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Cimarex v. Anadarko – Is a lease held by production if the lessee does not participate in the well and there is no operating agreement?

Last March the El Paso Court of Appeals decided Cimarex Energy v. Anadarko Petroleum, No. 08-16-00353-CV.  The facts are these:

Cimarex leased a 1/6th interest in 440 acres in Ward County. Anadarko leased the remaining 5/6ths.  Cimarex asked Anadarko to let Cimarex participate in wells on the leases under a joint operating agreement, but Anadarko refused. Anadarko drilled two wells, carrying Cimarex as a non-consenting co-tenant. Cimarex sued for an accounting. The parties settled, Anadarko agreeing to an accounting and to pay Cimarex its share of net profits from the wells. Cimarex paid its royalty owner for its share of production “according to the terms of its lease, dating back to the date of first production.”

But at the end of the primary term of the Cimarex lease – December 21, 2014 – Anadarko stopped paying Cimarex, claiming its lease had expired. Anadarko took a new lease from Cimarex’s lessor. Cimarex sued Anadarko for breach of the settlement agreement. The trial court held that Cimarex’s lease had expired and dismissed its suit. On appeal, the Court of Appeals affirmed. Cimarex has now filed a petition for review in the Supreme Court.

The El Paso court held that Cimarex’s lease required Cimarex to cause production in order to extend the primary term of its lease; Anadarko’s production did not count. It relied on an earlier opinion by the same court, Hughes v. Cantwell, 540 S.W.2d 742 (Tex.Civ.App.-El Paso 1976, writ ref’d n.r.e.), and Mattison v. Trotti, 262 F.2d 399 (5th Cir. 1959). “We conclude that the intent of the lease was in fact to require Cimarex to take some action to cause production on the subject property in order to keep the lease alive, and that it could not simply rely on a cotenant’s production in the absence of any cash consideration paid to the lessors.” Cimarex pointed out that it paid royalties on production from Anadarko’s wells and that it would be inequitable to not allow it to rely on Anadarko’s production to perpetuate its lease. The court disagreed:

There is nothing inherently contradictory with a lessor requiring a lessee to make royalty payments on a co-tenant’s production during the primary term of a lease–particularly where the primary term is paid-up–while at the same time requiring the lessee to cause its own produciton on the subject property in order to extend the lease into a secondary term, where there is no cash consideration paid.

The fact that Cimarex tried to get Anadarko to allow it to participate “should have no bearing on our decision.” Anadarko was only Cimarex’s co-tenant, and had no duty to Cimarex.

Cimarex’s lease provided that it would remain in effect for five years and “as long thereafter as oil or gas is produced from said land or from land with which said land is pooled.” It does not say “produced by lessee”.  A case to watch in the Supreme Court.

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