Replies to This Discussion

Permalink Reply by Ben Elmore on October 31, 2011 at 3:45

Most prudent operators when faced with a lease termination claim are going to cease operations pending adjudication of the suit.  Otherwise, they risk wasting a bunch of money and a potential bad faith trespass claim if the lessor wins. 

Permalink Reply by Les Bamburg on October 29, 2011 at 1:04

Baron, most leases do not allow unlimited time between operations and specify a maximum period of 90 days between drilling or reworking (completion) operations.  Also, the operator would need to be engaged in such operations on the lease expriration date.  So the operator needs to be diligent about scheduling the fracture stimulation and completion operations. 

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Permalink Reply by The_Baron on October 31, 2011 at 3:14

I would agree that many leases do limit to 90 days.

 

However, there seems to be a disconnect in what that 90 days is.

 

I will give one example of a well I was involved in:

The well was drilled, and more importantly was spud about a week before the expiration of the primary term. the well reached TD, logged and pipe was set.

It was decided that the well was to be fracked, and a crew was scheduled, however it would be almost four months before the frack would take place. Did we have a 90 day lapse in oiperations?

NO. During that time we began to aquired ROW for a flowline, prepared the location, made plans for water aquisition, restored some of the location, disposed of drilling fluid, and built a fence around the location. several weeks before the frack, the frack tanks began to arrive and we began filling them with water.

It is the opinion of our attourneys that we did not have a 90 day lapse in operations, as we were in the process of preparing for final completion of the well. Furthermore, despite the fact that there were no scout reports on SONRIS for that period, we were diligently working in an environment where it was difficult to speedily complete our well. (it was a CV well, and we have a had time competing on a scheduling basis with the big operators).

 

Should the landowner filed suit to claim that operations had lapse, we surely would have prevailed. We had detailed records showing what we were doing. Once the well was fracked and tested, we still had to build a pipeline to get us to the nearest sales line, so we shut in, and paid our shut-in royalty. We probally could have still claimed that the lease was held by operations, but since we only had to pay $1/acre in shut ins, we went ahead and cut checks.

 

It is very difficult, if not impossible to break a lease when there is a well that was drilled, but waiting on completion. proving a 90 day lapse is very hard in most cases.

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Permalink Reply by Ben Elmore on October 31, 2011 at 3:43

I think your fact situation would meet the 90 day clause and hold the lease, especially if the term "operations" is defined broadly in the lease.  Even if it is not defined, it still is probably met.  I do not think, however, that an operator who is sitting around waiting on a frac job and not doing anything else can hold a lease under the cessation of operations clause.  That operator would have to try and seek relief under the force majeure clause in the lease, but even that would be tough because most force majeure provisions require the event of force majeure to be outside the operator's control (e.g., an Act of God).  Arguably, the operator could have begun drilling the well long before the expiration of the primary term so that the waiting period for a frac crew is not an issue.

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Permalink Reply by The_Baron on October 31, 2011 at 4:06

Any prudent operator will find somthing to do, even if they are just driving around in a dozer. Give me some budjet to work with ans I can make sure there are ongoing operations.

 

Force Majeure is really going to need a flood or something...

 

Sometimes, there just isn't any way to get a project drilled prior to lease expiration. I have one propect now that has been waiting on a rig for four months.

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Permalink Reply by Les Bamburg on October 31, 2011 at 7:28

Baron, earlier comments implied an operator could hold a lease indefinitely if he had drilled a Haynesville Shale without completing.  I disagree as I believe an operator has to make a prudent attempt to comply with the terms of the lease agreement, not just ignore them.

 

During 2010 it may have been more defendable to say it took longer than 90 days to get a frac crew on location similar to your example above.  That is not the case now for the more active operators who have frac crews under long term contract.  Smaller operators may still have issues but it should not be implied that this situation exists for all operators in the Haynesville Shale play.

 

Waiting on a downstream pipeline is a different situation and is covered by the clause addressing shut-in royalty payments.  This does not cover an operator's refusal to pursue completion of a well when infrastucture already exists in the area.

 

Your position would be an operator can drill a vertical Haynesville Shale well in a section and leave cased and hold all the acreage ad infinitum.  This seems completely counter to actions exhibited by the various operators active in the play.

 

I would relish taking an operator to court whose sole defense was hiring a guy to drive around the location week after week as the means of holding the acreage.  Especially if he was busy completing multiple wells in other sections with his frac crew.    

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Permalink Reply by The_Baron on October 31, 2011 at 7:44

I am no way implying that it could be held indefinatly.

 

I do believe that you can not simply count 90 days from TD. Personally, I would say six months from TD, the operator would be in good shape.

 

If I was intending only to hold acreage, I would drill a vertical well, produce enough gas to call it a sucessful test, and pay shut ins.

 

My point sir, is only to show that 90 days of no operations is not as simple as counting  days on a calendar. The mineral owner is going to need detailed DAILY records that prove that no real progress has been made.

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Permalink Reply by Skip Peel - Mineral Consultant on October 31, 2011 at 7:50

Nor am I implying that it could be held indefinitely.  There is no need to do so as the operators are following though with completions.  As to how long they feel comfortable in waiting for completion from TD date, who knows.  I haven't run across any of them that seem concerned about it whether it's 90 days or 180 days.  I think The Baron is spot on as to how the HA operators would argue a case of lease termination during the period between TD and completion.  And I would guess their chance of prevailing in the local courts that would hear such a suit as 95+%.

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Permalink Reply by Les Bamburg on October 31, 2011 at 8:01

Baron, thanks for clarifying your position.  I do agree that it is not as simply as counting the days on the calendar and every situation is different.  I was just trying to make the point that an operator needs to be reasonably diligent in pursuing operations.  Believe me I have been involved in my share of litigation involving debates about the "reasonable and prudent" standard.

 

I think the land owner in that situation would be wise to drop letters and e-mails to the lessee inquiring about actions he is taking to complete the well throughout the 90 day clock to establish the paper trail. 

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Permalink Reply by The_Baron on October 31, 2011 at 8:41

I agree.

 

regular visits to the location and photos are also a great help.

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Permalink Reply by Joe Peckham on October 28, 2011 at 6:31

I apologize for the typo.  Auto spell check is annoying at times.  'Crack' is, of couse, 'frac.'  Wells are both in DeSoto Parish, LA.

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