I am curious if anyone has been told that an operator or payor is invoking Force Majeure. There is a good article in The American Oil & Gas Reporter on this topic and some rumblings amoung folks in industry.
As we all know, each lease can contain different Force Majeure language and that language dictates how that clause can be enforced. So, an operator should not be able to enforce the clause across all royalty owners. They should look at each contract individually.
What is the language in your Force Majeure Clause?
I avoid Force Majeure language if I can. It is not in my personal lease. If forced to use a company lease, I mark out all references to anything man made-poor planning on their part is not acceptable. God-invoked crises I will let pass.
There is an article in the new American Oil and Gas Reporter by an attorney arguing Force Majeure might be used to escape payment of royalties.
It really depends what your Force Majeure clause says exactly and what the reasons are for them not being able to perform. For example, it is a big difference for not paying because prices are low due to Covad 19, versus not paying because of a governmental decree that all the workers have to stay home or illness that prevented workers from going out and operating the wells.
I am not aware of any states that have not deemed oil and gas production as essential and are allowing it to continue.
Any operator that tries to avoid paying royalties on production that has already been sold under Force Majeure needs to be challenged immediately and please alert others on this forum.
IMPORTANT DEVELOPMENT -
We are hearing that many of the major producers have been getting notices their sales contracts for oil are going to be voided starting May 1 because the buyers are expected to run out of storage. Expect the producers to, in turn, shut in wells and try to invoke Force Majeure clauses in leases.
One thing my prior post did not address is whether an owner should agree to have their wells shut in rather than sell their oil at below $20 (the price companies are getting for WTI in the Permian). If you can afford the cessation of income, it is certainly something to look at.
Will be interesting to see how they handle that. With hundreds (or more) of mineral owners, not all will have force majeure lease clauses. I try not to have them in my leases. I donât mind shutting in a gas well as it will usually rebound fairly well. Oil wells donât like to be shut in as much. Although if they have enough gas still in their system, they may restart, but may need a kickstart -in my experience Maybe one of our petroleum engineers can comment on gas v oil wells and update us on the technology around restarting shut in wells-especially these long horizontals. (Remember to check your shut in payments clauses). I would rather get paid on a higher price than a lower price, but any payment is also better than no payment in some cases. Hate to waste good pressure and volume on low prices.
Not knowing what state you are in, the first place to contact is the operator. They âshouldâ have a copy of the lease. However, in some states, the lease will be filed in the county courthouse and in many cases, only a memorandum of lease will be filed. You want to ask the operator for a copy of the lease. If they will not give it to you, then you need to ask for the net acres they are showing, the complete description of the acreage that they have assigned to you and the royalty that they have listed for you. And depending upon the state, are there post production charges being levied or not and if so, how are they calculating them. I always request that they write out the formula (filling in all the parameters) that matches the Division Order decimal amounts.
So if there are multiple operators, does that mean that each one has their own lease, and we would have to contact each individual operator to see each individual lease?
If you are getting checks from different operators, then they may each have their own lease as it is for a different mineral property or it is possible that one (or more payors) is operating under the same lease, but took their product âin kindâ and has their own marketing agreement. I get some royalties from the oil transport companies and some from the gas transport companies for a single well held by the same lease. Look on the check stubs for which well they are paying on.
Someone just posted over on the main forum that he did receive a letter regarding FM and shutting in wells. it is starting.
I am wondering how an operator could declare Force Majeure if some leases have that clause and others do not. Is there case law in particular states that addresses the issue. What if you have a generic FM clause, but it does not have the words âpandemicâ or âquarantineâ in it?
Force Majeure has not really been used historically so this is unexplored territory. It is an issue that is affecting claims in many industries and contractual agreements across the country. A mineral owner who receives such a letter and does not respond may be in a legal position to not be able to later deny force majeure and claim that the lease has expired. To preserve rights, the mineral owner want to consult an attorney about sending a response stating that he does not agree that force majeure is applicable to his lease and that at a minimum, the lessee must provide detailed information regarding all of the conditions and situation revolving around each well and any applicable statutory or case law as to the force majeure provision in his lease. Also, that determination of the applicability of force majeure at a single moment does not mean that the operator can claim force majeure one month or two months later. The pandemic is not preventing well operations in most states, if indeed it is preventing operations in any state. At the same time, it is not necessarily in the best interest of the mineral owner to have a well produce and be paid at such low prices. So the alternative is to discuss a consent letter or similar agreement for the well to be shut in for a specified number of months, not an unlimited open-ended term. Texas GLO at its last School Land Board meeting agreed that operators may shut-in through December 2020 without losing State leases. Fee minerals leases are on their own. Oklahoma seems to be moving toward defining production at the low oil prices as âeconomic wasteâ which would allow wells to be shut-in and prevent fee mineral leases from expiring.
I received a letter from one operator asking me to sign a letter of cooperation allowing them to shut in wells rather than having to invoke FM as storage reaches capacity. The language of the letter seems vague to me and says in bold letters that itâs ânot a binding agreement.â The strangest and most unsettling thing about it is that the text of the letter appears on one page and the entire signature block appears on a second page. Since the pages are not numbered and do not reference each other, Iâm hesitant to sign what seems to be a blank page. Even if I staple them together, it just seems weird and risky especially since I am relatively unfamiliar with the pros and cons of the issues. Any thoughts?
Many operators are having their oil purchasing contracts canceled and are trying to figure out how or even whether they can sell the oil. And even if May production is sold, the price is likely to be less than $10 per bbl. Once the tanks fill up on the well pad, then the wells have to be shut-in or the well has to be sold at any price available. Some operators are sending letters asking for binding consent to shut-in wells for months without losing the leases. Given the low prices, keeping oil in the ground will be economic benefit to both mineral owner and operator. You can to limit the time for wells to be shut-in. The GLO has agreed to allow operators of State owned minerals to shut-in through December 31 and not lose leases. How long to remain shut-in is at the discretion of the operator - only a couple months or through December 31. It is up to you to decide what you are willing to do. To prevent the signature page from being attached to a different document, you can add numbers to the pages yourself and on the signature page add a statement that it is related to the non-binding letter of cooperation dated XXX, 2020 from YYY company regarding temporary shut-ins. You can also add a time limit, such as the GLO date of December 31.
To address Marthaâs question above as to Oklahoma. There is case law that holds that a lease can be extended by a well that is capable of commercial production. In other words, you donât have to market the product, but if you did, would it make a profit.
Even if a well doesnât have a shut-in clause, or the shut-in clause addresses gas only, the company can still shut in a well if there is no market for the product.
I did receive a FM letter on a lease where no exploration has yet occurred. The letter extends the expiration of the lease from May 2020 to 30 June 2020. I am not particularly bothered by this because of the short duration of the extension, but more letters could come at the end of June. Because there is no production, there is no shut in payment.
I am no legal beagle but donât see how FM can extend something that hasnât happened. The reality is with drilling costs dropping like a rock now is a good time to drill. Just not a good time to produce. Will be interested in a legal expertâs opinion on this one.
You should be concerned about just conceding the extension of the primary term of your lease as that could open the door for further extensions. It is much less likely that force majeure can be applied to a primary term when there has been no well drilled or production. Did the lessee give you a detailed explanation or just a summary statement? Had the lessee already permitted well(s) and lined up a drilling contractor and prepared the well pad? Is your lessee really an operator or is it a small company that might be a non-op working interest or is it a lease flipper still trying to find a buyer? It is your right to send a letter questioning the claim of force majeure and asking for a detailed explanation.