447 Fain Family First Ltd. Partnership v. EOG Res., Inc.

Richard F. Brown

 
The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
 
Fain Family First Ltd. P’ship v. EOG Res., Inc., No. 02-12-00081-CV, 2013 WL 1668281 (Tex. App.—Fort Worth Apr. 18, 2013, no pet.) held that a well is not capable of producing in paying quantities for purposes of authorizing a shut-in royalty payment, if the production is not sufficient to justify making the connection to a nearby pipeline.  The mere existence of the pipeline does not by itself satisfy the requirement that lessee must have “facilities for marketing gas.”  EOG Resources, Inc. (“EOG”) acquired a mineral lease from Fain Family Management Corporation and First Limited Partnership (“FFFLP”) on June 22, 2004, with a primary term of three years.  Additionally, EOG and FFFLP entered into an A.A.P.L. Form 610–Model Form Operating Agreement–1989 (“JOA”) whereby FFFLP could elect to participate in EOG’s efforts to develop the minerals by paying 1/8th of the development costs.  Pursuant to the JOA, on May 2, 2007, FFFLP agreed to participate in drilling the Fain 1H well, and on November 7, 2007, FFFLP agreed to participate in the Fain 4H well.  EOG drilled the wells and sent invoices to FFFLP.  When FFFLP failed to pay these invoices, EOG filed a suit on sworn account and for breach of contract.  The trial court granted EOG’s motion for summary judgment.
 
To prevail on its breach-of-contract claim on traditional summary judgment, EOG had to prove that the parties had a valid, enforceable contract.  FFFLP argued that the JOA terminated before FFFLP agreed to participate in the Fain 4H well and before EOG incurred the expenses that it billed to FFFLP.  The JOA’s termination clause was tied to lease expiration.  Specifically, under Article XIII of the JOA, the parties chose the option that states the JOA will continue in force “[s]o long as any of the Oil and Gas Leases subject to this agreement remain or are continued in force as to any part of the Contract Area, whether by production, extension, renewal or otherwise.”
 
The lease included a shut-in royalty clause, which stated that if, after the expiration of the primary term, there was a shut-in gas well capable of producing, then the Lessee may pay a shut-in royalty and the well would be considered to be producing.  EOG produced evidence in the form of an email dated June 2008 that EOG considered itself to be operating under the shut-in provision of the lease, and that EOG paid shut-in royalties in March of 2008.  The court observed that “capable of producing” meant “capable of producing in paying quantities,” and that a lack of “facilities for marketing the gas” is sufficient to show that a well is not capable of production in “paying quantities.”  There was evidence that the wells were not producing enough gas to justify the cost of connecting them to an existing pipeline.  The court held this implied that the wells were not capable of production in “paying quantities” because EOG had no facilities for marketing the gas.  This presented a question of material fact and summary judgment was improper.
 
The significance of the case is that it adds some additional definition to the meaning of “facilities for marketing gas” in the context of a shut-in royalty clause.  The existence of a nearby pipeline is not enough, if the well is not producing enough gas to justify the cost of making a connection to that pipeline.