Would this scenario keep you up at night? Your lease does not produce from May through August because a leak in a heater-treater makes it impossible or impractical to produce the well. Problems such as access to the site during rainy weather make repairs difficult. You are beyond the primary term. The top- lessee lurks.

The Lease

“If at the expiration of the primary term oil and gas is not being produced on said land but Lessee is then engaged in drilling or re-working operations thereon, the lease shall remain in force so long as operations are prosecuted with no cessation of more than thirty (30) consecutive days, and if they result in the production of oil and gas so long thereafter … .”

The Question

Did the lease automatically terminate due to cessation of production from the only well on the property?

The Answer

Go ahead and admit it.  You either don’t know or have forgotten the “necessarily implied” temporary cessation of production clause for a Texas oil and gas lease. The “ … automatic termination rule is relaxed if the lessee can prove that the cessation of production was temporary and due to sudden stoppage of the well, some mechanical breakdown of the equipment used in connection therewith, or the like.”

In Landover Production Company, LLC v. Endeavor Energy Resources, L. P.Endeavor had the lease in Borden and Dawson Counties. Landover held the top lease.  The jury, trial court, and court of appeal all agreed with Endeavor that cessation of production was excused in accordance with the implied doctrine.

The lease clause is a savings clause. The lease would remain in effect if the lessee is then engaged in operations and there was no cessation of more than 30 consecutive days. If production was obtained thereafter the lease would continue. But this clause never came to fruition because there was production at the end of the primary term. The court reasoned that the savings clause applied only if, at that time, oil and gas was not being produced. In order to avoid the harsh result of automatic termination, the court impressed the temporary cessation of production clause upon the lease.

Endeavor had to prove that the cessation of production after the primary term was temporary and due to sudden stoppage of the well, and that it acted with diligence and remedied the cause of a temporary cessation and resumed production within a reasonable time.

The court determined that there was evidence in the record to support the jury finding. The court recited examples of the temporary nature of the cessation and Endeavor’s attempts to make repairs and turn the well back on. This procedure ultimately resulted in resumption of production. Thus, there was no termination.

If you’ve dealt with cessation of production you are no doubt wondering about the myriad cases addressing continuous drilling and reworking operations. Those cases address typical explicit savings clauses in modern leases. but those provisions apply to the secondary term. Typical examples are shut-in royalties, continuous operations, and drilling operations. There was no such clause in this case.

Just to be sure Landover got the message, the court also declared that even if Landover had won, Endeavor held title to the leasehold estate by adverse possession.

Merry Christmas