Termination of Oil and Gas Leases for Failure to "Produce"
The oil and gas industry is in a state of uncertainty. The price of crude oil, which is depressed and fluctuating, has fallen significantly from 2014 to 2015. Some exploration and production (E&P) and services companies in the industry have filed for bankruptcy protection while others are experiencing operational distress and may soon follow suit.
One consequence of the decline in the price of crude oil is that E&P companies and the companies’ secured lenders may lose interests in oil and gas leases on property in which E&P companies are currently actively producing oil and/or gas. This is so because for a lessee to avoid termination of an oil and gas lease on a lessor’s property, the lessee is required not only to produce oil and/or gas, the production must be in “paying quantities.”
The article discusses a typical habendum clause of an oil and gas lease, the importance and definition of “production in paying quantities,” production in paying quantities litigation in bankruptcy, and best practices for parties holding interests in oil and gas leases that may terminate due to unprofitable production.
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