature there are being paid by the oil companies, it's not a mineral owner friendly state.
Joe, can you enlighten us what would be considered paying quantity in Ok? I would think if you were getting multiple checks per year that paying quantity would not be the issue.
This is a quote from the Oklahoma Bar Association:
After the primary term has expired, the lease will remain in force "as long thereafter as oil or gas is produced" from the leased premises. Under Oklahoma law, the term "produced," as used in the habendum clause, means "production in paying quantities."43 "Production in paying quantities," in turn, means "production of quantities of oil and gas sufficient to yield a profit to the lessee over operating expenses. The phrase "in paying quantities" signifies a return to the lessee beyond its "lifting expenses" - in other words, those "costs associated with lifting the oil from the ground after the well has been drilled.
Some wells produce more water than they are worth. Haul off, disposal and all other operating expense can far out way operator net revenue.
The number of checks received during a year are of no basis in determining if a lease is producing in paying quantities. Some have in their division order that the royalty amount due is not a determining factor in when they receive royalty payments, yes some only pay when there is a minimum amount due but some are to be paid monthly no matter the amount due.
Ed said:
You are absolutely correct that paying quantities means the operator must show a profit over an above it's operating costs, however, the period of time in which the operator must show a profit is not set in stone in all states. Is one month with no profit a reasonable amount of time, one day, one year?As to the original point, the lease may be completely out of date with what is normally done today, but that in itself does not mean it is void. I am personally aware of a lease in California (the State is the mineral owner) that has been producing for over 70 years and carries a 100% royalty provision. That's correct, the State retains all production in the form of royalty. Don't think the operator hasnt tried to re-negotiate that lease a few times.Ed
Mineral Joe said:This is a quote from the Oklahoma Bar Association:
After the primary term has expired, the lease will remain in force "as long thereafter as oil or gas is produced" from the leased premises. Under Oklahoma law, the term "produced," as used in the habendum clause, means "production in paying quantities."43 "Production in paying quantities," in turn, means "production of quantities of oil and gas sufficient to yield a profit to the lessee over operating expenses. The phrase "in paying quantities" signifies a return to the lessee beyond its "lifting expenses" - in other words, those "costs associated with lifting the oil from the ground after the well has been drilled.
Some wells produce more water than they are worth. Haul off, disposal and all other operating expense can far out way operator net revenue.
The number of checks received during a year are of no basis in determining if a lease is producing in paying quantities. Some have in their division order that the royalty amount due is not a determining factor in when they receive royalty payments, yes some only pay when there is a minimum amount due but some are to be paid monthly no matter the amount due.
Most commonly 1 1/2 year time period, at least here, in Oklahoma and why would an operator be foolish enough to lose money on purpose for over 70 years, there must be something in it for them or they’d plug it, actually they’d have never entered in the lease.
Actually, there was something in it for the lessee. The lease in question covers a portion of the Rincon field, offshore Ventura. At the time the lease was entered into, the lessee was the owner of a refinery in Long Beach and had a shortage of feedstock. The lease was offered under competitive bidding by either bonus, rental, royalty or a combination thereof. The lessee bid no bonus, 100% royalty in order to gain access to the feedstock. As to why the lease was not later released, it became part of various units and carried quite an abandonment liability. Here is a little history of it.
http://en.wikipedia.org/wiki/Rincon_Oil_Field
Here's another article on a recent case in Louisiana: A state appeals court overturned a district court decision that was in favor of the mineral owners.
My guess is this is going to be a little different from state to state. Maybe with low gas prices you can understand the decision in favor of the operator, but at some point you would think there is going to have to be a time period that defines "prudent" in terms of developing minerals.