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Permalink Reply by White Tiger on July 10, 2015 at 1:13pm

By the way my friend just built a new house with the money from his lease.

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Permalink Reply by Barry D on July 10, 2015 at 2:55pm

Paul,

Who defines the term " paying quantities" ?

One man's paying quantity is another man's loss.

Many corporations operate multiple facilities. Some make a profit some don't. But over all the corporation makes a profit. So why doesn't a corporation just shut down unprofitable facilities to increase profit? Because more goes into the equation than the simple profitability or lack of profitability to decide whether or not to shutter a facility.

The same is true of o&g wells. Yes there are those operators who are holding on to "un-profitable" wells to maintain leases, But doesn't that actually make the well profitable for the company ? That some day the lease that well holds will pay dividends in a sale of that lease?

Please understand, I am not sayinf the situation is fair to the landowner; it isn't. However, I do see the method to the madness of some of these companies in "producing" marginal wells.

I'd also like to know which law firms have tackled this issue and won; and how.

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Permalink Reply by E Johnson on July 11, 2015 at 6:15am

I do a lot of work in this area, being an o&g attorney. The simple answer to your question, as discussed in numerous Ohio court opinions, is that the lease must be generating a profit.  Profit means income less expenses. The profit need only be minimal, i.e. they are making more money than they are spending.

Where the confusion comes in is in two primary areas.  First, what period of time do we use to determine profit?  If the lease is only unprofitable for a year, I'd say you have a pretty tough case.  Four or five years in a row - that's a different story.

Second, though income is generally pretty easy to figure out (you can simply look at the gas and oil volumes reported to the ODNR and multiply by an estimate price for same), costs are more difficult to determine without actually filing a lawsuit.  Bigger companies, who have larger overhead, likely have more operating costs.  Oil wells, which require brine to be disposed, have higher costs than dry gas wells.  Also, what about the eventual cost of plugging the well and restoring the property?  Is that factored into the cost of production.  

Generally speaking, it does not cost a lot to operate an old gas well that produces mostly gas - could be as little as $200/month - maybe less for a small operator.  

Hope that is helpful.  More can be found about this topic in an article I did here: http://johnsonandjohnsonohio.com/oil-and-gas-lease-ownership-challe... 

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Permalink Reply by Markus on July 11, 2015 at 12:39pm

I am with Mike Murphy on this.  

It is determined by the specific lease language but in cases where it is not specified, as long as a royalty is paid based on revenue derived from producing the well, the lease is HBP.  Royalties should by definition come right off the top, before expenses, so all of the discussion about costs and profits is not relevant. Royalties paid, regardless of amount, based on production equals HBP.

Another thing to consider is that in many cases landowners are receiving house gas which is an important aspect for many and worth keeping that old well online, even if a marginal or minimal producer.  I know many cases where landowners cheat quite a bit on this by heating barns and other outbuildings which thus deprives the producer of revenue from the well, and thus affects royalty amounts.

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Permalink Reply by White Tiger on July 11, 2015 at 2:46pm

What if there is no royalty paid and no production for 2 years? But the lead says as long as oil and gas is found?

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Permalink Reply by Markus on July 12, 2015 at 4:47am

I have seen leases like this and I think that it would most certainly be open to interpretation - does the receipt of house gas mean that oil and/ or gas is indeed found and continues to be found?  I think so.  

Though, in the same leases it is pretty specific that a royalty equivalent to 1/8 needs to be paid on gas sold "as long as oil and/ or gas is found".  

A typical house uses about 100 MCF per year in natural gas (depending on a number of factors of course) so a well does not have to put out that much gas to meet the needs of a residence located on the lease and it is very possible that the residence can use all gas produced by the well leaving no extra gas for the operator to sell.  Hmmmm.  Though in this case, oil and/ or gas is indeed found.

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Permalink Reply by White Tiger on July 12, 2015 at 1:37pm

Thanks for the info.

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Permalink Reply by White Tiger on July 11, 2015 at 2:46pm

Lease

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