Held by production?

I have a question that seems to get many different answers depending on who you ask.

What is it that actually holds a lease by production? Is it a lease with both a primary and secondary term also called a habendum clause that contains both a primary and secondary term for as long as oil and gas is being produced? Or is it the actual production that occurs during the primary term of the lease and it doesn't matter after that as long as they produce it is held?

Views: 3512

▶ Reply to This

Replies to This Discussion

Permalink Reply by Christian E. Turak on December 29, 2015 at 4:01pm

I think this is one of the greatest mysteries of the oil and gas lease.  

Held by production is really a misnomer used in shorthand to describe when a lease is held when the primary/extended term has lapsed.  What you will see in a lot of leases is that the oil and gas company can hold the lease by production if it has "commenced operations."  What that means in practice is anyone's guess.  

On one end of the spectrum, the company has actually produced oil and gas.  That case is obvious.  On the other end of the spectrum, the oil and gas company has moved some dirt around in anticipation of drilling a well.  In my opinion, it is equally as clear that that is not what is meant by "commencing operations."  In the real world, the facts lie somewhere in the middle, and the oil and gas company is always going to claim that it has done enough to "commence operations."  The burden will be on the landowner to go to court if (s)he believes otherwise.  Oftentimes, the difference can mean hundreds of thousands of dollars, even millions, to the landowner who signed a bad lease who can then get out of it.

With the downturn in the market right now, and the inability of many companies to move their product off of the wellhead due to lack of pipeline infrastructure, I see a lot of landowners come into my office and claim that a well has been drilled but they haven't received any royalties.  What the companies are doing is drilling a well (and thereby "commencing operations") but not actually producing anything.  They can then hold the acreage and not worry about moving gas or selling gas into a depressed market.  This is what is called "delay in marketing" and many landowners are receiving payment for such purpose.

This is precisely why in my practice I strongly negotiate the held by production clause of the lease to provide for actual production.  I want it to be clear as day that that is what is required for the oil and gas company to hold the least past the primary/extended term.  And, if the oil and gas company wants to get creative and claim otherwise, we have a strong position in court.  

I think this is one of the most under-appreciated clauses in the lease and why getting an experienced oil and gas attorney is vital.  This clause could mean the difference between substantial sums of money in the landowner's pocket or the oil and gas company's pocket.  

What you seem to have, as another poster stated, is an old oil and gas lease that predates the shale boom.  The language in that, though phrased differently, would likely be treated the same.  However, in order for that lease to be valid, oil and/or gas would have to have been produced continually since the primary/extended period of the lease (notwithstanding any shut-in periods).  Whether that's the case--and whether you'd be able to prove that in court--is a different matter entirely.  It's all about the specific language in your lease.

Permalink Reply by Pondage on December 29, 2015 at 4:29pm

Thank you for the reply. This lease is one of three signed consecutively from 1932 to 1939 all of them are virtually the same except for length, payment for gas and the term as long as oil and gas was produced. . The first lease agreement signed was to change and modify a 1910 lease and was for less money for the gas royalty. This lease also had the wording as long as oil and gas is produced.

The second lease was for the same amount of money and the words "as long as gas was produced" was stricken by typewriter for filing as stated in the lease and the words shall become null and void where added.

The third lease was the same as the other two but did not have the words "as long as gas is produced". It just said "shall become null and void"

There where other oil and gas leases written on the original 1910 lease but all of those where for 2 years and then shall revert back to the original rate in the original lease. All where written by the same family.

It just seemed to me that the intent was to keep the oil and gas company coming back and signing a new lease every 2 years.  

If it was HBP why would they keep signing a new lease after the one before it expired? 

Permalink Reply by Pondage on December 29, 2015 at 4:58pm

Leases from that time frame did not include shut in clauses and all the garbage that leases have now. The leases in question have four parts the for and in consideration of one dollar in hand to the first party etc, a property description, the lease terms which I have posted in an earlier post and the signatures with notary. 

All this is about 5 or 6 paragraphs long and about one page. What I posted earlier was the complete lease terms in the lease there is no more.

Permalink Reply by Christian E. Turak on December 30, 2015 at 4:53am

I just also want to point out that a shut in clause, if containing the correct language, can be beneficial to the landowner.  

The shut-in clause is designed so that the oil and gas company can stop production but maintain the lease in full effect.  

The shut in clause proposed by the oil and gas companies allows them to stop production for long periods of time upon payments that are relatively low ($5/acre, etc.).  

For my clients, I always amend the shut-in clause so that there are strict time limits for the amount of time they can stop production and seek substantial payments in the event they do.

That way, the clause works for both parties to the lease.  The oil and gas company can stop production for a period of time so that it does not have to sell into a depressed market (like we're seeing now), and it works for the landowner in the same way.  The higher the price the oil and gas company sells, the higher royalty for the landowner.  

But, if the shut-in clause is not negotiated properly, the landowner is at the mercy of the oil and gas company.  It will only have to pay these minor amounts which incentivizes the company to keep wells shut-in longer than necessary--while turning back on other wells.  

My goal with my clients is to make sure that, in the event of a shut-in, it's legitimate and that the client gets paid an appropriate amount for that time period.  

This is yet again another reason why getting an experienced oil and gas attorney is key.  

Permalink Reply by Barry D on December 30, 2015 at 2:34am

Pondage,

Was there ever a well on the property ? That would make it HBP.

Leases were often revised to change the terms, even if HBP

Permalink Reply by Pondage on December 30, 2015 at 3:20am

Barry,

Yes there are two. I get the HBP assumption. I guess my thinking is that if there was intent from both party's to sign new leases after the one before it expired That one could argue both party's assumed that the lease was not held by production. If it was why sign more leases year after year? $$$$ have remained the same since 1932. The only thing that changed was the removal of "as long as gas is being produced" and the edition of "shall become null and void". Which as I read the lease is what kept the two party's returning to the table to sign new leases. The language in the leases are pretty straight forward.    

Then the old man died and nothing was ever done to correct the problem if there is a problem.     

Permalink Reply by Barry D on December 30, 2015 at 4:04am

Pondage,

As long as there are wells on the property it is HBP, generally speaking.

I have seen changes to leases after a well(s) have been drilled. Doesn't mean the property is not HBP.

Are the wells in production ?

Do you know the API numbers or well numbers?

What state, county, township/district?

Permalink Reply by Pondage on December 30, 2015 at 4:30am

Yes they are both still in production. But as  Christian E. Turak stated the HBP assumption is very mystifying. Intent and the wording in the lease(s) play a large role in determining HBP. I would also argue that the signing of new lease agreements lowering the amount of gas royalty from the original lease was a give and take benefiting both the lessor and lessee. The lower rate benefiting the lessee and the terms changing benefiting the lessor and keeping the two coming together every 2 years or so until the lapse.

   

Permalink Reply by Barry D on December 30, 2015 at 4:39am

Pondage,

It was not unusual for a producer to ask for a reduction in royalty or other compensation or other changes to a lease; even after a well(s) are drilled

Generally speaking, HBP is HBP, Held By Production. As long as there is production the property is held. I haven't seen anything posted that would change that.

Permalink Reply by Christian E. Turak on December 30, 2015 at 4:35am

From what I can piece together from what you wrote, there is an original 1910 lease and 3 modifications/amendments of that single lease.  Do you have the 1910 lease?  The answer to your questions is probably in it.

However, think of the situation this way: you have an oil and gas producer who is leasing property to produce oil and gas.  He is going to spend what is the equivalent of hundreds of thousands or even millions of today's dollars to drill a well and operate it.  He is not going to see a return on his investment until sometime in the future, if ever.  Why would he ever agree to two years only?  The producer is very unlikely to turn a profit by that point, and , even if he does, it will be very slight.  Plus, the well and associated installations would likely be considered fixtures that would remain with the landowner.  So the landowner could then operate the well himself after two years and reap 100% profit.  This is exactly why leases contain the "for as long as oil and gas is produced" language.  

I just think that your situation does not add up.  There's a missing piece to the puzzle, and I'd be willing to bet it's the 1910 lease if you don't already have it.  

Permalink Reply by Pondage on December 30, 2015 at 5:04am

Christian,

Confusing to me to. The 1907 (Corrected the date when I read the lease) lease is a standard lease for 1/8 of oil and $100.00 per gas well. Well to be drilled in three months if not .10 cents every 3 months per acre until well is drilled. Surface owner to get free gas making his own termination. There are a few stipulations about the cows LOL and a few gates but nothing out of the ordinary. It is as standard as an oil and gas lease gets. Wells where drilled in 1924 and have been producing very little gas and oil since DEP have kept records.

What would you look for in the 1907 lease that would affect the lease and deem it HBP or something similar? 

Permalink Reply by David Allen Lilly on December 31, 2015 at 2:05am

Your definition of "held by production" is the one I have seen actually being used to hold leases after the term has expired, I know people who this has actually happened to.

I wonder this, is it more a legal definition than one of lease wording ?

If you go to court I would think that the state's legal definition of HBP would take precedent over the lease wording, but maybe not.

If as you say in your comment (which is very helpful and appreciated) you write specifics concerning HBP does that carry sufficient weight with the state even if their own definition of HBP is different ?

Thank you,

David

RSS

© 2024   Created by Keith Mauck (Site Publisher).   Powered by

Badges  |  Report an Issue  |  Terms of Service