What are the limits of holding a lease by production?

Oil and Gas Leasing Help
#1

This may be a little...er strange.

In Weld County, CO.

A new lease is signed with a large operator in a Section that contains an abandoned well. No well is drilled by the new lessee however half way into the term of the lease, another producer happens by and drills a well, doesn't tell anyone. This well is very very...very close to the abandoned well and is producing. Our lessee in all likelihood will not drill but "may" settle with the operator on a royalty sharing arrangement. Emphases added on "may", not has or will and is yet to be determined.

If our lessee does enter into an agreement with the other operator, could we be bound and held by production through this arrangement?

Bob

#2

As you have explained the situation, the company that drilled the new well did so without a valid lease and without the consent of the lessee that owned the valid lease. This assumes of course that the lease you signed was validly recorded, executed and you in fact own the mineral rights where the well was drilled. This sort of situation is un-common, but not completely unheard of. If these facts are correct, the company that drilled the well has committed trespass on the lease. Any reputable operator conducts a drilling title opinion prior to commencing operations to drill a well in order to prevent this exact thing from happening. The title opinion is done by an attorney and lists any and all title defects that may exist. These defects are then normally corrected prior to drilling operations. In this case, if the company that drilled the well did so without a title opinion, a strong case can be made for bad faith trespass. . If the valid lessee can prove that the trespass was on purpose or done in bad faith, the company that drilled the well could be required to turn over the well and all production to the valid lessee as well as make restitution for any reserves already produced. If bad faith cannot be proven (i.e. the well was drilled with a title opinion that was in error) the company that drilled the well can be allowed to recoup their costs of drilling, but beyond that the valid lessee would own any production. The valid lessee could possibly require the trespassing company plug the well if the costs to operate the well going forward exceed the value of the reserves. This or course will effect whether or not your lease is HBP in the future.

As to the lessor, a lot depends of the facts of the case and what settlement, if any, the valid lessee wants to pursue. At minimum, you would be entitled to your royalty under the lease you signed as well as any damages to the surface if you were the surface owner. If I were in your situation, I would request a written statement of the facts surrounding the drilling of the well from both companies and then evaluate your options.

#3

Ed, the operator that drilled the well did have a drilling title opinion and a proper permit from COGCC, however they chose to not follow their Attorneys opinion fully with regard to clearing all of the various mineral interests prior to drilling. Don't know why that was? I was just wondering about being held hostage as it were, by production. Overall this is a very complicated issue. Thanks Ed.

Bob

Ed said:

As you have explained the situation, the company that drilled the new well did so without a valid lease and without the consent of the lessee that owned the valid lease. This assumes of course that the lease you signed was validly recorded, executed and you in fact own the mineral rights where the well was drilled. This sort of situation is uncommon, but not completely unheard of. If these facts are correct, the company that drilled the well has committed trespass on the lease. Any reputable operator conducts a drilling title opinion prior to commencing operations to drill a well in order to prevent this exact thing from happening. The title opinion is done by an attorney and lists any and all title defects that may exist. These defects are then normally corrected prior to drilling operations. In this case, if the company that drilled the well did so without a title opinion, a strong case can be made for bad faith trespass. . If the valid lessee can prove that the trespass was on purpose or done in bad faith, the company that drilled the well could be required to turn over the well and all production to the valid lessee as well as make restitution for any reserves already produced. If bad faith cannot be proven (i.e. the well was drilled with a title opinion that was in error) the company that drilled the well can be allowed to recoup their costs of drilling, but beyond that the valid lessee would own any production. The valid lessee could possibly require the trespassing company plug the well if the costs to operate the well going forward exceed the value of the reserves. This or course will effect whether or not your lease is HBP in the future.

As to the lessor, a lot depends of the facts of the case and what settlement, if any, the valid lessee wants to pursue. At minimum, you would be entitled to your royalty under the lease you signed as well as any damages to the surface if you were the surface owner. If I were in your situation, I would request a written statement of the facts surrounding the drilling of the well from both companies and then evaluate your options.

#4

Bob,

The fact that a drilling title opinion was obtained by the company at least shows that they knew they should be sure of their title status before drilling. As to what portions of that opinion they disregarded, (or whether the title opinion was worth following) is not clear. Keep in mind, that a drilling title opinion is not a binding document that establishes absolute title ownership. It is an "opinion" written by an attorney, nothing more. Attorneys have been known to be wrong on occasion.

It is possible that the company drilling the well believed the property was still under a valid lease via the original lease or under some alternate view of the chain of title, and decided to drill their well based upon that belief. This ultimately will be either litigated between the two companies or some settlement will result out of court.

As to your situation, you gave the lessee the exclusive right to drill wells on your property for the term of the lease. This lease however would be invalid if a prior lease were still in effect by some means you are not aware of. If no prior lease can be shown to be valid, then whether your lease becomes HBP or not will depend on whether the valid lessee wants to maintain the well that was drilled, or force it to be plugged by the trespassing company.

I wish you the best.

Ed

#5