Another significant oil and gas law decision has recently been published out of the Ohio Seventh District Court of Appeals. In the case of Hogue v. Whitacre, 2017-Ohio-9377, released on December 22, 2017, the Seventh District addressed two important issues. First the Court concluded that indirect costs such as costs of accounting, interest, postage, office supplies, telephone charges, and depreciation of office equipment are to be excluded in determining whether a well is producing in paying quantities while royalties, gas severance tax, maintenance, and operating costs directly relating to production of oil and gas are direct costs and will be considered. On the second issue, dealing with temporary cessation of production, the Court considered mechanical issues of an off-lease third party’s facilities as the cause of the temporary cessation, and evaluated the reasonableness of the lessee’s actions in response to that event, rather than limiting a consideration of temporary cessation to mechanical issues only as to the well or lease as is the case in some jurisdictions.
In Hogue, the lessors asserted that the well on the lease entered into in 2006, had failed to produce in paying quantities during the period of 2014 to 2015. Production records showed that the well produced a profit in excess of $1,000 per year from 2006 to 2012, a small profit in 2013, a small loss in 2014 and 2015, and a profit of over $1,000 a year after that. During the time period of the loss, the well was shut in or had minimal production due to the shutdown of the third party transporter’s compressor station for repair and replacement. The trial court ruled...
