Face Challenges Confidently

065 Hydrocarbon Mgt., Inc. v. Tracker Exploration, 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.
Hydrocarbon Mgt. v. Tracker Exploration, 861 S.W.2d 427 (Tex. App.–Amarillo 1993 no writ) analyzes whether three savings clauses in a lease are sufficient to preserve the lease on a gas well. The court found that the well ceased to produce on a certain date after the primary term had expired. Lessee argued that the lease was preserved under the shut-in royalty clause, the force majeure clause and the resumption of operations clause.
Held: the lease terminated. The applicable shut-in royalty clause pertained only to wells which were “capable” of producing gas in paying quantities at the time the well was shut in. This well had mechanical problems, and after extensive work, it did resume production. However, the court held that “capable of production in paying quantities” means a well that will produce in paying quantities if the well is turned “on”, and it begins flowing, without additional equipment or repair.
The Railroad Commission ordered the well shut-in for overproduction. The lessee secured the right to produce at a reduced rate, but then overproduced again. The Railroad Commission then ordered the well shut in. Lessee argued that the force majeure clause preserved the lease. The court noted that this force majeure clause referred to matter “mot within the reasonable control of lessee” and held that lessee’s failure to comply with the Railroad Commission was an event within the reasonable control of lessee.
The lease contained a sixty-day clause that preserved the lease if lessee “commences mining, drilling or reworking operations” and the lease would then remain in effect so long as such operations or “any additional operation” were prosecuted with no cessation of more than sixty days. Lessee argued this clause was sufficiently broad to include any operations or activities performed on the lease. The court held that “any additional operations” only includes those operations reasonably intended to cause a well to produce. During the critical period the activities upon which lessee relied were such things as removing tubing from the well to a supply house, selling junk tubing, cleaning up and filling pits on the location and hauling tubing from the well for storage. The court found that none of these activities were designed to change the well to a producer.
The significance of the case is that it emphasizes the importance of specific lease language in determining whether specific facts will operate through a “savings clause” to preserve the lease beyond the primary term when production ceases.