Face Challenges Confidently

132 Krabbe v. Anadarko Corp.

Thursday, September 3rd, 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.
Krabbe v. Anadarko Petroleum Corporation, 46 S.W.3d 308 (Tex. App.–Amarillo 2001, no pet. h.), is a lease termination case which analyzes the temporary cessation of production doctrine and applies it in a way which is generally favorable to the lessee. The consolidated lease at issue in the case was a very old form of lease and did not contain a shut-in clause, a cessation of production clause, a force majeure clause, or any other savings clause. There were two producing wells on the lease, and each was subject to separate marketing arrangements. The Rockwell 1-102 was completed in 1931 in the Brown Dolomite formation, and the gas production was subject to a long term gas contract. The Rockwell B1R was completed in 1961 in the Red Cave formation, and the gas production was being processed through the Turkey Creek gas plant. Production from the Rockwell 1-102 ceased for nineteen months in about 1985. The long term gas contract expired, negotiations began over the terms of a renewal, negotiations broke down, litigation resulted, and eventually production resumed. Production from the Rockwell B1R held the lease during this nineteen month interruption, except that the Rockwell B1R was itself shut-in for 92 days, and again for 61 days, during the same term. Both of these interruptions were attributable to mechanical work at the Turkey Creek Plant.
With no savings clause, the lease would terminate immediately upon the cessation of production, except for the operation of the implied temporary cessation of production clause. The operation of that clause has been summarized as follows in the leading Texas case of Watson v. Rockmill:

It appears to be very well settled that under the terms of the lease [under consideration], upon cessation of production after termination of the primary term, the lease automatically terminated. . . . The strictness of the above rule has been modified where there is only a temporary cessation of production due to sudden stoppage of the well or some mechanical breakdown of the equipment used in connection therewith, or the like. Under such circumstances, . . . the lessee is entitled to a reasonable time in which to remedy the defect and resume production. [emphasis added]

The troublesome issue is to determine the scope of “or the like” in defining the universe of interruptions in production which will be excused by the implied temporary cessation of production clause.
Krabbe contended that the cessation of production doctrine should be limited to cessations due to causes arising prior to the point of sale of gas from the well, or to physical or mechanical causes. After reviewing the principal Texas authorities, the court unequivocably rejected this contention.  The court appears to have left the trial court free to consider evidence of any cause resulting in an interruption in production and evidence of any action taken to restore production. The result is to re-direct the inquiry in a more useful direction to the lessee’s intent and the objective evidence of the lessee’s intent as manifested in lessee’s efforts to restore production. In fact, the court was more concerned with whether the lessee acted in good faith and with due diligence.
Krabbe also contended that due diligence required the lessee to take action by bypassing the Turkey Creek Plant and connecting to another transmission line. As authority for Krabbe’s position, it was contended that Gulf Oil Corp. v. Reid stands for the proposition that a “reasonable time” for a lessee to obtain resumption of production following a temporary cessation is the time it would take to lay gathering lines to a market. The court rejected this argument by noting that Reid was construing the effect of a shut-in royalty clause. The trial court was free to consider all the evidence before it, and the evidence was legally and factually sufficient to support the trial court’s findings and conclusion that Anadarko diligently and in good faith sought to re-establish production.
Finally, Krabbe contended that both the pricing dispute and the Turkey Creek Plant shut downs were foreseeable, avoidable, non-physical, marketing problems excluded from the temporary cessation of production doctrine. The court concluded that foreseeability and avoidability are not elements of the temporary cessation doctrine.
In summary, it appears that the court concluded that the specific cause of a cessation in production is not important, so long as the lessee acted in good faith. The more relevant inquiries are whether the cessation was temporary and whether the lessee acted with due diligence to restore production. If the cessation is temporary, and the lessee acts in good faith and with due diligence to restore production, then the interests of lessor and lessee are aligned. It is then logical to imply such a temporary cessation of production clause on behalf of the parties to the lease.