Legal Definitions - paying quantities

Paying Quantities

In the context of oil and gas law, paying quantities refers to the amount of oil or natural gas produced from a well that is sufficient to cover the costs of operating that well and yield a reasonable profit for the operator. This determination is made from the perspective of a reasonably prudent operator – a hypothetical, sensible, and careful oil and gas company that would make economically sound decisions. If a well is no longer producing in paying quantities, a prudent operator would typically cease operations, as it would be uneconomical to continue.

This concept is crucial because many oil and gas leases contain clauses stating that the lease remains in effect only as long as oil or gas is produced in paying quantities. If production drops below this threshold, the lease may terminate, allowing the landowner to regain control of their mineral rights.

• Example 1: Extending an Oil and Gas Lease

  Imagine a landowner has leased their property for oil and gas exploration. The initial lease term has expired, but the lease includes a clause stating it will continue "as long as oil and gas is produced." A well on the property is still producing, but at a very low rate. The operator must determine if the revenue generated from this minimal production is enough to cover the daily operating expenses (like electricity for pumps, maintenance, and labor) and still provide a reasonable profit. If it does, the well is considered to be producing in paying quantities, and the lease remains active. If not, a prudent operator would likely shut down the well, leading to the termination of the lease and the mineral rights reverting to the landowner.

• Example 2: Deciding to Plug and Abandon a Well

  Consider an older natural gas well that has been in operation for decades. Over time, the gas pressure has decreased, and the volume of gas produced has steadily declined. The operating company regularly assesses the well's performance. They calculate the revenue from the gas sold against the ongoing costs of keeping the well operational, such as regulatory compliance, equipment upkeep, and personnel. If the well's production falls to a point where it no longer generates enough income to cover these expenses and provide a reasonable return on investment, it is no longer producing in paying quantities. At this point, a reasonably prudent operator would decide to plug and abandon the well, as continued operation would result in financial losses.

• Example 3: Justifying a Major Well Repair

  Suppose an oil well experiences a significant mechanical failure that requires an expensive repair, such as replacing a downhole pump or performing a complex "workover" to clear blockages. Before investing a substantial amount of capital into the repair, the operator must project the well's expected production after the repair. They will analyze whether the anticipated increase in oil production, once the repair costs are factored in, will be sufficient to cover both the repair expense and future operating costs, while still generating a reasonable profit. If the projected post-repair production would not meet this economic threshold, meaning it wouldn't be in paying quantities, a prudent operator would likely deem the repair unjustified and instead consider shutting down the well.