Exercise Care In Shutting Down Leases

With the drop in the price of oil, operators may feel compelled to completely shut down operations as to a particular lease. This could prove to be a risky proposition. An IlJinois Appellate Court decision in 2003 stated as follows with respect to the cessation of operations and the status of the lease:

“One of the reasons offered for the defendants’ failure to run the pumps and produce oil was the depressed price of oil. Though a depressed market may have rendered it unprofitable to operate the lease, it did not prevent the operation of the wells. We have reviewed the lease and have found no provision excusing production and marketing in the event that the oil market becomes depressed. The depressed price of oil was not contracted against. Consequently, it cannot be used to justify nonproduction, and it does not prevent a lapse of the lease where production has been shut down.”

The terms of the operative lease should be carefully reviewed to determine any language that addresses cessation of operations and production. Many of the lease forms provide that if the operations are not resumed within a certain number of days, the lease could terminate.

The fact that the wells on a lease are the subject of temporary abandonment status will not excuse the absence of operations and production for purposes of perpetuating the lease.

Before completely ceasing operations as to a lease, the lease provisions should be carefully reviewed. Do not place yourself in a position where it could be argued that the lease has terminated.

Consult with your attorney as to this issue and be cognizant of the minimal operations and production required to perpetuate your lease.