Force majeure in an oil lease - Corona Virus

Is the Corona virus Pandemic a force majeure event? I received the following letter.

"The Corona virus Pandemic is a force majeure event under the terms of our oil and gas lease.

Lessee shall not be liable for delays or defaults in its performance of any agreement or covenant in this lease due to force majeure. The term ‘force majeure’ shall mean: any act of God including but not limited to … epidemic or quarantine regulations …

At the end of April, we will shut in all wells on the leases until conditions improve."

That is a very interesting question. One of the issues I see is whether the oil company is claiming force majeure because of the covid virus or is it really because of the incredible oversupply of oil and gas that has prices reaching into negative territory. Many operators are not able to sell their production for enough to pay the electricity and pumper wages.

There has been a lot of litigation recently, and will continue to be given the current climate, regarding what constitutes a force majeure event. There are a number of current cases that say that fluctuations in price are not a force majeure event, but it depends on the precise wording of the force majeure clause in your lease and the language in the balance of your lease. For example, there may be a “cessation of production” clause that would excuse production for some amount of time. You may be best served by having an oil and gas attorney look at the entire language of this paragraph as well as the remaining language in the lease and take a look at the current court decisions to determine if this is a true force majeure event or not.

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Force majeure is rarely invoked in oil and gas leases. A unilateral declaration by your lessee does not make it so.

Covid virus has not been declared an Act of God by the federal government and does not necessarily qualify as such. Any such declaration would have huge financial and contractual fall-out across the nations and many industries. Does your lease clause actually include the words “epidemic or quarantine regulations”? If not, the lessee does not have the power to add those words and its statement could be viewed as self-serving. If so, are these defined terms or subject to court interpretation? How is the end of “an epidemic or quarantine regulation” determined?

Where are your producing wells? Oklahoma regulators and administrative judge have declared production in the current price environment to be “economic waste” and apparently that will enable oil producers to shut in wells and not lose the leases even for fee minerals. This is not the case in Texas. The GLO is allowing lessees of state-owned minerals to shut in wells through December 31 without losing the leases. This applies to state leases and to mineral classified leases. It is not in your best financial interest to have oil sold at very low prices. Many small operators are having their oil sales contracts cancelled by the purchasers. You should definitely as the lessee what it means and requires for conditions to improve.


What state do you own minerals?

The Great State of Texas

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Thank you for commenting on my question regarding force majeure. Your reply is very informative. I will have to take a close look at my lease.

Personally, I would prefer to be shut-in for a while rather than having royalties based upon $15 per barrel.


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