231 Chesapeake Exploration Ltd. P’ship v. Corine Inc.
Wednesday, September 2nd, 2015
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Chesapeake Exploration Ltd. Partnership v. Corine Inc., No. 10-06-00265-CV, 2007 WL 2447293 (Tex. App.—Waco Aug. 29, 2007, no pet.), construed a shut-in royalty clause to determine whether the point in time when the shut-in well must be “capable of production in paying quantities” was: (1) at the moment when the well was shut-in, or (2) at the end of the primary term of the lease. While the lease was in its primary term, an off-lease well was drilled on property adjacent to the lease. The well was completed, shut-in, and a gas unit formed which pooled lessor’s property into the unit, all in 2002. The primary term expired on September 4, 2003. There was no activity on the unit well until September of 2004. Lessor sued for lease termination. The lease provided:
If at the end of the primary term or any time thereafter one or more wells on the leased premises or lands pooled therewith are capable of producing oil or gas or other substances covered hereby in paying quantities, but such well or wells are either shut in or production therefrom is not being sold by Lessee, such well or wells shall nevertheless be deemed to be producing in paying quantities for the purpose of maintaining this lease (emphasis in the opinion).
Lessee argued that the trial court erred in finding the lease had terminated because the court failed to consider whether the well was capable of producing in paying quantities at the time the well was shut-in. The Waco court held that the intent of the parties could be easily ascertained. “If at the end of the primary term,” were words that manifested the intent that “the time to determine whether the well was capable of production in paying quantities was at the end of the primary term.” Lessee relied on a case out of the Amarillo court which held that “for a well to be maintained by the payment of shut-in royalties, it must be capable of producing gas in paying quantities at the time it is shut-in.” However, the Waco court pointed out that the Amarillo Court was not deciding the same issue. The Amarillo court was focused on the meaning of the phrase “capable of producing in paying quantities,” and it was not addressing the moment in time when the capability to produce was to be gauged. Moreover, the well in the Amarillo case had been shut in during the secondary term and not in the primary term, which made the two cases factually distinguishable.
Having decided that the end of the primary term was the appropriate time to determine whether the well was capable of production in paying quantities, the Waco court then examined whether the well was capable of producing in paying quantities at that time. The Waco court followed the reasoning of the Amarillo court. “A well is capable of production if it is capable of producing in paying quantities without additional equipment or repairs.” If the well is turned “on,” and it begins to flow without additional equipment or repair then it is capable of producing in paying quantities. However, if the well is turned “on,” and the well does not flow because of mechanical problems, or, as in this case, because the well needed rods, tubing, or pumping equipment, the well would not be capable of producing in paying quantities.
The significance of the case is that it defines the moment in time when (under this particular common form of shut-in royalty clause) a shut-in well must be capable of producing in paying quantities. It does not address whether the shut-in well must continue to be or continuously be capable of producing in paying quantities. More fundamentally, the case highlights the principle that to preserve the lease under a shut-in royalty clause, lessee must have not only a lease clause and a well which could produce if fully equipped, but a well capable in fact of producing in paying quantities at the very moment specified in the lease.