Force Majeure

Can anyone explain whether or not Force Majeure should or should not be included in an Exhibit A and is it in the best interest of the mineral owner? Does it help both the lessee and the lessor?

force majeure, in short, allows for the Lessee (or operator) to cease production due to a governmental action (ex: moratorium on drilling) or natural disaster that would make it impossible to maintain production. By operating under this clause, this gap in continuous development/production would not cause the lease to become invalid. Depending on the specific wording of the clause in the lease, it can be styled to be more lessor or more lessee friendly.

In a true force majeure situation, nobody could drill your property, so I think it is reasonable.

Shut in, on the other hand I believe is abused and should be limited to a Cumulative time period and there should be a definition of paying quantities so they can't just claim and pay you for a Mcf or a barrel of oil per month that most likely was never produced. You hear the horror stories of the valve rusted shut or the pump rod missing but the operator still claims some minimal production to save the lease.

Thank you. I had added this to an Exhibit A but the company I am talking with did not want to include it. The wording was: Force Majeure: Lessee must notify Lessor, in writing, of all occurrences of Force Majeure during the primary and secondary term of the lease, specifying the event causing the delay. In no case will Force Majeure be continued without good faith efforts to restore operations or production.

Seems like this would be something beneficial to the lessor (me) and wonder if it is a major point to push or just go along with them. I tend to think I would want to keep it.

There are certainly benefits to having this language included and it would be to your benefit, but if I were you I would decide how much money that clause is worth to you (I can help you come up with a dollar amount if you want) and I would ask the oil and gas company to pay that to you upfront as part of the bonus payment. This is a win-win that the oil and gas company will probably be OK with approving. (I also agree with what R W said below)

The standard force majeure provision, such as is included as a standard feature in the wide variety of printed leases falling under the rubric of "Producers 88" (and similar), generally operates more in favor of the lessee, and somewhat less in favor of the lessor, depending on the circumstances existing at the time force majeure is invoked.

The force majeure provision in the printed portion of the lease contains language which is well-tested in case law, and the legal effect of which is relatively certain. Many (if not most) lessees will be hesitant to depart from a well-established provision under which they know with reasonable certainty what their rights and responsibilities are, for a force majeure provision containing untested, unlitigated language, where their rights and responsibilities may not be so clear.

You'll lose nothing by suggesting an alternative to the standard force majeure provision, but bear in mind that a lessee's willingness to accept wholesale changes to the standard force majeure will be directly proportional to their desire to secure a lease on your acreage. If you control 6,000 net mineral acres smack dab in the middle of their area of interest, you're probably in a good bargaining position. On the other hand, if you own a small undivided interest in 20 acres on the outer edge of a 15,000 acre area of interest, you can guess that the lessee would be less interested in considering any changes to the standard force majeure.

The traditional purpose behind force majeure clauses was to excuse the lessee from losing a lease if production stops due to "acts of god" or other events out of the lessee's control. Most standard form Producer's-88 leases define force majeure broadly as anything beyond lessee's control. A more reasonable clause would give an exclusive list of all the events that could constitute force majeure, and leave none of them up to the lessee's sole discretion.

As a mineral owner I think it is reasonable to let a lessee keep its leasehold if events truly beyond the lessee's control cause production to cease. After Hurricane Katrina, thousands of wells on the Louisiana Gulf Coast and in the Gulf of Mexico were shut in for months because the midstream infrastructure was so heavily damaged by the storm. I believe a once-in-a-century storm is a fair excuse for a few months of non-production if it makes it impossible to operate a well. An invasion of the US by a foreign country would be another good excuse. Low commodity prices is not a good excuse.

I prefer to require an annual delay rental to be promptly paid if lessee wants to maintain its lease through force majeure only, and I limit the total months the lease can be maintained by force majeure in much the same way I would with shut-in rentals. I think that is a fair accommodation for both parties's interests.