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Shut-in Wells and Lease Primary Term Extension
Posted 3/15/08 Koy R. Killen, Winstead, P.CThe Waco Court of Appeals recently affirmed a Johnson County trial court’s summary judgment declaring that an oil and gas lease had terminated, holding that a shut in well with no rods, tubing, or pumping equipment was not “capable of producing in paying quantities” at the end of the primary term.
The lease at issue in Chesapeake Exploration L.P., et. al v. Corine Inc. and Drewland Enterprises, Inc., 2007 Tex.App. LEXIS 6986 provided that the lease could be maintained beyond its primary term by a shut-in well if such well was capable of production in paying quantities at the end of the primary term.(Emphasis added). In the trial court, the summary judgment evidence established that the well was not equipped with rods, tubing, or pumping equipment at the end of its primary term, which Texas courts have required in order for a well to be deemed capable of producing in paying quantities. The lessee, Chesapeake, also admitted through deposition testimony that the well did not have the equipment necessary to make it a well capable of producing in paying quantities on the day that the primary term expired.
The issue on appeal was the proper point in time that the well was required to have been capable of production in paying quantities. Despite the language of the lease, Chesapeake argued that the well only needed to be capable of production in paying quantities at the time it was shut-in, which occurred during the primary term. However, Corine argued that the trial court applied the proper temporal inquiry by focusing on the well・s capability of production at the end of the primary term. The Court, citing the “plain language of the lease,” ruled that the operative time to determine whether this particular well was capable of producing in paying quantities was at the end of the lease’s primary term.
The practical effect of this ruling is that if a well is shut in, for whatever reason, during the primary term of an oil and gas lease with similar provisions to the lease in this case as described above, the lessee must ensure that all equipment necessary for the well to be turned “on” and begin flowing must be replaced and in working order when the primary term expires. For practitioners representing lessees, it would be prudent to negotiate for the inclusion of lease provisions providing for the measure of a well・s capability for production at the time of shut-in, even when it occurs during the primary term.
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1 A well is capable of production if it is capable of producing in paying quantities without additional equipment or repairs. Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 558 (Tex. 2002). A well is not ：capable of producing in paying quantities； if the well switch is turned ：on； and thewell does not flow, because of mechanical problems or because the well needs rods, tubing, or pumping equipment. Hydrocarbon Mgmt. v.Tracker Exploration, 861 S.W.2d 427, 434 (Tex.App.--Amarillo 1993, no writ.)
2 Chesapeake relied upon several reported cases focusing on a well・s capability of production at the time of shut-in, but the Court found those cases distinguishable because the wells in those cases were shut in during the secondary terms of the leases, as opposed to during the primary term.