Issue has become important: if there is pipe and a driilled well, but no frac yet, have they a well that is capable of producing nat gas for purposes of meeting their lease deadline?

Tags: Chesapeake

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Under Texas law, "capable of producing" is defined as a well that is capable of producing in paying quantities when turned on, without the need for additional equipment or repairs.  When you say "no crack yet" do you mean no frac job?  There is a case invoving a well in the Barnett Shale where there was expert testimony that wells in the Barnett will not flow without a frac job.  Accordingly, this was deemed not to be capable of producing in paying quantities.

Attached is an article I did on this issue for a legal seminar.  I expect LA law is silent on the issue, so TX law would be persuasive if you are in LA.
Attachments:
Joe, well that has not been fracture stimulated in the Haynesville Shale is not capable of producing. 

While they well is not capable of producing if it has not been fracked yet, the lease is held by ongoing operations.

 

It is difficult at best to break  a lease when there is a well that has been drilled and is in the completion phase. Look for language in yourlease about ongoing operations. There may even be a 90 day period set forth, or it may be more open ended.

I agree with The Baron and would add that it is a normal occurrence for a Haynesville horizontal well to be drilled to Total Depth and in the Waiting On Completion status for months before a frac crew is available to complete the well.  The last time the state updated their chart on HA wells by status category, there were approximately 500 wells Waiting On Completion.  The backlog is significant for the larger operating companies but considerably longer for the smaller operating companies.  Any well that meets this description would be covered by "ongoing operations" even though there is nothing happening on a daily basis at the well site.
Skip, the backlog of uncompleted wells was more of an issue in 2010 as the decrease in drilling rigs and movement to development drilling mode has reduced the backlog significantly.  Many of the smaller operators have cut back (or stopped) their Haynesville Shale drilling operations.  The larger operators have frac crews under contract and/or providing their own equipment.  Most delays in completions now are associated with pad drilling operations where lease expiration is not an issue.  An operator should not be able to use waiting on a frac crew as ongoing operations to extend the 90 day period specified in the lease. 
I think they would disagree with you, Les B.  In fact I know they would.
Skip, so which operator do you think would try to hold a lease after expiration of the primary term based on waiting longer than 90 days for a frac crew?  Chesapeake?  I think discovery in the law suit would be very revealing and damaging. 
Yes, and others given the proper circumstances.  As to litigation, that is my point exactly.  Unless a lessor wishes to engage competent counsel and file suit, the chances of getting a lessee to release their development rights based on a demand is slim and none, IMO.

Skip, are you aware of operators actually taking this position?

 

Regarding litigation, it would never come to that because an operator would settle before letting it get to court.  The downside is too great as he knows the position is undefendable and would trigger similar claims to the extent he has repeated this absurd practice.

Yes. And although I agree that most operators will settle, they will not do so until suit has been filed, jurisdiction has been established and a court date for the suit, not the venue, has been set.  It usually takes about two years.  An experienced (and forthright) O&G attorney will inform a client of this and the client upon hearing the time and expense will more often than not decide not to file.  Of course the operators intent is only to buy a few months time in many cases as they are not trying to set on the well long term.  And they know from experience that most lessors/plaintiffs either run out of money or patience.  Makes it easier to settle with them.

  The HA operators all seem to follow this strategy to some extent but it does depend on who is threatening suit and what firm  or attorney represents them.  The attorneys I work with do not take such a case unless the client and the circumstances of the demand meet certain minimum requirements.  The industry has a stellar record of prevailing in Federal Court and in the 2nd. Circuit Court of Appeals which covers the area of the HA/BO Play. 

Skip, what about the first question.  Have you actually seen an operator take this position about waiting for a frac crew as continuing operations for a period longer than 90 days?  If yes, which operator(s)?

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