Face Challenges Confidently

488 PNP Petroleum I, LP v. Taylor

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.
PNP Petroleum I, LP v. Taylor  held that a well did not have to be capable of producing for a shut-in royalty payment to preserve the lease.  In June 2009, PNP Petroleum I, LP (“PNP”) entered into an oil and gas lease with Edna Earnest Taylor and Elizabeth Earnest Herbst (“Taylor”) with a shut-in royalty savings clause that read:  “If, at the expiration of the primary term there is located on the leased premises a well or wells not producing oil/gas in paying quantities, Lessee may pay as royalty a sum of money equal to Twenty ($20) dollars per proration acre associated with each well not producing.”   At the time the lease was signed, there were thirteen non-producing wells on the leased land that were drilled by a prior lessee.  Upon the expiration of the primary term in May 2010, PNP tendered shut-in payment to extend the lease (relying upon the non-producing wells), which Taylor rejected.
During the contract negotiation between the parties, they removed the term “capable of” from the lease’s terms.  The red-line changes to the lease were as follows:

If, at the expiration of the primary term—or at any time thereafter, there is located on the leased premises a well or wells not capable of producing oil/gas in paying quantities or being used as a salt-water injection well(s), and such gas is not otherwise produced and sold in paying quantities for lack of suitable market and this lease is not otherwise being maintained in force and effect, Lessee may pay [to extend the lease term.]

Taylor objected to the introduction of this evidence based on the parol evidence rule, hearsay, and relevancy.
“We consider surrounding circumstances as a construction aid to determine the parties’ intentions as expressed in the plain language of the lease.”   “Understanding the context in which an agreement was made is essential in determining the parties’ intent as expressed in the agreement, but it is the parties’ expressed intent that the court must determine.  Extrinsic evidence cannot be used to show that the parties probably meant, or could have meant, something other than what their agreement stated.”   The court concluded that the parol evidence rule did not bar the presentation of this evidence and the trial court abused its discretion in sustaining the parol evidence rule objection.
The court also quickly dismissed the hearsay and relevancy objections finding that: (1) the deletions and revisions were offered to show what was said, not the truth of the matter asserted; and (2) the drafts were relevant to determining the parties’ intent in selecting the language used in the shut-in royalty clause.
The court recognized that “If a lease term has a generally accepted meaning in the oil and gas industry, we use its generally accepted meaning.”   The court also recognized that the use of the term “shut-in royalty” has special meaning in the oil and gas industry and it includes the requirement 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 court found that the parties’ action of striking the express reference to “capable of” during negotiations reflected the parties’ intent to change the commonly used definition of “shut-in royalties” in the lease because “the parties could not have intended for the law to engraft into their agreement the very language they removed.”
This case is significant because it reaffirms that “shut-in royalty” does have a special meaning in the industry and that “capable of” producing is part of that conventional meaning.  No one wants all of their prior drafts to be admissible, but the case suggests that it is appropriate only under narrow circumstances.