American Oil and Gas Reporter - April 2016 - 109

ConventionCoverage: Illinois Oil & Gas Association
well? Have I created circumstances . . .
that may result in litigation?"
Matthew L. McArthy, who engages
in private practice in Carmi, Il., discussed
habendum clauses and their variations,
and lease modifications such as requirements for additional drilling, shut-in royalty clauses and force majeure.
Generally, he said, the definition of production requires "lifting of oil and/or gas
through the wellbore to the storage facility
or pipeline. Flaring gas is not production."
Neither, he added, is occasionally selling oil that was produced much earlier.
"You must have oil going into the tank,"
he insisted.
Although courts in many jurisdictions
have interpreted habendum clauses to
imply production in paying quantities,
McArthy said that was not true in Illinois.
In Gillespie v. Ohio Oil Co., he said, the
Illinois Supreme Court held the lease
was extended, "even though the quantity
produced was so small as to make the
venture unprofitable."
Other important lease provisions,
McArthy indicated, include Pugh clauses,
both vertical and horizontal. He said vertical Pugh clauses could limit the acreage
held by a well to only the acreage included
in the drilling unit. There are a number
of variations to horizontal Pugh clauses,
he added, such as holding only to the
depth of the well or to 100 feet below the
depth of the well, holding only to the
depth of the deepest producing formation,
or only the producing formations.
If conditions make fulfilling lease
work obligations impractical, McArthy
encouraged operators to consult their
lessors. "They probably don't want you
to produce the well at this price either,"
he opined. "But you have to ask for it."
If temporary cessation of production
leads to a legal challenge, McArthy encouraged operators to keep good records
of maintenance activities. "There needs
to be evidence you are preparing to restart
operations," he advised.
Hedin seconded that. "Judges love detail; they love chronology," he said. "Keep
your taxes paid. Keep your well fees
paid. Keep your power on. Keep it on
some kind of pumper schedule. Be able
to say two years after the fact, 'Yes, my
pumper didn't check it every day, but he
checked it (regularly) to make sure things
were in good shape.'"
Creditors And Investors
The key to dealing with creditors and
investors in difficult times, suggested C.
Michael Witters, who practices law in
Mt. Carmel, Il., is communication. Bankers

understand that cash flow is down, they
simply don't want to be ignored, he insisted. And mortgagors aren't without
leverage, he held.
"The absolute last thing the bank wants
is to operate 48 wells," he illustrated.
"The bank wants you to keep operating
your wells and work it out. The only way
that is going to happen is for you to
make a deal."
It is important the operator have a
plan, Witters said. Options include negotiating a lower interest rate, making interest-only payments, or lengthening the
term of the loan, he suggested.
Witters also advised communicating
with balky working interest owners, especially less sophisticated investors. "Offer
to buy them out," he counseled. "The absolute worst thing for you to do is ignore
their calls and keep sending operating
bills where the deficiencies keep getting
bigger. At some point they are going to
call somebody ugly."
As a last resort, Witters said an operator
could file a lien against a delinquent
working interest owner. "Illinois has a
really nice oil and gas lien statute," he
observed. "It allows you to go back two
years on operational expenses and collect
a fair rate of interest. If you have to file a
lawsuit to foreclose the lien, you get to
charge the investor your attorney fees.
That is a big club."
Regulatory Compliance
Jarred R. Tynes, an attorney with Black,
Hedin, Ballard, McDonald PC in Mt. Vernon, Il., reviewed regulatory requirements
for idle wells. In Illinois, he detailed, a
well on an active lease that has not produced in 24 months must either be plugged
and abandoned or seek temporarily abandoned status. If the lease itself is inactive,

TA is not an option, he added.
If a TA request is denied, Tynes said
the operator had 90 days to plug the well
or correct the deficiency. TA status is
good for two years and may be renewed
if the well remains in compliance and
the lease stays active.
"Class II UIC wells have similar requirements for TA status," he remarked.
Turning to Illinois Department of Natural
Resources rules, Tynes said IDNR could
issue a notice of noncompliance for unintentional violations that were capable of
being remediated within 120 days and that
wouldn't cause significant environmental
harm or property damage. More serious
issues that will result in a notice of violation
include such things as drilling or operating
without a permit, failing to maintain a
bond or pay the annual well fee, failing to
maintain mechanical integrity, not responding to a crude oil or saltwater spill, or improper discharge or disposal of produced
fluids, he enumerated.
An NOV is followed by a director's
decision, which may affirm, vacate or
modify the NOV, Tynes went on. The director's decision also may include a fine,
regardless whether the violation has been
abated. "There is nothing in the regulations
that says if you abate the violation within
the prescribed time frame that the director
won't assess a penalty," he emphasized.
The operator may appeal a director's
decision, which Tynes said could result
in a new or amended decision, or a settlement agreement. "If (IDNR) amends
or replaces the director's decision, it
results in waiving your right to any further
hearing," he cautioned. "So consider what
you are asking for. It is possible you
could get an amendment you still don't
like, and now you have waived your right
to a hearing."
❒

Geologist Dale Helpingstine
(center), a member of the
Illinois Oil & Gas Association
Award Committee, presents
the association's Wildcatter
of the Year Award to Robert
Stewart (left), president of
Stewart Producers Inc. in Mt.
Vernon, Il., during the association's annual meeting,
March 3-4 in Evansville, In. At
right is prospect geologist
Mike Tucker. Stewart Producers completed the
Illinois Minerals No. 30-1 on
Sept. 28 as an extension to
the Sesser Field in Franklin County. The well came in producing 52 barrels of oil a day from
Renault Sand perforations between 2,667 and 2,671 feet. As of Feb. 1, it still was making 50
bbl/d oil.

APRIL 2016 109

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