Scenario: Land was leased X years ago, and a producing well was drilled on the land. The primary term of the lease has expired, and the well continued to produce. There have been a few intermittent, single months where the well produced nothing, only to be followed by a few months of production. Is there a standard time period of no production that dictates when a lease/land will no longer be "held by production", or is that a clause in the lease?
If this is a clause in the lease, what is the standard type of language that I should be looking for? Thanks in advance.
KDK:
You hit the nail on the head in that the answer lies within the lease. The wording could be phrased in several ways so without knowing what your lease wording is, it is hard to answer that question. It is not unusual for a well to be shut in at times as this could be the result of several factors.
KDK, I think you could look for a continuing operations clause, which would have what I call a grace period which is intended to give the lessee time to start reworking an existing well or drilling a new well should production cease. Most of these grace periods I have seen range between 60 and 180 days, the longest I have heard of was 1 year, but if someone isn't watching the language of the lease there is no reason the lessee couldn't make it a ten year grace period. You should also look for a shut in clause. Many leases have shut in clauses that say a well can be shut in indefinitely as long as the pitifully small shut in royalty is paid, frequently $1 per acre per year. If the well was not producing for only single months at a time, I think the continuing operations clause alone would cover it and you probably couldn't make a valid objection.
Thanks guys. The well is shut-in as of July 6, 2012. It produced in April, but nothing in May. I assume there is going to be none in June, given the shut-in date of July 6, 2012. (this is the info I find on the MT Board of Oil and Gas website)
Can you tell me if I have this correct: The primary term of the lease expired February 25, 2010. The lease has a continuous drilling clause for 120 days, so lessee has until approximately the end of August 2012 (April 30, 2012 + 120 days) to commence re-working operations or drill a new well. Otherwise, the lease has expired.
r w kennedy, you are right, the lease also has this clause: ..."One Dollar per year per net royalty acre retained hereunder, such payment or tender to be made on or before the anniversary date of this lease next ensuing after the expiration of 90 days form the date such well is shut in and thereafter on or before the anniversary date of this lease during the period such well is shut in. If such payment or tender is made, it will be considered that gas is being produced within the meaning of the this lease."
However, this shut-in clause appears to be limited by an added clause in an Exhibit A that states "In no event shall the "shut-in" gas clause extend this lease more than two (2) years beyond the expiration of the primary term."
Can you also tell me if this is correct: Given what I typed above regarding the shut-in clause, since we are well past "two years beyond the expiration of the primary term", lessee cannot extend the lease with a shut-in payment. The only way they will be to extend the lease is to commence re-working operations, get the current well producing, or by drilling a new well.
KDK, I think you are going to need a legal opinion on that, whether it is two years from cessation of production or simply two years past the primary term. There can be other things in the lease such as the force majure clause, which may state that the operator may maintain the shut in well by shut in payments for lack of a market. I'd have to see the whole thing to give an informed opinion, and it would be my opinion, not a lawyers.
KDK said:
Thanks guys. The well is shut-in as of July 6, 2012. It produced in April, but nothing in May. I assume there is going to be none in June, given the shut-in date of July 6, 2012. (this is the info I find on the MT Board of Oil and Gas website)
Can you tell me if I have this correct: The primary term of the lease expired February 25, 2010. The lease has a continuous drilling clause for 120 days, so lessee has until approximately the end of August 2012 (April 30, 2012 + 120 days) to commence re-working operations or drill a new well. Otherwise, the lease has expired.r w kennedy, you are right, the lease also has this clause: ..."One Dollar per year per net royalty acre retained hereunder, such payment or tender to be made on or before the anniversary date of this lease next ensuing after the expiration of 90 days form the date such well is shut in and thereafter on or before the anniversary date of this lease during the period such well is shut in. If such payment or tender is made, it will be considered that gas is being produced within the meaning of the this lease."
However, this shut-in clause appears to be limited by an added clause in an Exhibit A that states "In no event shall the "shut-in" gas clause extend this lease more than two (2) years beyond the expiration of the primary term."Can you also tell me if this is correct: Given what I typed above regarding the shut-in clause, since we are well past "two years beyond the expiration of the primary term", lessee cannot extend the lease with a shut-in payment. The only way they will be to extend the lease is to commence re-working operations, get the current well producing, or by drilling a new well.
This is a Producers 88 -Paid Up lease, so I assume it contains pretty standard language, limited or changed only by what is in it's Exhibit A. I believe Clause 12 has the force majure clause you mentioned: "Production, drilling, or reworking operations or a well shut in for want of a market anywhere on a unit which includes all or a part of this lease shall be treated as if it were production, drilling, or reworking operations or a well shut in for want of a market under this lease."
What is "for want of a market?" I did some quick searches on the forum & with Google, didn't find much. Does this simply mean that the well can produce oil & gas, but due to the lack of a pipeline or another way to get it to market, it is shut in? If that is the case, we then will have to find out why the well is considered shut-in before we should pursue a new lease, correct?
r w kennedy said:
KDK, I think you are going to need a legal opinion on that, whether it is two years from cessation of production or simply two years past the primary term. There can be other things in the lease such as the force majure clause, which may state that the operator may maintain the shut in well by shut in payments for lack of a market. I'd have to see the whole thing to give an informed opinion, and it would be my opinion, not a lawyers.
KDK, I definitely think you should know the reasoning behind the shut in. Possibly they had a contract for the production and it ran out and was not renewed, thus no market. I hope you don't wind up in court over this, it's not a fun place to be.