Face Challenges Confidently

029 Bachler v. Rosenthal

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 some significance to you.
In Bachler v. Rosenthal, 798 S.W.2d 646 (Tex. App.–Austin 1990, writ denied), lessors brought suit against oil and gas lessees seeking the cancellation of a lease as a result of an alleged cessation of production. The court held that a total cessation of physical production for the number of consecutive days stated in a lease’s cessation-of-production clause automatically terminates the lease without regard to a “reasonably prudent operator” standard.
The terms of the lease provided that it would be for a term of five years “and as long thereafter as oil, gas or other mineral is produced . . . .” The lease also provided:
If after discovery and production of oil, gas or other mineral [on said land], the production thereof should cease from any cause, this lease shall not terminate if lessee commences operations for drilling or reworking within sixty (60) days thereafter . . . .
The lease was extended past its primary term by profitable operations. However, production began decreasing and at some point ceased altogether. Reworking operations were conducted and profitable production was eventually restored. The lessors brought suit to cancel the lease alleging that production had ceased for more than 60 consecutive days before reworking operations were begun.
Texas courts have frequently held that when the issue is whether the lease is producing in paying quantities, the questions to be asked are:

  • Whether revenues from production exceeded operating and marketing expenses when viewed over a reasonable time; and


  • Whether under all the relevant circumstances a reasonably prudent operator would, for purposes of making a profit and not merely for speculation, continue to operate the lease in the manner in which the lease in question was operated.

If the answer to either question is yes, the lease does not terminate. This “reasonably prudent operator” test did not apply in this case. The Court followed the Texas Supreme Court holding in Samano v. Sun Oil Company, 621 S.W.2d 580, 584 (Tex. 1981), which provided that if physical production does cease entirely, the cessation of production clause is definitive and drilling or reworking must commence within the stated number of days or the lease automatically terminates by its expressed terms.
In these times of depressed markets, there has been considerable speculation about the legal effect of shutting-in a well to wait for a better market, and there has always been some tension in determining whether the habendum (paying quantities) clause or the cessation of production (sixtyday) clause should apply to a particular situation. The most interesting thing about the Bachler case is this footnote:

  1. In view of the fact that this case will be remanded to the trial court, we deem it appropriate to caution against an overly rigid application of the cessation-of-operation clause:

The fact that the event which is designed to prevent termination [of the lease] is the commencement of drilling or reworking operations gives some indication of the purpose of the clause and the intention of the parties. It indicates that the parties are concerned with a situation where cessation of production is of the type that is remedied by drilling or reworking operations. Thus, the parties must have intended that the clause would become operative if a dry well is drilled or if a producing well ceases to be capable of producing in paying quantities. A literal application of the clause to every temporary cessation of production could lead to absurd and unintended results.

2 E. Kuntz, Oil and Gas § 26.13, at 416-17 (1989).