COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2022

Commitments and Contingencies Disclosure [Abstract]

Legal Proceedings

From time to time, the Company is involved in various commercial and regulatory claims, litigation, and other legal proceedings that arise in the ordinary course of its business. The Company assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. In accordance with authoritative accounting guidance, an accrual is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the most likely anticipated outcome or the minimum amount within a range of possible outcomes. Because legal proceedings are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about uncertain future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. No claims have been made, nor is the Company aware of any material uninsured liability which the Company may have, as it relates to any environmental cleanup, restoration, or the violation of any rules or regulations.

Upon closing of the HighPoint, Extraction, and Crestone Peak Mergers, the Company assumed all obligations, whether asserted or unasserted, of HighPoint, Extraction, and Crestone Peak. As of the filing date of this report, there were no probable, material pending, or overtly threatened legal actions against the Company of which it was aware, other than the following:

Boulder County. As of the date of this filing, there is ongoing litigation between Boulder County and Extraction which has been previously disclosed as having the potential to prevent oil and gas operations for the development minerals contained within Boulder County, Colorado. As noted below, this matter remains pending, but the substantive issues have been fully addressed by the appellate court in the Company’s favor and the Company is awaiting a dismissal from the trial court.

Boulder County initiated suit in District Court for Boulder County, Colorado in case no. 2018CV030925. The action was primarily a contract case, where the relevant contracts are the conservation easement (“CE”) over the Blue Paintbrush location, Extraction’s Surface Use Agreement (“SUA”) for the Blue Paintbrush location, and the leases that Boulder owns within the Blue Paintbrush drilling and spacing unit. Boulder sought invalidation of these leases in the litigation.

Boulder argued that the lease underlying the CE only authorize the extraction of minerals underneath the CE property. Boulder took issue with the planned 32 wells for the location and argued that only the number of wells necessary to extract the minerals underlying the CE property should be allowed. Boulder also argued that Extraction induced a breach of the CE by contracting with the CE property owner for the SUA. Boulder argued that the terms of the SUA violate the CE because the SUA allows for development in excess of that allowed under the underlying lease. Boulder’s argument was based on its assertion that the lease underlying the CE property only allows for the extraction of minerals underneath the CE property.

Boulder’s remaining claims asserted that Extraction breached the terms of leases Boulder owns in the drilling and spacing unit by establishing the Blue Paintbrush drilling and spacing unit. Specifically, Boulder’s leases within the Blue Paintbrush drilling and spacing unit have a clause that states that a unit must be the “minimum size tract on which a well may be drilled under the laws, rules, or regulations in force at the time of such pooling or unitization.” Boulder argued that no drilling and spacing unit including acreage covered by these leases can be greater than 80 acres because Colorado Oil and Gas Conservation Commission ("COGCC") Order 407 established 80-acre drilling and spacing units for the Codell and COGCC Order 407-87 established 80-acre drilling and spacing unit for the Niobrara.

On September 25, 2018, Extraction prevailed before the district court on all issues. The district court’s order was appealed, was fully briefed on appeal, and was argued before the Colorado Court of Appeals on December 14, 2021 - Board of County Commissioners of Boulder County v. 8 North and Extraction Oil & Gas, Case No. 2019CA001896 (Colorado Court of Appeals). On March 3, 2022, the Colorado Court of Appeals issued a unanimous opinion rejecting Boulder County's claims. Under the Colorado Rules of Appellate Procedure, Boulder County had forty-two days to petition the Colorado Supreme Court for certiorari. This date passed, and on April 25, 2022, the Court of Appeals issued a mandate affirming the judgment of the District Court of Boulder County. There are no outstanding issues for consideration by the trial court, and the Company is authorized to rely upon the Colorado Court of Appeals mandate.

Enforcement. Disclosure of certain environmental matters is required when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that the Company believes could exceed $0.3 million. The Company has received Notices of Alleged Violations (“NOAV”) from the COGCC alleging violations of various Colorado statutes and COGCC regulations governing oil and gas operations. The Company has further received notices from the Colorado Air Pollution Control Division. The Company continues to engage in discussions regarding resolution of the alleged violations. As of March 31, 2022 and December 31, 2021, the Company has accrued approximately $1.0 million associated with the NOAVs and Colorado Air Pollution Control Division notices, as they are probable and reasonably estimable.

Commitments

Firm Transportation Agreements. The Company is party to one firm pipeline transportation contract to provide a guaranteed outlet for production on an oil pipeline system. The contract requires the Company to pay minimum volume transportation charges on 8,500 gross barrels per day through April 2022 and 12,500 barrels per day thereafter through April 2025, regardless of the amount of pipeline capacity utilized by the Company. The aggregate financial commitment fee over the remaining term was $44.7 million as of March 31, 2022. The Company expects to utilize most, if not all, of the firm capacity on the oil pipeline system.

Minimum Volume Agreement - Oil. The Company is party to a purchase agreement to deliver fixed and determinable quantities of crude oil. This agreement includes defined volume commitments over a term ending in 2023. Under the terms of the agreement, the Company is required to make periodic deficiency payments for any shortfalls in delivering minimum gross volume commitments, which are set in six-month periods. The minimum gross volume commitment will increase approximately 3% each year for the remainder of the contract, to a maximum of approximately 16,000 gross barrels per day. The aggregate financial commitment fee over the remaining term is $31.7 million as of March 31, 2022. Upon notifying the purchaser at least twelve months prior to the expiration date of the agreement, the Company may elect to extend the term of the agreement for up to three additional years. Since the commencement of the agreement and through the remainder of its term, the Company has not and does not expect to incur any deficiency payments.

Minimum Volume Agreement - Gas and Other. The Company is party to a long-term gas gathering and processing agreement (the “Gathering Agreement”) with a third-party midstream provider over a term ending in 2029 with an annual minimum volume commitment of 13.0 billion cubic feet of natural gas (“Bcf”). The Gathering Agreement also includes a commitment to sell take-in-kind NGLs from other processing agreements of 7,500 barrels a day through year seven of the Gathering Agreement with the ability to roll forward up to a 10% shortfall in a given month to the subsequent month. The aggregate financial commitment fee over the remaining term is $145.5 million as of March 31, 2022. The Company has not and does not expect to incur any deficiency payments.

Additionally, the Company is also party to a gas gathering and processing agreement with several third-party producers and a third-party midstream provider to deliver to two different plants over terms that end in August 2025 and July 2026. The Company’s share of these commitments requires an incremental 51.5 and 20.6 MMcf per day, respectively, over a baseline volume of 65 MMcf per day for a period of seven years following the in-service dates of the plants. The Company may be required to pay a shortfall fee for any incremental volume deficiencies under these commitments. These contractual obligations can be reduced by the Company’s proportionate share of the collective volumes delivered to the plants by other incremental third-party volumes available to the midstream provider that are in excess of the total commitments. Because of the third-party producer reduction provision, we believe that the aggregate financial commitment fee over the remaining term is zero as of March 31, 2022. The Company has not and does not expect to incur any deficiency payments.

The Company is also party to two additional agreements that require the Company to pay a fee associated with the minimum volumes regardless of the amount delivered. The aggregate financial commitment fee over the remaining term for these contracts was $12.5 million as of March 31, 2022.

The minimum annual payments under the these agreements for the next five years as of March 31, 2022 are presented below (in thousands):


	Firm Transportation		Minimum Volume(1)
Remainder of 2022	$	10,616	$	42,589
2023	14,600		32,241
2024	14,640		22,298
2025	4,800		20,400
2026	—		19,553
2027 and thereafter	—		52,716
Total	$	44,656	$	189,797

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(1)The above calculation is based on the minimum volume commitment schedule (as defined in the relevant agreement) and applicable differential fees.

Other commitments. The Company is party to a drilling commitment agreement with a third-party midstream provider such that the Company is required to drill a total of 106 horizontal wells, whereby a minimum number of wells out of the total must be drilled by a deadline occurring every two years over a period ending December 31, 2026. The drilling commitment agreement provides for, among other things, a number of specifications such as minimum consecutive days of production, well performance, and lateral length. Wells operated by others can satisfy this commitment, subject to limitations. If the Company were to fail to complete the wells by the applicable deadline, it would be in breach of the agreement and the third-party midstream provider could attempt to assert damages against Civitas and its affiliates. As of the date of filing, the Company cannot reasonably estimate how much, if any, damages will be paid.

Refer to Note 13 - Leases for lease commitments.