Essays Oil & Gas

Front 1

Habendum Clause

Back 1

Establishes a primary term (generally lessee has no obligation to conduct drilling during this period) and a secondary term (indefinite duration usually requiring production in paying quantities)

Front 2

Delay Rental

Back 2

if clause states "unless" it is a CONDITION of the lease and terminates the lease.

If is states "or" it creates a COVENANT and does not terminate the lease automatically; rather, the lessor must sue for breach o contract and damages would be equal to the unpaid amount of rental

If Lessor accepts a late delay rental payment, the lease comes alive again based on a "loose theory of estoppel". This requires an 1) act by Lessor (e.g. cashing check), 2) upon which Lesee has determinately relied.

Front 3

Prouction in Paying Quantities (PPQ)

Back 3

Revenues - lessor''s royalty - operating costs. (don't have to deduct drilling costs). Exceptions to the doctrine include:

1. short, temporary shutdown
2. which lessee acts diligently to fix,
3. that is due to a mechanical breakdown or the like.

Also subject to the MARGINAL WELL DOCTRINE. Some wells only produce PPQ during some months of the year. The test is whether a REASONABLY PRUDENT OPRATOR would continue to operate to make a profit.

Front 4

Force Majeure

Back 4

While this clause may excuse the performance of certain covenants, it will not excuse the failure to perform a condition.

Front 5

Defenses to not complying with the secondary term in the Habendum Clause

Back 5

While the Habendum Clause is generally strictly contrued against lessee, several docrines save it:

1. Temporary Cessation Doctrine - Once actual production in paying quantities has tarted, a "sudden stoppage of the well or mechanical breakdown of equipment" will not terminate the lease as long as the lessee acts DILIGENTLY to restore proaction in a REASONABLE AMOUNT OF TIME.

2. Force Majeure Clause