129 Utley v. Marathon Oil Co.

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Utley v. Marathon Oil Co., 31 S.W.3d 274 (Tex. App.—Waco 2000, n.pet.h.), construes a continuous operations clause and a shut-in royalty clause in a lease termination case. Marathon commenced the drilling of a well late in the primary term and completed drilling operations after the expiration of the primary term. For a period in excess of ninety days, Marathon attempted to test and complete in the Cotton Valley Lime. After expending $440,000 on testing and completion, Marathon gave up and plugged back and completed in the Bossier Sand. Utley contended that Marathon’s attempts to complete in the Cotton Valley Lime were not in good faith or did not qualify as “continuous operations.” The continuous operations clause was a common form clause providing that if Marathon was:

. . . engaged in operations for drilling, mining or reworking any well or mine thereon, this lease shall remain in force so long as such operations or said additional operations are commenced and prosecuted (whether on the same or successive wells) with no cessation of more than ninety (90) consecutive days. . ..

The trial court instructed the jury:

. . . that operations means actual work being done in a good faith endeavor to cause a well to produce oil and/or gas in paying quantities. [emphasis in original]

There was no objection or attempt to limit what evidence the jury could consider. There was a single broad form submission of the question to the jury which asked whether operations on the well ceased for any period longer than ninety consecutive days during the time interval challenged by Utley. The jury answered in Marathon’s favor and judgment was entered that the lease had not terminated.

The court described the trial as a “classic case of competing experts.” There was a great deal of evidence from both sides as to whether the completion attempts in the Cotton Valley Lime were prudent or in good faith, but the jury ultimately believed Marathon, and the court refused to disturb that finding. The court apparently found little Texas authority defining “operations” in the context of a continuous operations clause. After noting the definitions accepted in other cases considering “reworking operations,” and in the absence of any objection by Utley, the court simply accepted the trial court’s instruction as defining the conduct which the jury could consider.

In addition to the completion efforts in the Cotton Valley Lime, Marathon had also been engaged in completing a pipeline to connect to the well. Utley contended on appeal that pipeline construction is not “operations” that will extend the lease. However, Utley did not object to the charge for failure to include a limiting instruction and did not request such an instruction. Thus, it was not possible to determine what activity (completion attempt or pipeline construction) the jury considered as operations. Because the court found sufficient evidence to support the jury’s finding based on the completion attempt, it never reached the pipeline construction issue.

There was also an unrelated claim in the same case for lease termination based on a failure to pay shut-in royalties. Acreage from the lease was included in multiple pooled units. Utley contended that there was no proportionate reduction clause applicable to shut-in royalties, and that the entire shut-in royalty, as expressed in dollars, must be paid as to each portion of the leased premises included in a unit, or, in other words, for each pooled unit. Apparently Marathon had made shut-in payments after making various proportionate reductions. There was no “Freestone Rider” clause in the lease providing that a well on pooled acreage would hold only pooled unit acreage. The complete facts are not stated in the opinion, because the court found that the proper payment of shutin royalty was not a prerequisite to a judgment in this case preserving the lease. Because there was another well on the lease commenced and completed in the middle of the ninety-day window challenged by Utley, the court found that the lease was preserved by the continuous operations clause, regardless of the payment or attempted payment of shut-in royalty.

The case is significant for providing some guidance on the definition of “operations” as used in a continuous operations clause. The definition includes the concepts of “actual work,” in a “good faith” effort to cause a well “to produce” in “paying quantities.” Although other cases defining “reworking operations,” have included as an additional element that the work be the same as that which an “ordinarily competent operator” would undertake, that element is not included in the instruction accepted by the court in Utley. However, there was no objection to the omission of that element. The proportionate reduction of shut-in royalties issue will have to wait until there is another case.