Preview-microThe collapse in oil prices since June 2014, and the significant drop in those for natural gas, have put tremendous pressures on relationships in the industry. The stresses — between operators and non-operators, lessees and royalty owners, principals and contractors, investors and investees, among others — make legal disputes both more likely and harder to forgive.

In light of the strains within the oil and gas industry, what sorts of claims can you expect to see in 2015? In this series — which originated as a paper for the 66th Annual Oil & Gas Law Conference in Houston — Blawgletter will offer the top seven answers.

We start with Busting leases – when does failing to produce in paying quantities entitle the lessor to kick the lessee out?

Why bust a lease

Let's start with the why — what could prompt a party to a lease to want to bring it to an end. The answer generally has to do with the terms of the lease or with the parties' course of performance under it. The minerals owner — the lessor — will prefer a higher royalty rate (25 percent, say) over a lower one (12.5 percent, for instance) because the higher percentage means more money to her. The lessee, on the other hand, will want to pay as a smaller percentage. And all kinds of difficulties and breaches may make either party unhappy with the contractual relationship and therefore anxious to end it.

Legal backdrop 

The ability of a well to produce oil or gas “in paying quantities” generally will extend the lease until the quantities will no longer pay a profit, even a “small” one. Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684, 690-91 (1959). “Whether there is a reasonable basis for the expectation of profitable returns from the well is the test.” Id. at 691; see, e.g., T.W. Phillips Gas & Oil Co. v. Jedlicka, 615 Pa. 199, 42 A.3d 261, 276 (2012) (applying Cliftonstandard). Several factors may enter into the analysis, including what constitutes “a reasonable period of time under the circumstances” for turning a profit. Clifton, 325 S.W.2d at 691.

The capacity to produce at a profit holds the lease whether or not profitable production in fact occurs, but the well must flow without additional equipment or repair. See, e.g., Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 557-58 (Tex. 2002); Pack v. Santa Fe Minerals, 869 P.2d 323, 326-27 (Okla. 1994) (stating that “the lease in the case at bar cannot terminate under the terms of the habendum clause because the parties stipulated that the subject wells were at all times capable of producing in paying quantities”). Even if a well no longer pays but still produces some oil or gas, a second prong of the test may save the lease anyway. In that situation, the party seeking to end a lease must show also that a reasonably prudent operator would not have continued operations for the purpose of profit rather than mere speculation. EnerQuest Oil & Gas, LLC v. Plains Expl. & Prod. Co., 981 F. Supp. 2d 575, 597 (W.D. Tex. 2013) (citingCannon v. Sun-Key Oil Co., Inc., 117 S.W.3d 416, 421 (Tex. App. – Eastland 2003, pet. denied)). A total cessation of production may also permit termination of a lease. Cannon, 117 S.W.3d at 421-22.

Changes in market prices of course affect whether or not a well can produce in paying quantities. A large price rise may make low-producing wells capable of paying, while a plunge in price may turn profitable wells into losers. In the pricing climate of early 2015 – when crude oil prices in the U.S. had fallen from more than $100 per barrel (in June 2014) to less than $45 and gas had gone from over $4 per MMBtu (with a $6 spike in February 2014) to below $3 – some lessors and lessees who want to break leases may have a chance.

Claim economics

The basic economics of pursuing claims (whether in a lawsuit, arbitration, or otherwise) will make some claims more viable than others. In general, the same traits that render a claim attractive to a contingent-fee lawyer will determine whether the potential gain supports risking your own resources (e.g., hourly fees plus expenses) in the endeavor. On a lease-busting claim by a lessee for failure to produce in paying quantities, favorable characteristics will include these:

  • Large non-producing reserves within the lease area (making the future bright for whoever controls the minerals);
  • Successful use of production-maximizing techniques in the relevant formation on or near the acreage (tending to enhance the revenue stream);
  • Demand for but failure of the operator to employ the successful techniques or perform repairs, including as a result of financial distress (putting the equities on the lessor's side);
  • Unfavorable lease terms from the lessor’s perspective (e.g., below-market royalty rate);
  • Pipeline access from the tract to points of sale (improving the ability to obtain market prices); and
  • Low wellhead prices due to temporary oversupply (possibly implying a speculative motive on the part of the operator for holding the lease).

These features suggest a situation in which an operator may have sacrificed the lessee’s interest in maximizing current production (and therefore royalties) at the altar of saving money during an industry downturn. They also indicate a potentially large upside for the mineral owner, who without the existing lease could enter into a more favorable one or develop the minerals herself.

*   *   *   *

Next in the series — the obligation of operators to use the latest technology for drilling and completing wells.

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Photo of Barry Barnett Barry Barnett

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck…

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck Redden).

Barnett is a Fellow in the American College of Trial Lawyers, and Lawdragon has named him one of the top 500 lawyers in the United States three years in a row. Best Lawyers in America has honored him as “Lawyer of the Year” for Bet-the-Company Litigation (2019 and 2017) and Patent Litigation (2020) in Houston. Based in Texas and New York, Barnett has tried complex business disputes across the United States.

TRIAL COUNSEL
Barnett’s background, training, and experience make him indispensable to his clients. The small-town son of a Texas roughneck and grandson of a Texas sharecropper, Barnett “developed an unusual common sense about people, their motivations, and their dilemmas,” according to former client Michael Lewis.

Barnett has been historically recognized for his effectiveness and judgment. His peers chose him, for example, to the American College of Trial Lawyers and American Law Institute. His decades of trial and appellate work representing both plaintiffs and defendants have made him a master strategist and nimble tactician in complex disputes.

Barnett focuses on enforcement of antitrust laws, the “Magna Carta of free enterprise,” in Supreme Court Justice Thurgood Marshall’s memorable phrase. “Barry is one of the nation’s outstanding antitrust lawyers,” according to Joseph Goldberg, a member of the Private Antitrust Enforcement Hall of Fame. Named among Texas’s top ten antitrust lawyers of 2023, Business Today calls Barnett a “trailblazer” among the “distinguished legal minds” who “dedicate their skill and expertise to the maintenance of healthy competition in various sectors” of the Lone Star State’s booming economy. Barnett is also adept in energy and intellectual property matters and has battled for clients against a Who’s Who list of corporate behemoths, including Abbott Labs, Alcoa, Apple, AT&T, BlackBerry, Broadcom, Comcast, Dow, JPMorgan Chase, Samsung, and Visa.

Barnett commands a courtroom with calm and credibility and “is the perfect lawyer for bet the company litigation,” said Scott Regan, General Counsel of former client Whiting Petroleum. His performance before the Supreme Court in Comcast Corp. v. Behrend prompted the Court to withdraw the question on which it had granted review. The judge in a trial involving mobile phone technology called Barnett “one of the best” and that his opening statement the finest he had ever seen. Another trial judge told Barnett minutes after a jury returned a favorable verdict against the county’s biggest employer that he was one of the two best trial lawyers he’d ever come across—adding that the other one was dead.

COMPLETE PACKAGE
A versatile trial lawyer, Barnett knows how to handle a case all the way from strategic pre-suit planning to affirmance on appeal. He’s tried cases to verdict and then briefed and argued them when they went before appellate courts, including the Second, Third, Fifth, and Tenth Circuits, the Supreme Court of Louisiana, and (in the case of Comcast Corp. v. Behrend) the Supreme Court of the United States.

Barnett is a sought-after public speaker, often serving on panels and talking about topics like the trials of antitrust class actions and techniques for streamlining complex litigation. He also comments on trends in commercial litigation and the implications of major rulings for outlets such as NPR, Reuters, Law360, Corporate Counsel, and The Dallas Morning News. He’s even appeared in a Frontline program about underfunding of state pensions, authored chapters on “Fee Arrangements” and “Techniques for Expediting and Streamlining Litigation” (the latter with Steve Susman) in the ABA’s definitive treatise on Business and Commercial Litigation in Federal Courts, 5th, and commented on How Antitrust Enforcers Might Think Like Plaintiffs’ Lawyers.

HARD GRADERS
Clients and other hard graders have praised Barnett for his courtroom skills and legal acumen.

A client in a $100 million oil and gas case, which Barnett’s team won at trial and held on appeal, said Barnett and his team “presented a rare combination of strong legal intellect, common sense about right and wrong, and credibility in the courtroom.” David McCombs at Haynes and Boone said Barnett “has a natural presence that goes over well with juries and judges.”

Even former adversaries give Barnett high marks. Lead opposing counsel in a decade-long antitrust slugfest said “Barry is a highly skilled advocate. He understands what really matters in telling a narrative and does so in a very compelling manner.”

CIVIC ENGAGEMENT
Barnett relishes opportunities to collaborate with all kinds of people. At the Center for American and International Law (CAIL), founded by a former prosecutor at Nuremberg in 1947 and headquartered in the Dallas area, he has served on the Executive Committee, co-chaired the committee that produced CAIL’s first-ever strategic plan, supported CAIL’s Institute for Law Enforcement Administration and other development efforts, and proposed formation of a new Institute for Social Justice Law. CAIL’s former President David Beck said “Barry is extremely bright” and is “very well prepared in every lawsuit or professional task he undertakes.”

Barnett is also a Trustee of the New-York Historical Society, a Sterling Fellow at Yale, a member of the Yale University Art Gallery’s Governing Board, a winner of the Class Award for his work on behalf of his college class, and a proud contributor to the Yellow Ribbon Program at Harvard Law. Barnett’s pro bono work includes leading the trial team representing people who are at greatest risk of severe illness and death as a result of being exposed to the novel coronavirus SARS-CoV-2 while being detained in the Dallas County jail—work for which he received the NGAN Legal Advocacy Fund RBG Award.

At Susman Godfrey, Barnett has served on the firm’s Executive Committee, Employment Committee, and ad hoc committees on partner compensation, succession of leadership, and revision of the firm’s partnership agreement. He also twice chaired the Practice Development Committee.

KEEPING PERSPECTIVE
Barnett understands that clients face many pressures. Managing the stress is important, especially in matters that take years to resolve. He encourages clients to call him whenever they have a question or concern and to keep the inevitable ups and downs in perspective. He wants them to know that he will do his level best to help them achieve their goals. He also strives to foster trust and to make working with him a pleasure.

Cyrus “Skip” Marter, the General Counsel of Bonanza Creek in Denver and a former Susman Godfrey partner and client, said Barnett is “excellent about communicating with clients in a full and honest manner” and can “negotiate for his clients from a position of strength, because he is not afraid to take a case through a full trial on the merits.” Stacey Doré, the President of Hunt Utility Services and a former client, said that Barnett is “an excellent trial lawyer and the person you want to hire for your bet-the-company cases. He is client focused, responsive, and uniquely savvy about trial and settlement strategy.” A New York colleague said, “Barry is a joy to work with as co-counsel. He tackles complex procedural and factual hurdles capably, efficiently, and without drama.”

PERSONAL
Barnett’s wide-ranging experience and calm, down-to-earth approach enable him to connect with clients, judges, jurors, witnesses, and even opposing counsel. He grew up in Nacogdoches, Texas. He co-captained his high school varsity football team as an All-East Texas middle linebacker while also serving as the Editor of Key Club’s Texas-Oklahoma District, won the Best Typist award, took the History Team to glory, and sang in the East Texas All Region Choir. As Dan Kelly of client Vistra Corp. put it, Barnett is “a great person to be around.”

Barnett is steady and loyal. He has practiced at Susman Godfrey his entire career. He and his wife Nancy live in Dallas and enjoy spending time in Houston and New York. Their daughter works for H-E-B in Houston, and their son is a Haynes and Boone transactions lawyer in Dallas.

As a member of Ivy League championship football teams in his junior and senior years at Yale and a parent of two Yalies, Barnett has no trouble choosing sides for “The Game” in November. And he knows how important fighting all the way to the end is. On his last play from scrimmage, in the waning minutes of The Game on Nov. 22, 1980, he recovered a Crimson fumble.

Yale won, 14-0.