Paying Quantities

A lot of people subscribe to the myth that an oil and gas lease stays in force as long as the lessee pays the lessor some royalty at least once a year. As a result of this myth, you may see leases going on and on with eighty or so barrels sold off every December. Of course, if the lease itself has a provision that makes this good enough, then so it is. But I’ve never seen such a lease with anything like that as a standard provision, and it’s extremely rare to see it added as a special provision.

In the absence of special provisions, a lease will remain in force so long as it continues to produce in “paying quantities”. There are two facets to this term. The first is the arithmetic of comparing income to expenses to see whether it’s in the red or the black. The second is the time period over which this determination is made. Obviously, a one month period would be too short to get an accurate view, unless it’s otherwise established that it’s a typical month over the long haul. Courts have applied time periods ranging from a few months to a few years. It depends on what’s sufficient to enable the court to say that it would provide a reasonable and prudent operator sufficient data to determine whether the lease should be produced or abandoned.

There’s a standard litany of cases seen in virtually every brief on the issue of whether a lease has terminated for lack of production in paying quantities. The basic brief reads something like this:

“Paying quantities” means production of quantities of oil or gas sufficient to yield a profit to the lessee over operating expenses, even though the drilling costs, or equipping costs, are never recovered, and even though the undertaking as a whole may result in a loss to the lessee. Reese Enterprises, Inc. v. Lawson, 220 Kan. 300, 553 P.2d 885 (1976).

The question of whether the requisite profit has been made is answered by using an objective mathematical test. In order to apply the test an appropriate accounting period must be selected, and the proper income and expense items must be identified. These elements were considered at length in Texaco, Inc. v. Fox, 228 Kan. 589, 618 P.2d 844 (1980).

If there is production in paying quantities, then the lease is valid and continues in force; if production in paying quantities has permanently ceased, then the lease has expired of its own effect under the terms of the habendum clause. Kelwood Farms, Inc. v. Ritchie, 1 Kan. App. 2d 472, 571 P.2d 338 (1977).

An oil and gas lessee, temporarily ceasing production, thereafter has only a reasonable time, under all the circumstances, to return the leasehold to production in paying quantities. Wrestler v. Colt, 7 Kan. App. 2d 553, 644 P.2d 1342 (1982).

A mere temporary cessation of production because of necessary developments or operation does not result in the termination of an oil or gas lease or the extinguishment of rights acquired under its terms. Whether the cessation of production at an oil or gas leasehold is temporary or permanent is a question of fact to be determined by the trial court. Eichman v. Leavell Resources Corp., 19 Kan.App.2d 710, 876 P.2d 171 (1994).

A load of oil a year may or may not amount to paying quantities. The bigger issue is, actually, the subject of a different covenant, one that you generally won’t see actually written in the lease. We’ll talk about this implied covenant in a later article.

Outsourcing and Miscellaneous

It’s not just IT and assembly line work that’s being outsourced overseas. It appears that legal work is being outsourced, as well. I don’t know what to think about that. All I can think to say is, “Hmm.”

Given some of my experiences in court the last several years, I’m going to have to take this kind of thing seriously. I’ve always felt that it was important to have your mojo working whenever going to court, but these days natural born mojo doesn’t seem to be enough. Clearly, there’s some kind of spell casting or black magic going on, as there’s no rational explanation for some of the things I’ve seen in court.

I happened across The ‘Lectric Law Library’s Legal Lexicon the other day. It’s not quite Black’s Law Dictionary, but it’s pretty good and it’s handy.

Dirty Secrets About Legal Fees

Don’t get me started about legal fees. Not because I would talk for hours, but because I’d really just as soon not talk about ’em at all. Legal fees, charging ’em, collecting ’em, are the second most stressful aspect of my legal life. If you want to know the most stressful, it’s having to deal with assholes who are abusing the legal system for personal greed, at the expense of my clients. That, in turn, contributes to the stress of legal fees, since right from jump street I’m believing that in a just world my client shouldn’t be put in the position of having to pay thousands of dollars for legal fees in the first place. I should do my part to make it a just world, shouldn’t I?

I was near dumbfounded when I saw this Dirty Little Secrets article about what some lawyers actually charged their clients for. That kind of stuff is so foreign to anything I would even think about doing, that I wanted to believe the clients were just making it up out of spite. But, I’m afraid that’s probably not the case. So, it got me to thinking that maybe I’m way out of line, in the opposite direction, about how I charge fees.

As opposed to double billing, I’ll actually discount my billing if I think something I spent ten hours doing could maybe have been done in less time if I would’ve worked faster or harder. There’s that popular joke about the 50 year old lawyer who dies and is greeted by St. Peter who says the lawyer looks awfully young, inasmuch as he must be at least 150 according to the time he’s billed his clients. I won’t have that problem. St. Peter will be looking at my time records and asking how I thought I could get by only working four hours a day, like I must be some sort of sloth.

I mean, who can’t work a little harder or a little faster? How many lawyers actually even turn off the clock when they take a 20 minute break from the brief they’re working on? I guess not many. Hmm, maybe I could afford to join a gym if I would think about a case a few times while working out, so I could bill out the gym time. Any guesses how many lawyers actually do that?

Well, in the end, maybe my approach is one of the reasons that once I have a client, I generally have a loyal client. But, I wonder, is that because I’m me, or because I’m cheap? Maybe it’s time to start finding out.