Held By Production – or is it?

An Introduction to Commerciality Relating to an Oil and Gas Lease

by Randy C. Smith

Many parts of Oklahoma are booming, and new oil and gas leases are being taken. Most people think that if an oil or natural gas well is producing, then the underlying mineral interest is held by that production. In other words, a common belief is that there is no way to get out of the old oil and gas lease in order to lease the mineral interest again so long as the well holding the lease is actively producing some quantity of oil or gas. This is not always true.

Under Oklahoma law, for an old oil and gas lease to be valid, the well holding the lease must be “capable of producing in paying quantities.” To determine whether a well meets this requirement, certain expenses are properly deducted from the gross revenue of the well to determine the overall commerciality of the well. These deductions include taxes, pumping expenses and other well costs. If these expenses are greater than the revenue from the well, that well may be deemed non-commercial.

If you believe a well is non-commercial, title work is required to determine who owns the oil and gas lease holding the mineral acreage. If negotiation with the parties identified in the title report fails to produce a release, a mineral interest owner may file a lawsuit known as a quiet title action seeking to extinguish the lease under the legal theory that the lease is no longer held by production because the well is non-commercial. If the court determines that the well is non-commercial, or a release is otherwise provided, that acreage is deemed open and ready to be leased at a new royalty and with a new lease bonus.

For more information, please contact Randy Smith at 272-9241 or rcsmith@andrewsdavis.com.

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