Face Challenges Confidently

049 Hunt v. HNG Oil Co.

Friday, September 4th, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the ease may be of some significance to you.
Hunt v. HNG Oil Co., 791 S.W.2d 191 (Tex. App.–Corpus Christi 1990, writ den.), addresses the costs of development that the good-faith trespasser can offset against production. HNG drilled a well under a valid lease and found nothing. HNG plugged back and recompleted in a shallow zone at a time when the lease had already expired. The issue was whether HNG could offset the cost of drilling the well against the shallow production.
Held: HNG was entitled to deduct its recompletion costs, production taxes, transportation charges, operating expenses, and royalties paid after expiration of the lease, but was not entitled to deduct drilling costs that occurred before the lessee became a good-faith trespasser. In Texas, a “bad- faith” trespasser loses everything. If he has improved the land by the value of his oil and gas operations, the bad-faith trespasser walks away from all of his improvements and must account for all production. The “good-faith” trespasser, on the other hand, is entitled to deduct from production the value of his drilling, operating, and marketing costs. Thus, when a lessee becomes a trespasser (e.g. by lease termination), it is of critical importance to determine whether the lessee is a good-faith or bad-faith trespasser (usually a question of notice or knowledge) and to determine what expenses can be recouped in the case of a good-faith trespasser.
The case law is not well developed, but the issues for lessee and lessor can be of great economic significance. In this case, the drilling costs were $887,303. Drilling costs are usually the most significant element that might be recoverable. The Amarillo Court has twice considered the issue of whether drilling costs incurred prior to the expiration of the lease are recoverable as valuable improvements made in good faith, when the well later produces in paying quantities. In one case, the drilling costs were recoverable and, in the other, they were not. The significance of the Hunt case is that it highlights again the great risk the lessee assumes in undertaking operations, even when lessee has a reasonable belief that lessee is fully authorized to proceed.