HBP----Legal definition of Producing quantities

There are 100s of thousands of acres out there being HBP by wells/leases that  produce pennies per month.

The Lease holders are neglecting these wells...just holding on to them to preserve and cash in on the leases.

For sake of discussion lets limit the production to  NG only.

What amount of NG produced on a yearly basis ( per well) would you consider "paying quantities"?

What maintenance is required by law on these wells, are there any regulations that need to be followed?

What law firms have successfully been used to have leases terminated that were held by these low producers?

BTW....I am in OH...but assume this applies to all.

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Permalink Reply by Philip Thackray on July 10, 2015 at 3:14am

Paul,

In the 80's myself and three other individuals drilled 20+ vertical wells to the Clinton sand, if I recall correctly, in (and or around) Columbiana County, Ohio.  We used Quality Oil and Gas a small drilling firm owned by Tim Lanzer in Alliance, Ohio.  Tim manages a lot of the shallow wells that fall into the category you are describing.

He is bound to have the information you are seeking.  The last number I have for him is 330 821 6375.  Mention the Laser Drive group, Bill Aull, Dick Matta, Philip Thackray and Mike Yarussi (geologist).

Phil

Permalink Reply by Dexter Green on July 10, 2015 at 3:21am

Paul, here's how it was always framed for me, by oil and gas attorneys:

A judge is loath to shut down a well if it is still producing any profit for the operator.  That said, an operator (which can mean a company with 100 employees or a one man show) cannot produce a well that is losing money and call it "commercially producing".  If a one man company is operating a well that makes $1,000 year gross and costs $1,500 a year to operate it's not profitable, right?  Well maybe that one man does all of the labor and thus counts his costs at $0.  There have been cases where judges have had that scenario before them and they have essentially said an operator cannot pretend that their time is worth $0/hr.  If you're the operator and the welltender you have to account for the cost of your time and roll that into the equation.  

The hangup here is simple.  Most leases say that production is in the eye of the operator.  So any landowner wishing to get out likely needs to sue the operator and prove in court that said operator is using an inconsistent definition of production.  That's a tough sell.  Going to court costs a heck of a lot of money and can take 12-15 months to get a judgement.  I'm actually surprised that we didn't see more bargaining during the boom times.  If I operated a dozen wells of questionable production I'd have been happy to go to my landowners and release all non-producing formations in exchange for a cut of any income from a new lease.  

It'll be interesting to see how many lawsuits end up being filed by the end of this cycle.  ECR has by far the most questionable production wells (from the Oxford deal) and I wonder if they're actively trying to get that dealt with before too much more time passes by.

Mike MurphyPermalink Reply by Mike Murphy on July 10, 2015 at 4:45am

if a well pays you any amount as a leasee in a year you are HBP no matter if the oil company is making a profit or not as long as you are paid something from production.......I have involvement in a group of 5 Clinton wells in carroll county  was paid 5 bucks and change in 2014 so I am HBP of course what ever your lease reads is the way that HBP works   my lease reads that the wells have to have production of some sort within a 12  month period......nothing to do with profitability  for the producer

Permalink Reply by william r rinehart on July 10, 2015 at 5:00am

All,
I talk to a lawyer on this and he said it cost around $10,000. because the driller will lawyer up as he put it. I did much research on this and the prodcution numbers are provided by the driller. His production numbers remain the same year in and year out. What I found odd was there was an oil leak at the tank on one of the pipes, so a nieghbor called ODNR and they sent someone out called the driller, driller hire someone to fix the leak.
By luck we where there when the guy show up, and what he found was the pipe was under pressure due to the fact the pump was not working. The pump was located a mile away, and did not work, maybe has not worked for a while, who knows. How do you get prodcution when the pump does not work?
Fox guarding the hen house,
Bill

Mike MurphyPermalink Reply by Mike Murphy on July 10, 2015 at 7:22am

all the production lines have pressure on them .......even if the pumps not working you still would get some gas production from any given well .....cant figure out what this has to do with HBP....if you receive a royalty from a well you are HBP....no matter if a pipe leaks or some kinda pump is not working

Permalink Reply by Paul Martinelli on July 10, 2015 at 7:55am

What I was trying get at is the following:

The lease says in "paying quantities"

So....if a well cost so much a year to maintain/insure....whatever total costs are.

How little NG is need to be produced to be profitable?

Is 100  MCF/month enuff (~$2500 Gross to Producer)?

There has to be some numbers out there that say a well cost ~$XXXX to maintain per year.

Permalink Reply by Charles Hurlburt on July 10, 2015 at 12:17pm

While I wish there was a more definite number to include, as long as a lease can be shown to make ANY profit; that is if it makes as little as one cent more than it costs to operate, it is producing in paying quantities.

Costs of acquiring the lease and drilling/completing the well are NOT included in the "operating costs"  nor, I believe would any legal fees associated with a Lessor;s attempt to prove the well was HBP
(fpr that matter ANY legal fees may not be considered s "costs of production" depending on the Court).

Further generally speaking, unless there is a lease provision or state federal statue otherwise, Courts have customarily allowed a "reasonable" time for a lease to be in non-production status, to allow for such things as well or equipment repair, acts of God (floods, fires etc.) and so forth although those may lso be covered under the Force Majeure clause of the lease

Mike MurphyPermalink Reply by Mike Murphy on July 10, 2015 at 12:51pm

if he lease reeives as little as 1 cent in a year in royalties with the producer makes a profit or not the lease is held by production .......what profit or no profit to the producer makes no bearing  on HBP  if they produce anything you are HBP

unless there is a minimum amount in your lease agreement ......in most cases there is not  

Permalink Reply by Charles Hurlburt on July 10, 2015 at 1:29pm

Exactly!

Some of the leases I administer have such a "minimum royalty" requirement (not much, just a couple of hundred dollars per year for an 160 lease) and for years I argued that a marginal lease that didn't return at LEAST the cost of the minimum royalty should expire.  I lost that fight every time; the minimum royalty is simply not one of the "cost of production" item we can check. 

However,  that turns out to be a double edged sword for some producers.  The extra royalty isn't a cost to produce, but payment of the royalty in lieu of production doesn't hold the lease--FAILURE to pay can lose a lease but simply paying the amount can't hold one absent real production.

Please note that we are talking about the least valuable leasehold properties in your area; the ones that just barely produce at best and maybe don't produce t worst. 

Permalink Reply by william r rinehart on July 13, 2015 at 1:59am

Mike,

the point I was trying to make is unless you pay a lawyer to audit production numbers there is now way of knowing what is true. The driller supplies the production numbers, are they real or are they just trying up the land, waiting for the large offer from a driller? I was part of a large farm theat was sold off in parcels.

I think the original owners receive $10.00 for the year.

Bill

 

Mike MurphyPermalink Reply by Mike Murphy on July 13, 2015 at 2:22am

I expect your talking about old Clinton wells and most of them are exhausted and most of them are making the oil companies able to HBP the acreage as long as the landowner received a royalty check no matter how big or how small it is    production royalties have nothing to do with how profitable a well is to the producer  as long as u get royalties u are HBP  and even though they may have abandoned and plugged some of the wells on the property as long as one well makes revenue you are HBP on the whole property   the original owner received 10 bucks he was paid for production if this year they pay 1 buck you are still HBP 

Permalink Reply by White Tiger on July 10, 2015 at 1:10pm
I have a friend of mine that had that problem and went to Critchfield, Critchfield & Johnston, Ltd out of Wooster. they took care of it, and negotiate a new lease for him at $5000 and 18% an acre for 1/3 of the of the new lease bonus money no royalty. Don't know how true that is but that's what he told me.

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