“whether or not in paying quantities”

Last year the 14th Court of Appeals in Houston issue an opinion that should serve as a warning to mineral owners, Thistle Creek Ranch v. Ironroc Energy Partners, No. 14-20-00347-CV.

Thistle Creek sued IronRoc to terminate an oil and gas lease it claimed had expired for lack of production in paying quantities. The lease is on a form I have seen before. The habendum clause provides:

Unless sooner terminated or longer kept in force under other provisions hereof, this lease shall remain in force for a term of three (3) years from the date hereof, hereinafter called “primary term,” and as long thereafter as operations, as hereinafter defined, are conducted upon said land with no cessation for more than ninety (90) consecutive days.

The lease contains this definition of “operations”:

“Operations” is defined as: operations for and any of the following: drilling, testing, completing, reworking, recompleting, deepening, plugging back or repairing of a well in search for or in any endeavor to obtain production of oil, gas or other minerals, excavating a mine, production of oil, gas, sulphur or other mineral, whether or not in paying quantities.

Ironroc claimed the lease remains in force because there has been production without cessation of more than ninety days, and that it need not be production “in paying quantities.” Thistle Creek argued that a requirement of production paying quantities is implied in every oil and gas lease, whether or not stated. Whenever a lease provides that it remains in force as long as there is production, the courts have implied that the production must be in paying quantities, ever since Garcia v. King, 164 S.W.2d 509 (Tex. 1942).

The court held that the lease must be enforced as written, and the phrase “whether or not in paying quantities” negates the court-imposed implied requirement of production in paying quantities. IronRoc wins.

Lesson for mineral owners: never sign a lease using this form.