COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2023

Commitments and Contingencies Disclosure [Abstract]

Commitments

Firm Transportation Agreements. We are party to a firm pipeline transportation contract to provide a guaranteed outlet for production on an oil pipeline system. The contract requires us to pay minimum volume transportation charges on 12,500 Bbls per day through April 2025, regardless of the amount of pipeline capacity utilized. The aggregate financial commitment fee over the remaining term was $25.4 million as of December 31, 2023. We have not and do not expect to incur any deficiency payments.

Minimum Volume Agreement - Crude Oil. We are party to a transportation services agreement to deliver fixed and determinable quantities of crude oil. Under the terms of the agreement, we are required to make periodic deficiency payments for any shortfalls in delivering the minimum volume commitment of 20,000 Bbls per day over a term ending in December 2028. The aggregate financial commitment fee over the remaining term was $74.9 million as of December 31, 2023. We have not and do not expect to incur any deficiency payments.

Minimum Volume Agreement - Gas and Other. We are party to a gas gathering and processing agreement (the “Gathering Agreement”) with a third-party midstream provider over a term ending in December 2029 with an annual minimum volume commitment of 13.0 billion cubic feet of natural gas. The Gathering Agreement also includes a commitment to sell take-in-kind NGL from other processing agreements of 7,500 Bbls a day through 2026 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 was $79.0 million as of December 31, 2023, which fluctuates with commodity prices as this is a value-based percentage of proceeds sales contract. During the year ended December 31, 2023, we recorded $5.6 million in other operating expense in the accompanying statements of operations based on volume deficiencies relative to the minimum volume commitment. Based on current projections, we may incur approximately $20.6 million of shortfall payments under the Gathering Agreement during the remaining term of approximately six years; however, we are actively engaging alternative strategies to reduce any potential contract deficiencies incurred in future periods.

Additionally, we are 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. Our share of these commitments requires an incremental 51.5 and 20.6 million cubic feet of natural gas (“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. We may be required to pay a shortfall fee for any incremental volume deficiencies under these commitments. These contractual obligations can be reduced by our 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 was zero as of December 31, 2023. We have not and do not expect to incur any deficiency payments.

We are also party to additional individually immaterial agreements that require us to pay a fee associated with the minimum volumes over various terms ending in December 2025, regardless of the amount delivered. The aggregate financial commitment fee over the remaining term for these contracts was $5.8 million as of December 31, 2023.

The minimum annual payments under these agreements for the next five years as of December 31, 2023 are presented below (in thousands):


	Firm Transportation		Minimum Volume(1)
2024	$	18,932	$	29,583
2025	6,501		30,952
2026	—		28,774
2027	—		28,720
2028 and thereafter	—		41,626
Total	$	25,433	$	159,655

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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. We are party to a drilling commitment agreement with a third-party midstream provider such that we are required to drill and complete a total of 106 qualifying 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 we 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 us and our affiliates. As of the date of filing, we cannot reasonably estimate how much, if any, damages will be paid.

Refer to Note 13 - Leases for lease commitments.

Legal Proceedings

From time to time, we are involved in various legal proceedings that arise in the ordinary course of our business. We assess these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in our 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, we 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. We regularly review contingencies to determine the adequacy of our accruals and related disclosures.

As of the filing date of this report, there were no probable, material pending, or overtly threatened legal actions against us of which we are aware.