044 Evans v. Gulf Oil Corp.

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of some significance to you.
 
Evans v. Gulf Oil Corp., No. 13-91-008-CV (Tex. App.–Corpus Christi, May 28, 1992, n.w.h.), provides an excellent summary of Texas law relating to determinations of production in paying quantities. The fact scenario is a fairly common one: there was a poor well on the lease, lessee drilled a successful new well, and suit was filed alleging lease termination prior to the completion of the new well.
 
To determine whether a new well is producing in paying quantities, the courts apply a two- prong test:
 

1. Does the production yield a profit after deducting operating and marketing costs, and

2. Would a prudent operator continue, for profit and not for speculation, to operate the well?

 
If the well is profitable under the mathematical first test, then it is profitable and the second test is not applied. If the well fails the first test, then the more subjective and more difficult to prove second test must be applied. Only if the well fails both test #1 and test #2 will it be held that the well has failed to produce in paying quantities and that the lease has terminated. Note carefully that this is the test applied in cases involving the issue of production in paying quantities. Entirely different issues are involved if there is a complete cessation of production.
 
There are many cases attempting to define the appropriate time period and the expenses to be included in “costs” under test #1. The Evans case focused on depreciation of lifting equipment and held that depreciation was includable in “costs,” but the amount to be included was actual, physical depreciation, not the amount calculated under an IRS depreciation schedule.
 
In a time of declining production on mature leases, the case is significant as a reminder of the law which will be applied to determine if a lease is producing in paying quantities.