Middleton v. EP Energy E&P Co., L.P., Louisiana Second Circuit, 2016 La. App. LEXIS 160, February 3, 2016

In an action to terminate a lease for lack of production in paying quantities, the finder of fact must consider all factors, including market price, the relative profitability of nearby wells, operating costs, net income and the reasonableness of the expectation of profit.

The Middletons obtained a summary judgment against EP Energy and others terminating their mineral leases covering land in DeSoto Parish. Three identical leases were granted in 1982 and 1983 (the “Whorton leases”) covering 300 acres, none of which contained a Pugh clause. The Louisiana Office of Conversation established the 480-acre PET RA SU45 unit, which included 30 acres of the Whorton leases. Production from the Keatchie well held the leases. The Middletons sought a releases of the Whorton leases in 2012, claiming that the leases terminated. The lessees refused to execute a release.

The evidence showed that, for the 41month period from August 1991 to December 1994, the well made an average profit of $70.87 per month. The trial court held that this was not sufficient to induce a reasonably prudent operator to continue production and ordered the leases terminated on December 1, 1994. EP argued that the trial court erred in considering the 41-month period and ignored the following 17 years. The court held that the standard is “whether or not under all the relevant circumstances a reasonably prudent operator would, for the purpose of making a profit, continue to operate a well in the manner in which the well in question was operated.”

The court held that the trial court, by deciding which evidence to emphasize and which to disregard, the trial court exceeded its role and reversed. The court held that the “fact finder” must consider all of the factors, including the market price available, the relative profitability of other nearby wells, the operating costs, the net income and the reasonableness of the expectation of profit.