Oil and Gas Lawyer Blog
On September 22, the Texas Supreme Court refused to reconsider its opinion in BP America v. Red Deer Resources, No. 15.0569 – after some 16 amicus briefs and letters were filed urging the court to grant Red Deer’s motion for rehearing.
The Court addressed the construction of a shut-in royalty clause in an oil and gas lease:
Where gas from any well or wells capable of producing gas … is not sold or used during or after the primary term and this lease is not otherwise maintained in effect, lessee may pay or tender as shut-in royalty …, payable annually on or before the end of each twelve month period during which such gas is not sold or used and this lease is not otherwise maintained in force, and if such shut-in royalty is so paid or tendered and while lessee’s right to pay or tender same is accruing, it shall be considered that gas is being produced in paying quantities, and this lease shall remain in force during each twelve-month period for which shut-in royalty is so paid or tendered ….
BP had one gas well on the lease that produced less than 10 mcf per day. BP turned off the valve on the well on June 12, 2012 and tendered a shut-in royalty payment to the lessors on June 13. The well last produced gas on June 4.
The jury was asked four questions. The Court considered the jury’s answer to two of those questions:
Question 1: from April 27, 2009 to June 12, 2012, did the Vera Murray lease fail to produce oil and gas in paying quantities?
Answer: No, the Vera Murray lease did not fail to produce in paying quantities.
Question 3: Was the Vera Murray #11 well incapable of producing in paying quantities when it was shut-in on June 13, 2012?
Answer: Yes, the Vera Murray #11 well was incapable of producing in paying quantities when it was shut-in on June 13, 2012.
Based on the jury’s answer to Question 3, the trial court held that the lease had terminated. The court of appeals affirmed. 466 S.W.3d 335 (Tex.App.-Amarillo 2015).
The Supreme Court reversed and rendered. It held that Question 3 asked the wrong question. The correct question should have been: “Was the Vera Murray #11 well incapable of producing in paying quantities over a reasonable period of time as of June 4, 2012,” the last day that gas was sold or used.
When the Court’s opinion was issued, I wrote:
It seems to me that this case and several of the Court’s statements suffer from failing to distinguish between two circumstances: in the first, a well ceases to produce and cannot return to production without additional work on the well. In the second, a well’s production is not in paying quantities. In both cases, courts have held that the lessee may not rely on a shut-in royalty clause to extend the term of the lease. In the first instance, courts have held that a shut-in royalty payment cannot extend the term of the lease if the well was not capable of producing gas at the time it was shut-in without additional work on the well. In the second instance, courts have held that a shut-in clause cannot save a lease if it has already terminated because the well shut in had already ceased to produce in paying quantities — it might still be capable of producing some gas, but the lease has terminated before the well was shut in because of lack of production in paying quantities. The Court does not distinguish between these two circumstances. For example, the Court says that the tender of the shut-in payment would keep the lease in force “so long as the well was capable of production in paying quantities over a reasonable period of time on the date that gas was last sold or used.” Or again: “to negate BP’s invocation of its shut-in royalty rights Red Deer bore the burden of proving that the #11 well was incapable of production in paying quantities over a reasonable period of time as of June 4, 2012.”
I believe the Court’s opinion will make it difficult for mineral owners to know how to submit jury questions in future shut-in royalty cases, and for juries to know how to decide such cases. From a drafting perspective, those of us who represent royalty owners need to re-evaluate the shut-in royalty clause in our lease forms in light of the Court’s opinion.