Getting out of leases after the well stops producing.

http://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?ch...

Business Workshop: Landowners can terminate oil leases

December 31, 2012 12:08 am

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By Ryan James

Unknown to many Pennsylvania landowners who have signed contracts to allow drilling for oil and gas on their land is the fact that in some cases they can terminate the contract the exact moment that the well stops producing any oil or gas.

This right to terminate the oil and gas lease as soon as the energy stops flowing exists only if the contract calls for royalty payments based on the volume of gas or oil actually produced by the wells on the land, which is called a "production royalty." If the contract calls for flat rental payments or royalties based on well pressure, other termination rules come into play that are much less onerous for producers. Many producers prefer a production royalty lease because they pay royalties only on gas and oil that they are shipping out for sale.

A recent Pennsylvania Superior Court decision reaffirmed the automatic termination rule for oil and gas leases that use production royalties as the means of paying the landowner. The oil and gas producers that lost the original lawsuit and the Superior Court appeal decided not to take the case to the Pennsylvania Supreme Court.

What that means is that producers in Pennsylvania with production royalty leases do not even have a reasonable period of time to take a well off-line for maintenance or repair without risking lease termination. As soon as the gas or oil stops flowing, the landowner can walk away from the lease.

The only way that a producer can get around this termination rule is if the lease specifically includes a cessation of production clause granting the producer a grace period in which to recommence production for reasons that are explicitly stated in the lease, for example after a mechanical breakdown.



Read more: http://www.post-gazette.com/stories/business/news/business-workshop...

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Replies to This Discussion

Permalink Reply by JK on January 2, 2013 at 2:27pm

It's good to hear this.

What about WV?

 

Permalink Reply by paleface on January 3, 2013 at 6:21am

Sometimes the gas companys shut in a well that is producing when the presure drops to let the presure build to clear liquids from the piping,I can't see anyone having a problem with that.

Permalink Reply by Jim Litwinowicz on January 3, 2013 at 6:48am

I disagree that this means anyone can get out of a lease as soon as production stops.  Almost every lease will have a clause allowing for the well to be shut in with a minimum payment, often only $5/yr/acre.  Most leases, especially old ones, have no time limit on the length or the frequency of such shut ins. As long as a company pays the shut in fees, they can extend the lease without production.

However, for a well to be "shut in" it must be capable of production. If a well is no longer capable of production....say a collapse of the casing....then the landowner/rights owner can then file to terminate the lease. The problem is proving that a well that hasn't produced for a couple of years is now longer capable of production. Companies will gladly pay a very low shut in fee and maintain a lousy lease rather than negotiate a new lease and pay higher bonuses and royalties. Most would probably even repair a collapsed casing to maintain an old lease.

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