Is there really a rule in Oklahoma that if a well was capable of producing when it was shut in it holds the lease just as much as actual production? I think someone is blowing smoke.
Not only is it a rule, but it’s established Oklahoma law as set forth by the Oklahoma Supreme Court. Unless you have express language to the contrary, then yes, a well capable of commercial production will perpetuate the lease.
I think something should be done about that law!
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Most of us have clauses in our Exhibit A’s that limit the time a shut-in well can hold a lease. This is just one of the many reasons that it’s necessary to negotiate changes to the lease language that the developer initially offers.
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869 P.2d 323 Supreme Court of Oklahoma. Mary Lou PACK, Ann E. Watts, Robert E. Stevens and Jo E. Stevens, Husband and Wife, Appellees, v. SANTA FE MINERALS, A DIVISION OF SANTA FE INTERNATIONAL CORPORATION, Southland Royalty Company, a Delaware Corporation, and Deck Oil Company, an Oklahoma corporation, Appellants, John V. BALZER, an individual, Jake F. Balzer and Lydia Balzer, Husband and Wife, Appellees, v. SANTA FE MINERALS, A DIVISION OF SANTA FE INTERNATIONAL CORPORATION, a Delaware corporation, Hamon Operating Company, a Texas corporation, Frontier Fuels, Inc., a Delaware corporation, Southland Royalty Company, a Delaware Corporation, and Deck Oil Company, an Oklahoma corporation, Appellants. Nos. 74605, 74606 Feb. 22, 1994. Mineral right owners/lessors brought suit against oil and gas lessees to quiet title, asserting that leases terminated by their own terms when wells failed to produce for 60–day period and lessees neither commenced drilling operations nor paid shut-in royalty payments. The District Court, Texas County, Frank Ogden, J., determined that interruption in sale and marketing of gas was cessation of production which resulted in termination of leases. The Court of Appeals affirmed. On certiorari, the Supreme Court, Simms, J., held that: (1) failure to market did not in and of itself cancel leases under “cessation of production” clause, and (2) lessees did not breach implied covenant to market by curtailing marketing of product in summer months when prices for product were lower. Opinion of Court of Appeals vacated; Judgment of District Court reversed; remanded with directions.
Lease, held by gas well which is capable of producing in paying quantities but is shut-in for period in excess of 60 days but less than one year due to marketing decision made by producer, does not expire of its own terms under “cessation of production clause” if shut-in royalty payments are not made.
Term “produced” as used in lease clauses in oil and gas lease means capable of producing in paying quantities and does not include marketing of product.
Interesting case. I note that it was submitted upon agreed facts including that the well was capable of producing. Makes me wonder why theCourt then added the requirement that lessors had the burden of proving otherwise. Obiter dicta? Sounds backward to me, since lessees will have all the info. Well,the list of amici curiae might be a clue. If I live to be 100 I may learn some Okla law.
Todd: Thanks a heap for the cite. JimB
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And Tim, thanks for the added detail.
Yet another reason to negoiate the highest Royality you can ----
Bonus can be a one time thing-- yet they can drill more and more and
you can benefit !!!.
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I wonder what the current treatment of this precedent might be, realizing the tendency to stretch every point.
not any difference. I have a longer post on this, but it waiting approval for some reason.
There are other cases with similar language and holdings. That was just the one I found first.
Pack , 1994 OK 23, ¶¶ 5 n.1, 8-12, 869 P.2d at 325 n.1, 326-27 (“The term ‘produced’ as used in the lease clauses means ‘capable of producing in paying quantities.’ “); James Energy Co. , 1992 OK 117, ¶ 19, 847 P.2d at 338-39 ; Bixler , 1987 OK 15, ¶ 6, 733 P.2d at 412 (recognizing that a lease can be held under the habendum clause by virtue of a shut-in gas well that is capable of producing in paying quantities); Amoco Prod. Co. , 1982 OK 14, ¶ 6, 645 P.2d at 470 (”[Cap]ability to produce a shut-in gas well will hold a lease as long as the operator seeks a market with due diligence.” (citing McVicker , 1958 OK 49, 322 P.2d 410 ) ); Carter Oil Co. of W. Va. , 1958 OK 289, ¶ 45, 336 P.2d at 1095 (“In other words in the absence of a specific clause requiring marketing within the primary term fixed in the lease, the completion of a well, as provided therein, capable of producing oil or gas in paying quantities will extend such term, provided that within a reasonable time the actual length of which must of necessity depend upon the facts and circumstances of each case, a market is obtained and oil or gas is produced and sold from such well.” (emphasis added) ); Henry , 1954 OK 170, ¶ 11, 274 P.2d at 548 (“In the case of Okmulgee Supply Corporation v. Anthis , 189 Okl. 139, 114 P.2d 451, we held … that the standard by which the judgment and good faith of the lessee is measured is whether the lease is producing, or by the exercise of reasonable skill and diligence could be made to produce , sufficient oil and gas to justify a reasonable and prudent operator in continuing the operation thereof. It is a poor rule that does not work both ways. Having held that the operator is under a duty to continue production if by the exercise of reasonable skill and diligence the well could be made to produce sufficient oil and gas to justify a reasonable and prudent operator in continuing the operation thereof, we believe the operator should have the right to continue production under the same circumstances.”
FWIW We’ve been able to ask for and get a release on everything HBP but the existing well bore a couple of times on old shut in wells.
The first time that happened, we had not been paid shut in royalty. I had sent a letter telling CHK they had violated terms of the lease, and then an attorney informed me it didn’t matter, per the law cited above. A lease agent asked for and got a release and then leased it.
More recently, a well was shut in, no shut in royalty had been paid, I sent a respectful letter asking for a release and they filed one a couple of days later.
Thanks, Duff. The game goes on… Jim B
Okay. Sounds like rule based on equity. Balancing of interests, case by case. Right?
Thanks, Tim. This is an interesting decision. The case was submitted on agreed facts including that the well was capable of commercial production when shut in, so there was no need for the Court to state that the Licensor had the burden to prove otherwise. Not the first time, I think, that a Court used obiter dictum to move the law in a desired direction. Fascinating to me as a 92 year old Texas lawyer (retired) as Texas law is different. I love learning new things. Jim Brock
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no; you’re trying to make the cases say something they are not saying. If the well is capable of commercial production, but is not being produced because of a lack of market (shut-in), or it is temporarily incapable of production due to mechanical breakdown, then the well is held by production if the revenue if produced would be greater than the cost of operating the well. That is why the failure to pay shut-in royalties is not fatal to ogls in Oklahoma, as it is in other states.
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Tim: Nope. I am just commenting on the opinion as it is written. Over all, of course, the Opinion holds that marketing of gas is not required in order to satisfy the habendun clause requirement of “production”. As I understand the general approach it is somewhat a balancing of interests, mainly to preserve the estate created to encourage production with investments incurred in preparation thereof. But it isn’t absolute (in theory) and requires some action by the lessee. In practice, the lessor having the burden of proof of a negative may render the theoretical obligation moot. The cases cited do not go into this aspect very far. I do love to explore new vistas … Jim B
“Habendum” Fat finger.
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This is why I like time limits on shut-in clauses in leases.
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