6. Lease Liabilities

Effective January 1, 2019, the Company adopted ASU 2016-02 Leases (Topic 842). We first determine if a contract is a lease at inception of the arrangement. To the extent that we determine an arrangement represents a lease, we then classify that lease as an operating lease or a finance lease. As of January 1, 2019, the Company capitalizes its operating leases on the Consolidated Balance Sheet as a right of use asset and a corresponding lease liability. The Company also capitalizes its finance leases on the Consolidated Balance Sheet as other property and equipment and a corresponding lease liability. The right of use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Short term leases that have an initial term of one year or less are not capitalized unless the Company intends to renew the lease to extend the initial term past one year.

We lease certain office space, a storage yard, and field vehicles to support our operations. A more detailed description of the Company’s lease types is included below.

Office and Storage Yard

The Company maintains an office to support its corporate operations. This office agreement is with a third party and was structured with a 39 month initial term and an August 31, 2020 expiration date. The Company renewed the lease for 12 additional months thereby extending the expiration date to August 31, 2021. The Company’s corporate office lease is classified as an operating lease.

The Company maintains an office to support its field operations. This office is with a third party and is on a month-to-month lease. However, the Company intends to continue to renew this lease for the foreseeable future. Based on the Company’s intent to renew the lease, the Company is assuming the same lease term as its corporate office lease for calculation of its right of use asset and lease liability. The Company’s field office lease is classified as an operating lease.

The Company maintains a yard to store certain equipment used in its field operations. This storage yard agreement is with a third party and is on a month-to-month lease. However, the Company intends to continue to renew this lease for the foreseeable future. Based on the Company’s intent to renew the lease, the Company is assuming the same lease term as its corporate office lease for calculation of its right of use asset and lease liability. The Company’s storage yard is classified as an operating lease.

As a result of the renewal of the corporate office lease, the Company recorded right-of-use assets and liabilities associated with operating leases of approximately $63,000 in 2020.

Field Vehicles

The Company leases certain vehicles from a third party for use in its field operations. The lease term for each vehicle is based on expected daily use of the vehicles by the field personnel, typically between 18 and 36 months. The Company also pays an upfront fee at the commencement of the lease term. The Company can continue to lease the vehicles past the initial lease term on a month-to-month basis. In addition, each vehicle has a residual value guarantee at the end of the lease term. The Company’s field vehicle leases are classified as finance leases.

Significant Judgment

To determine whether the Company’s contracts contain a lease component, the Company is required to exercise significant judgment. The Company will review each contract to determine if: an asset is specified in the contract; the asset is physically distinct; the supplier does not have substantive substitution rights; the Company obtains substantially all economic benefit from use of the asset; and the Company can direct the use of the asset. The Company also determines the appropriate discount rate to use on each lease. If there is a stated rate in the contract, the Company will use the stated rate as its discount rate. The contract associated with the field vehicles includes a stated rate typically between 5% and 6.5%. These stated rates for the field vehicle agreements were used as the discount rates. If there is no stated rate, the Company will use its borrowing rate as the discount rate. The contracts associated with the offices and yard do not include a stated rate. The Company used its borrowing rate of 3.75% as the discount rate for these agreements.

Components of lease costs for the years December 31, 2020 and 2019 (in thousands):




		For the years ended December 31,
	Statement of Operations Account	2020		2019

Operating lease cost:
	Production costs and taxes	$	13	$	13
	General and administrative		50		49
Total operating lease cost		$	63	$	62

Finance lease cost:
Amortization of right of use assets	Depreciation, depletion, and amortization	$	75	$	79
Interest on lease liabilities	Net interest expense		5		5
Total finance lease cost		$	80	$	84

Supplemental lease related cash flow information for the years December 31, 2020 and 2019 (in thousands):




	For the years ended December 31,
	2020		2019

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	63	$	62
Operating cash flows from finance leases		5		5
Finance cash flows from finance leases	$	41	$	53

Right of use assets obtained in exchange for lease obligations:
Operating leases	$	63	$	98

Supplemental lease related balance sheet information as of December 31, 2020 and December 31, 2019 (in thousands):




	Balance Sheet as of December 31,
	2020		2019

Operating Leases:

Right of use asset - operating leases	$	42	$	41

Lease liabilities - current	$	42	$	41
Lease liabilities - noncurrent		—		—
Total operating lease liabilities	$	42	$	41


Finance Leases:

Other property and equipment, gross	$	342	$	295
Accumulated depreciation		(240)		(146)
Other property and equipment, net	$	102	$	149

Lease liabilities - current	$	61	$	61
Lease liabilities - noncurrent		16		41
Total finance lease liabilities	$	77	$	102

Weighted average remaining lease term and discount rate as of December 31, 2020:




	Operating Leases		Finance Leases

Weighted average remaining lease term		0.7 years		0.7 years
Weighted average discount rate		3.75%		5.30%

Maturity of lease liabilities as of December 31, 2020 (in thousands):




	Operating Leases		Finance Leases

2021		43		62
2022		—		16
Total lease payments		43		78
Less imputed interest		(1)		(1)
Total	$	42	$	77