This language is in california master leases. How do you validate paying quantities as far as a lease default?
Thank you very much debra.
Debra Ganske said:
I can’t find California case law that defines “paying quantities,” but here is a copy and paste from an Oklahoma case:
MAX SMITH, d/b/a SMITH OIL, Appellant, v. MARSHALL OIL CORPORATION, Appellee.
No. 96,987
SUPREME COURT OF OKLAHOMA
2004 OK 10; 85 P.3d 830; 2004 Okla. LEXIS 10; 75 O.B.A.J. 578; 158 Oil & Gas Rep. 309
February 10, 2004, Decided
- *
“Production in paying quantities” is a term defined by Oklahoma case [*8] law to mean “production of quantities of oil and gas sufficient to yield a profit to the lessee over operating expenses, even though the drilling costs or equipping costs are never recovered, and even if the undertaking as a whole may result in a loss to the lessee.” Hininger v. Kaiser, 1987 OK 26, P6, 738 P.2d 137, 140. The phrase denotes a return in excess of “lifting expenses,” costs associated with lifting the oil from the ground after the well has been drilled. Stewart v. Amerada Hess Corp., 1979 OK 145, P6, 604 P.2d 854, 857. * * * “Lifting expenses” include but are not limited to the following: costs of pump operation, pumper’s salaries, costs of supervision, gross production taxes, royalties payable to the lessor, electricity, telephone repairs, depreciation, and other incidental lifting expenses. Hininger v. Kaiser, 1987 OK 26, P5, n. 4, 738 P.2d 137, 139, n. 4.
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You can use the free case law searchable database at this site: http://www.lexisone.com/
Dear Mr. Brandon,
California Case Law is clear on the matter of paying quantities and what must occur for the Habendum Clause to send the lease into its secondary term.
In San Mateo Community College District v. Half Moon Bay Limited Partnership, 65 Cal.App.4th 401 (1998), the producer argued that it satisfied the Habendum Clause to justify automatic extension into a secondary term by discovering oil and gas during the primary term. The California Court rejected that argument and ruled that to extend the lease, oil or gas must be produced in paying quantities before the end of the primary term. The Court said that production in paying quantities meant "sufficient quantities each year as will return a profit to the lessee over and above his operating, but not his drilling or equipping costs in producing the oil and gas." This language was taken from an earlier California case, Montana-Fresno Oil Co. v. Powell, 219 Cal.App.2d 653 (1963), which also said that a producing well, not just discovery of oil or gas, is required.
California has also refined the "paying quantities" issue by noting that if there is production in the secondary term, the court will measure revenue over a longer period of time to determine if the well is producing at a profit. (Transport Oil Co. v. Exeter Oil Co., 84 Cal.App.2d 616 (1948). The Court also commented that a highly profitable lease may at times be operating at a temporary loss, but that would not necessarily mean it is not "producing in paying quantities."
Mr. Cotten: When you copy and paste passages from an article, you should provide the proper attribution. The information you provided came from this article:
Oil & Gas leasing: Montana Supreme Court discusses “production in paying quantities”
http://www.bullivant.com/Oil-Gas-leasing-Montana-Supreme-Court-discusses
Buddy Cotten said:
Dear Mr. Brandon,
California Case Law is clear on the matter of paying quantities and what must occur for the Habendum Clause to send the lease into its secondary term.
In San Mateo Community College District v. Half Moon Bay Limited Partnership, 65 Cal.App.4th 401 (1998), the producer argued that it satisfied the Habendum Clause to justify automatic extension into a secondary term by discovering oil and gas during the primary term. The California Court rejected that argument and ruled that to extend the lease, oil or gas must be produced in paying quantities before the end of the primary term. The Court said that production in paying quantities meant "sufficient quantities each year as will return a profit to the lessee over and above his operating, but not his drilling or equipping costs in producing the oil and gas." This language was taken from an earlier California case, Montana-Fresno Oil Co. v. Powell, 219 Cal.App.2d 653 (1963), which also said that a producing well, not just discovery of oil or gas, is required.
California has also refined the "paying quantities" issue by noting that if there is production in the secondary term, the court will measure revenue over a longer period of time to determine if the well is producing at a profit. (Transport Oil Co. v. Exeter Oil Co., 84 Cal.App.2d 616 (1948). The Court also commented that a highly profitable lease may at times be operating at a temporary loss, but that would not necessarily mean it is not "producing in paying quantities."
Best,
Buddy Cotten