Diligent Development
Below is a portion of a discussion involving the case, Edmondson Brothers Partnership v. Motex Drilling Co., 731 So.2d 1049 (La.App. 1999) , in which due diligence is used to take action against O&G's for not holding up their end of the bargain in developing leaseholds. With the trouble that operators are now running into just getting leaseholds HBP, how full are the court dockets going to be concerning their inability to reasonably explore and development. While a tad lengthy , I found the article very interesting. It certainly gives mineral owners something to think about in regards to a bad lease from an operator who just wants to sit on a poorly performing vertical shale well to HBP.
How much slack should be given to operators under these circumstances or do you feel that the actions by mineral owners will be appropriate ?
Louisiana also examined the covenant of diligent development. The lessor, Edmundson, leased two tracts, one referred to as the Shell lease (1765 acres) and the other known as the Durham lease (1194 acres). The Shell lease was executed in 1975 and Moncrief drilled the EE #2 on it in 1984. The Durham lease was executed in 1980 and Moncrief drilled the EE #1 on it in 1983. Both were vertical wells in the Austin Chalk. There was production from both wells, but the EE #2 ceased production for more than 90 days in 1987-88. The lessor did not know this, and demanded further development on both leases in December of 1991. Moncrief initially indicated a well would be drilled on each lease, but then drilled one horizontal well on the Shell lease, which was completed on March 27, 1992. In June of 1993, the lessors sought a judgment that both leases be canceled for lack of production and that Moncrief failed to reasonably explore and develop both leases.
The trial court found for the lessor. It awarded money for lost leasing revenue and lost production revenues, and shares of future revenue from the time of judicial demand forward. In this regard, Moncrief could only deduct costs up to certain dates in late 1997. Thereafter, no production costs would be deducted from the revenue owed the lessors.
In Edmondson Brothers Partnership v. Motex Drilling Co., 731 So.2d 1049 (La.App. 1999), the Court of Appeals affirmed on liability, and modified the damages for future production. The covenant of further development and exploration on the Durham lease was breached because only one well was drilled in 10 years. The horizontal well on the Shell lease did not "explore" or "develop" the Durham lease; oil was known to be there and no additional information was needed. The Shell lease was also inadequately developed by 2 wells on 1765 acres. Moreover, the lessors were not estopped from claiming that the Shell lease automatically terminated pursuant to its cessation of production clause in 1998. Although the request for development is inconsistent with a claim that the lease terminated for failure to produce, the lessors had no way of knowing the facts when they requested development. Moncrief had filed inaccurate reports with the Railroad Commission, which reports showed production and on which the lessors could have relied. These errors did not arise to the level of fraud, but because only the lessee's negligence kept it and the lessors unaware of the Shell lease's termination, Moncrief produced in bad faith in regard to the two wells on the Shell lease. Therefore, as a trespasser in bad faith, no costs could be deducted from revenues at all. As to the well on the Durham lease, Moncrief was in bad faith from the date of judicial demand, 1993. The Durham lease also expired for failure to produce in paying quantities. Even if overhead expenses were not included, the best Moncrief could show was profit of $139 per month for the 18 month period preceding filing of suit. This amount is not sufficient to "induce a reasonably prudent operator to continue production." The court also concurred that leasing activity would have made the acreage attractive to buyers when the leases had terminated. The award of loss of leasing damages was thus appropriate.
http://www.mosburgoil-gas.com/html/mansfield_11_99_3b.html
How much slack should be given to operators under these circumstances or do you feel that the actions by mineral owners will be appropriate ?
Louisiana also examined the covenant of diligent development. The lessor, Edmundson, leased two tracts, one referred to as the Shell lease (1765 acres) and the other known as the Durham lease (1194 acres). The Shell lease was executed in 1975 and Moncrief drilled the EE #2 on it in 1984. The Durham lease was executed in 1980 and Moncrief drilled the EE #1 on it in 1983. Both were vertical wells in the Austin Chalk. There was production from both wells, but the EE #2 ceased production for more than 90 days in 1987-88. The lessor did not know this, and demanded further development on both leases in December of 1991. Moncrief initially indicated a well would be drilled on each lease, but then drilled one horizontal well on the Shell lease, which was completed on March 27, 1992. In June of 1993, the lessors sought a judgment that both leases be canceled for lack of production and that Moncrief failed to reasonably explore and develop both leases.
The trial court found for the lessor. It awarded money for lost leasing revenue and lost production revenues, and shares of future revenue from the time of judicial demand forward. In this regard, Moncrief could only deduct costs up to certain dates in late 1997. Thereafter, no production costs would be deducted from the revenue owed the lessors.
In Edmondson Brothers Partnership v. Motex Drilling Co., 731 So.2d 1049 (La.App. 1999), the Court of Appeals affirmed on liability, and modified the damages for future production. The covenant of further development and exploration on the Durham lease was breached because only one well was drilled in 10 years. The horizontal well on the Shell lease did not "explore" or "develop" the Durham lease; oil was known to be there and no additional information was needed. The Shell lease was also inadequately developed by 2 wells on 1765 acres. Moreover, the lessors were not estopped from claiming that the Shell lease automatically terminated pursuant to its cessation of production clause in 1998. Although the request for development is inconsistent with a claim that the lease terminated for failure to produce, the lessors had no way of knowing the facts when they requested development. Moncrief had filed inaccurate reports with the Railroad Commission, which reports showed production and on which the lessors could have relied. These errors did not arise to the level of fraud, but because only the lessee's negligence kept it and the lessors unaware of the Shell lease's termination, Moncrief produced in bad faith in regard to the two wells on the Shell lease. Therefore, as a trespasser in bad faith, no costs could be deducted from revenues at all. As to the well on the Durham lease, Moncrief was in bad faith from the date of judicial demand, 1993. The Durham lease also expired for failure to produce in paying quantities. Even if overhead expenses were not included, the best Moncrief could show was profit of $139 per month for the 18 month period preceding filing of suit. This amount is not sufficient to "induce a reasonably prudent operator to continue production." The court also concurred that leasing activity would have made the acreage attractive to buyers when the leases had terminated. The award of loss of leasing damages was thus appropriate.
http://www.mosburgoil-gas.com/html/mansfield_11_99_3b.html
Views: 26
Replies to This Discussion
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Permalink Reply by Snake Stewart on
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Hey GoshDarn,
I agree with you. But this is as certain as death and taxes. Just thought it would be an interesting discussion. When people start realizing that those dreams they were promised are going to be longer in coming , or not in their lifetime,it aint gonna be pretty.
What about pro bono or class action ?
It certainly wouldnt take 1765 acres to make the case worth millions of dollars.
20 acres and a 1/8 royalty would be worth several million dollars conservatively.
Again, I am not saying I agree with it but there will be plenty that entertain the idea. IMO.
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Permalink Reply by msfva on -
KB,
Can you provide an example of a "well written development clause?" Thanks.
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Permalink Reply by sesport on
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KB - When you say "so consider tying to CPI," would you suggest the national or regional index? Also, because these too change from time to time, would it be sufficient to state it as " the current (one)" or does it have to be defined by the year? Thanks
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Permalink Reply by sesport on
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"For those with much less acreage under lease, and who find themselves in similar circumstances . . .
It truly boils down to . . .
The pluses and minuses of hiring a lawyer to handle such a case, IMHO."
goshdarn - This is too true, which is why it is even more important for neighbors to stay organized, meet at regular intervals, and continue to stary on top of development & communicate. As Mr. Stewart mentions, class action can be taken even if l/o, m/o possesses a small parcel. That puts one on a more even playing field with lessee/operator/developer (whoever is going after the gold). It also affords one the chance to engage the level of professional advice that will get the kind of clauses that KB advises.
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Permalink Reply by cocodrie man on
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Would the failure to pay royalties for a decade or more add to the rights of the mineral owners?
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WOW !
I assume that you at one time received royalty payments ?
I would check to see if the well had been shut in, first of all. But yes, I would think that there would be several things that would be in the l/o , m/o's favor at this point. There are probably many on this site with first hand experience with things of this nature that should be able to give you more percise answers. It would be difficult to answer without more info I am sure but you can cross that bridge when you get there.
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