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Baytide Petroleum, Inc. v. Cont'l Res., Inc. - 2010 OK 6, 231 P.3d 1144 (Okla. 2010)

Rule:

Stewart v. Amerada Hess Corp., provides that a lease will not expire for lack of production in and of itself. However, it does not hold that only a judicial determination may end a lease for lack of production in paying quantities. The pronouncement in Smith v. Marshall Oil Corp., makes it clear that it is the unreasonable cessation of production that causes the lease to terminate. Therefore, in conformance with Smith and Stewart, the Supreme Court of Oklahoma determines that it is the failure to produce in paying quantities during the lease's secondary term rather than the entrance of a court order which terminates a lease.

Facts:

Defendant Continental Resources, Inc. ("Continental") obtained top leases covering two oil and gas wells that were then under lease to and being operated by plaintiff Baytide Petroleum, Inc. ("Baytide"). Continental filed an action in Alfalfa County district court seeking to have Baytide's lease terminated for failure to produce in paying quantities. In the same year, on Continental's application, the Oklahoma Corporation Commission ("Commission") established a drilling and spacing unit, the Aline Oswego Unit, which included the wells. Continental obtained a court order directing Baytide to comply with the plan of unitization. Shortly thereafter, the Alfalfa County court determined that Baytide's lease had terminated for failure to produce in paying quantities. Baytide then filed a lawsuit in Garfield County district court asserting that it was not a lessee when the Unit was formed and that its oil and gas equipment located on the wells had been wrongfully converted; Baytide also alleged claim of unjust enrichment and misuse of process. Considering opposing motions of the parties, the district court entered final judgment in favor of Continental and the Unit. The court of civil appeals affirmed, finding that Baytide remained a lessee when the Unit was formed because, prior to that, no court order had entered terminating the lease for failure to produce in paying quantities. Baytide was granted a writ of certiorari.

Issue:

Did Baytide's oil and gas lease that Continental sought to have terminated for failure to produce in paying quantities remain effective until the lease was judicially terminated?

Answer:

No.

Conclusion:

The state supreme court vacated the appellate court's opinion and affirmed the decision of the trial court. The court held that it was not the court order that terminated Baytide's lease; it was the failure to produce in paying quantities under the habendum clause during the lease's secondary term that terminated the lease. Although a court order might have been necessary to adjudicate the rights of the parties, the lease terminated for failure to produce in paying quantities. Thus, Baytide was a lessee at the time the Unit was formed. Furthermore, because Baytide had agreed to the valuation method and the value assigned to its property, and it was bound by that agreement.

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