Four Issues to Watch in Oil and Gas Law in 2021
By Christopher Hogan, Trial Attorney & Founding Partner, Hogan Thompson LLP
2020 was a year for the history books, both in the energy industry and the world as a whole. While oil prices have been volatile for much of the last decade, few would have predicted West Texas Intermediate to trade at below $0 per barrel following an oil-price war and the arrival of the COVID pandemic. These monumental changes should make for an interesting year in energy litigation. Below, I have outlined four issues relating to oil and gas disputes I think we’ll see start to see in courthouses across the country.
1. What happens to “paying quantities” during negative prices? Most leases allow for a lessee to retain its leased interest so long as oil or gas is being produced “in paying quantities.” Lessors and lessees have been fighting in court for decades about what exactly that means. But the events of 2020 are going to add another layer of complexity: How will courts treat the plunge in oil prices that took place in 2020? Lessees seem likely to ask courts to recognize the unprecedented circumstances and take a wider view of the timeframe used for paying quantities. Lessors may try to narrow the “paying quantities” inquiry to a shorter timeframe centered on the time when prices were at their lowest (or even negative). Courthouses in Texas and other oil-producing states are likely to see more of these disputes crop up in 2021, though it seems unlikely that operators will get any kind of recorded appellate decisions on the issue until at least 2022.
2. Force majeure claims based on the impact of COVID will start to make their way through the court system and will continue to multiply. When events go haywire, the first place that parties often look is their force majeure (or “Act of God”) clause, which details when and how parties can be relieved from their contractual obligations based on unexpected events. In 2020, oil and gas operators across the United States were looking closely at these clauses in their leases and other agreements. Parties will often disagree about whether events like what we saw in 2020 qualify under their particular clauses. Some of the disagreements will be based on the text of the clause, while others will be a more fundamental disagreement about whether the events of 2020 should be treated more like a typical decline in commodity prices (usually not a force majeure event) or an extraordinary pandemic. Many of these disputes have already landed in court, and we’ll likely start to see the first trials involving this issue in 2021.
3. Fights over drilling obligations. Over the last decade, most new leases I have seen executed in major shale plays like the Permian and Eagle Ford contain some kind of continuous drilling obligation. These usually require a lessee to drill a new well every so often on a lease or risk a partial termination of the lease. Lessors want to be sure that lessees are developing their property and do not want to rely on more imprecise implied covenants to secure that development. But many of these agreements were struck in a very different price environment and did not account for a multi-month pandemic shutdown when drilling may have been very difficult or impossible to undertake. Disputes related to these drilling obligations—already prevalent in courthouses throughout various shale plays—are likely to multiply in 2021.
4. Reverse RPO claims. Perhaps the most interesting thing that I saw in 2020 was a role reversal when it came to allegations about oil and gas companies not being “reasonably prudent operators.” Most of the time, lessors or non-operator parties under joint operating agreements (“JOAs”) claim that an operator is not being prudent when it fails to drill or complete new wells on a property. After all, those lessors or non-operators want to see the property developed. But in 2020, I saw parties claim that operators were not being prudent when they went forward with planned developments despite the change in the pricing environment. When disputes like these start to make their way to court, it will be interesting to see how courts apply the “reasonably prudent operator” standard in this novel context.