Face Challenges Confidently

136 Anadarko Petroleum Corp. v. Thompson

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.
Anadarko Petroleum Corp. v. Thompson, 2002 WL 1432330 (Tex. 2002), holds that a well capable of production will sustain the lease without additional drilling or reworking operations, even if actual production ceases for more than sixty days. This is the first case to be decided of several important cessation-of-production cases which have recently reached the Texas Supreme Court. The Texas Panhandle has been a hotbed of litigation brought by plaintiff lessors alleging lease termination. The alleged lease termination claims are typically based on Railroad Commission records showing no actual production for one or more cessations in excess of the permitted time interval under the lease cessation-of-production clause (typically sixty or ninety days). The cessation alleged is frequently attributable to a time twenty or thirty years prior to the filing of suit. The defendant lessee then has a serious evidentiary problem because of the difficulty inherent in producing any records or testimony as to the reason for a cessation which occurred so long ago.
In this particular case, it was undisputed that production totally ceased for sixty-one days in 1981 and ninety-one days in 1985 while the gas purchaser conducted pipeline repairs. Lessor Thompson sued for lease termination and conversion damages. Lessee Anadarko defended on the express language in the habendum clause of the lease. The court ultimately agreed with Anadarko. However, the opinion is very narrowly written, so that little else is decided except the construction to be given to the particular form of habendum clause found in this particular lease. The habendum in this lease provided:
This lease shall remain in force for a term of one (1) year and as long thereafter as gas is or can be produced.
The lease’s cessation-of-production clause was a typical sixty-day clause, which provided:
If, after the expiration of the primary term of this lease, production on the leased premises shall cease from any cause, this lease shall not terminate provided lessee resumes operations for drilling a well within sixty (60) days from such cessation, and this lease shall remain in force during the prosecution of such operations and if production results therefrom, then as long as production continues.
There is a well-established line of Texas cases holding that actual production is necessary to hold a typical Texas lease in force after the expiration of the primary term and any applicable cessation-of-production clause. The previous cases all construed leases in which the habendum clause sustained the lease as long as oil or gas “is produced.” The court held that those cases were not controlling when the habendum clause includes the phrase or concept that the well need only be “capable of producing.”  The court was particularly persuaded by the “plain language” of this habendum clause, but it also found that its construction was consistent with and in harmony with the cessation-of-production clause. The cessation-of-production clause contemplates the drilling of a new well, which would not make sense, if there was already a well capable of producing. The court expressly held that “the cessation-of-production clause only applies if the lease would otherwise terminate under the habendum clause.”
The court then defined a well as being “capable” of production if it is capable of producing in paying quantities without additional equipment or repairs. It expressly approved the following definition found in Hydrocarbon Mgt., Inc. v. Tracker Exploration, Inc.:
We believe that the phrase “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. Conversely, a well would not be capable of producing in paying quantities if the well switch were turned “on,” and the well did not flow, because of mechanical problems or because the well needs rods, tubing, or pumping equipment.”
The case is significant because there are many existing lease forms employing the “capable of production” language, and perhaps there will now be even more. The case is also significant in harmonizing the habendum clause with the cessation-of-production clause on the basis that a “savings clause” is only triggered when the lease is not otherwise held in force and effect. This is certainly conventional wisdom. It also comports with the evolution of the oil and gas lease in Texas, which is now a patchwork of savings clauses whose intended purpose is to ameliorate the harsh results of a cessation of production under a fee simple determinable lease.
The court did not reach any of Anadarko’s affirmative defenses of limitations, laches, quasi- estoppel, unjust enrichment, adverse possession, revivor, judicial estoppel or promissory estoppel. The court remanded, rather than reversed, presumably because it expects the trial court to determine whether this particular well was “capable of producing.” To the extent that a lessee is required to prove that a well was “capable” of producing many years ago, the proof problems may persist. However, as to downstream interruptions (e.g. pipeline failures), under this form of habendum clause, a lease will not terminate.