Recently, the Seventh District Court of Appeals of Ohio in
Joseph and Anna Lang v. Weis Drilling Company, et al., Slip Opinion No. 2016-Ohio-88213, held that estimates derived from a common metering system are insufficient to refute evidence that a lease has failed to produce oil or gas in paying quantities for a period of at least two years, thus terminating under its own terms. The decision is significant as it will help landowners argue property is not "held by production."
In
Lang, Appellant Weis Drilling Company held an oil and gas lease on real property owned by Appellees Joseph and Anna Lang. The lessee measured overall production of several wells through a common metering system and paid estimated royalties to owners based upon the historic performance of the individual wells. The lessor admitted though that it could not show production from individual wells. The trial court determined that because records sent to the Ohio Department of Natural Resources and the IRS showed the wells failed to produce during a five year period, and the lessee could not prove individual well production to refute these records, any claimed production was speculative at best. Consequently, the trial court held that the lease terminated upon its own terms.
On appeal, the Seventh District Court of Appeals reviewed and affirmed the trial court's decision. The Seventh District noted that while it has declined to adopt a bright-line rule as to when a nonproduction period terminates a lease, other appellate districts have held that a lease expires when there is no oil or gas produced for two or more years. Further, the Court stated that "just because [common metering] is accepted by some oil and gas companies does not mean that the trial court had to accept it in this case as a valid means to measure production for purposes of whether a well is producing paying quantities of gas." The Court held that "[i]t is reasonable for the court to require a more accurate method of gas production" than a common metering system. "[The Court] should not be required to guesstimate the amount of gas attributable to the well in question when the party responsible for the metering has chosen to use a common meter for multiple wells as opposed to individual meters for each well."
This decision is notable because it held that: 1) two years of non-production is sufficient to terminate an oil and gas lease; and 2) estimates based upon a common metering system are insufficient to prove that an individual oil or gas well produced in paying quantities during the term of a lease. Further, because the payment of royalties estimated from historic well production are insufficient to refute evidence that a well failed to produce in paying quantities, it is vital that both lessors and lessees keep accurate records for individual wells when production is measured through a common metering system.
