298 Vortt Exploration Co. v. EOG Res. Inc.

Wednesday, September 2nd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Vortt Exploration Co., Inc. v. EOG Resources Inc., No. 11-07-00159-CV, 2009 WL 1522661 (Tex. App.—Eastland May 29, 2009, rule 53.7(f) motion granted) (mem. op.), held that two separate saving clauses (force majeure and shut-in royalties) could be stacked to save a lease, but lessee must comply with the terms of each to perpetuate the lease. For adverse possession to be adverse under a terminated lease, there must be a new well, a recompletion, production, or sales. An oil and gas lease executed in 1980, with a primary term of two years, was held into the secondary term by production in paying quantities. In November 2001, the gas purchaser stopped taking gas from the well, and the well was disconnected from the pipeline. In February 2006, a pipeline connection became available, but the well was not equipped to produce because the gas could not enter the pipeline without a compressor. The well was never reconnected. On March 24, 2006, notice was sent to the lessee as required by this particular lease that the shut-in royalty payments were delinquent. On July 21, 2006, lessee tendered shut- in royalties. The shut-in royalty clause in the lease read as follows:

While there is a gas well on said land or on lands pooled therewith and if gas is not being sold or used off the premises for a period in excess of three full consecutive calendar months, and this lease is not then being maintained in force and effect under the other provisions hereof, Lessee shall tender or pay  to Lessor. . . . If such payment of shut-in royalty is so made or tendered by Lessee to Lessor, it shall be considered that this lease is producing gas in paying quantities and this lease shall not terminate, but remain in force and effect.

Lessee contended that the lease continued in force and effect under the force majeure clause and the shut-in royalty clause. Lessee also asserted adverse possession under the three- and five-year statutes.
Under the habendum clause of the lease, once the primary term ended, the lease was to remain in effect “as long thereafter as oil, gas or other mineral is produced from said land or land with which said land is pooled hereunder.” An oil and gas lease creates a fee simple determinable that will automatically terminate, absent some other lease provision, upon the happening of the event by which it is limited. Here, that event is a cessation of production. Lessee argued that although production ceased in November 2001, the lease was still in effect because the lease contained a force majeure clause that excused any failure to produce the well and, because shut-in royalties were paid, there was constructive production.
The court noted that “[a] force majeure clause in an oil and gas lease excuses a lessee from nonperformance of obligations contained in the lease if the nonperformance ‘is caused by circumstances beyond the reasonable control of the lessee.’” However, here, even if the force majeure clause applied to the original cessation of production, a pipeline connection became available in February 2006. Therefore, under the very best scenario for lessee, when the pipeline connection again became available in February 2006, the event triggering the force majeure clause no longer existed. When the event triggering the force majeure clause ceased to exist, Lessee had ninety days to either resume production or to pay shut-in royalty. Neither of these things occurred.
Shut-in royalty payments are paid as a substitution for production. To perpetuate a lease by paying shut-in royalties when a well is not actually producing, the payment must be timely or the lease will terminate under the habendum clause.
Evidence was introduced that indicated that production from the well could not enter a pipeline without a compressor. The court relied on this evidence to conclude that the well was not capable of production in paying quantities at the time it was shut-in. A shut-in royalty clause will not extend the term of the lease, if the well is not capable of producing in paying quantities at the time it is shut-in.
Notice was sent to lessee (as required under this particular lease) on March 24, 2006, notifying lessee that shut-in payments were delinquent, but it was not until July 21, 2006 that lessee tendered shut-in royalties. The court held that because shut-in royalties were tendered more than ninety days after the pipeline connection became available in February 2006, the lease terminated for lack of production, even if the well was capable of production in paying quantities. It was not perpetuated by the payment of shut-in royalties, because the payment was not timely. However, the opinion is silent as to whether the “shall pay” provision in the shut-in royalty clause could have made payment a covenant, rather than a condition.
Finally, lessee argued that it re-acquired title to the leasehold under the three- and five- year statutes of limitation. The court rejected this argument because the holdover by the lessee was not adverse. “There was no evidence that it drilled a new well, recompleted an existing well in a new formation, produced any oil or gas, or sold any production from this lease.”
This case illustrates that while lease savings clauses can be stacked to save a lease (e.g., force majeure plus shut-in royalty), lessee still must comply with the terms of each clause to perpetuate the lease. The case also lists the activities which may be “adverse” under the statute of limitations when a holdover lessee continues to operate.