216 In re Nueces Petroleum Corp.
Wednesday, September 2nd, 2015
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
In re Nueces Petroleum Corp., No. 06-3696, 2007 WL 418889 is a production in paying quantities case. The court held that the lease could only be extended under three conditions: production in paying quantities, excused performance under force majeure, or continuous drilling or reworking operations. However, the court held that none of these three conditions were met and the lease terminated.
Analyzing the production in paying quantities issue, the court upheld the lessor’s method of cumulating production revenues less operating costs over multiple months for a reasonable period of time. Lessee contented that the analysis should be monthly, but there is no explanation as to how this could possibly help lessee’s case. There were many months (approximately 20 out of 36) in which there was no production or no production in paying quantities.
The lease was located in wetlands on the banks of the Lavaca River. The land could be flooded by high tides, southerly winds, releases from spillways, and hurricanes. The force majeure clause in the lease extended to various events, “including storm, flood, or other act of God.” Lessee put on some evidence of the difficulties caused by Hurricane Claudette, although other leases in the area did not suspend operations. The court held that the burden was on lessee, and that lessee failed to present any evidence, except on Hurricane Claudette. The court allowed a brief suspension of lessee’s obligations during the period after the hurricane and no other. The lessee was in a unique position to know what effects any alleged flooding produced, but lessee did not bring sufficient evidence of these effects to carry its burden.
Finally, the court held that lessee’s claimed continuous operations were also not enough to preserve the lease as the defendants could not prove that the operations had been conducted in “good faith and in a workmanlike manner” as required by the lease. There was some conflicting witness testimony, but there was evidence that defendant had halted drilling operations on a well to avoid paying overtime (resulting in a lost well), that forty of the forty-two wells on the lease were noncompliant with Texas Railroad Commission requirements, and photographic evidence of multiple well-site deficiencies (including missing equipment) . The court found the work was not “workmanlike” or even competent.