Pack v. Santa Fe Minerals - 1994 OK 23, 869 P.2d 323

Rule:

The terms "produced" and "produced in paying quantities" have substantially the same meaning. Where a well is completed and capable of producing in paying quantities within a primary term, the lease will continue, so far as the habendum clause is concerned, as long as the well remains capable of producing in paying quantities, regardless of any marketing of the product. This rule of law has been consistently upheld. To say that marketing during the primary term of the lease is essential to its extension beyond said term, unless the lease contains additional provisions indicating a contrary intent, is to not only ignore the distinction between producing and marketing, which inheres in the nature of the oil and gas business, but it also ignores the difference between express and implied terms in lease contracts.

Facts:

The mineral owners or their predecessors in interest entered into oil and gas leases with the lessees. Each of the leases contained similar provisions including a habendum clause, a shut-in or minimum royalty clause, and a 60-day cessation of production clause. The primary terms of each of the leases expired, and the leases continued pursuant to the habendum clause due to the wells' capability to produce in paying or commercial quantities. Each of the wells continued to be capable of producing in paying quantities up until the time of trial, but lessees have chosen at times not to market gas from the wells for periods exceeding 60 days. The mineral owners filed suit in district court asserting the leases terminated by their own terms when the wells failed to produce for a sixty (60) day period and the lessees neither commenced drilling operations nor paid shut-in royalty payments. The trial court determined that an interruption in the sale and marketing of gas from the wells in excess of sixty (60) days constituted a cessation of production within the meaning of the cessation of production clause resulting in a termination of the leases. The court of appeals affirmed the trial court’s judgment. Certiorari was granted. 

Issue:

Did an interruption in the sale and marketing of gas from the wells in excess of 60 days constitute a “cessation of production” within the meaning of the cessation of production clause resulting in a termination of the leases? 

Answer:

No.

Conclusion:

The court found that the lease did not expire of its own terms. The court vacated the opinion of the court of appeals, reversed the district court's judgment, and remanded with directions to enter judgment in favor of the lessees. The court held that where a well was completed and capable of producing in paying quantities within a primary term, the lease continued, so far as the habendum clause was concerned, as long as the well remained capable of producing in paying quantities, regardless of any marketing of the product. The court found that the leases did not terminate under the terms of the habendum clause, the cessation of production clause, or the shut-in royalty clause. Further, the lease could not have been canceled under the doctrine of temporary cessation as the temporary cessation was for a reasonable time.