Anadarko Petroleum Corp. v. Thompson

• Decision Date: 03 July 2002
• Docket Number: No. 01-0261.,01-0261.
• Parties: ANADARKO PETROLEUM CORPORATION, Petitioner, v. Phillip THOMPSON, et al., Respondents.
• Court: Texas Supreme Court

94 S.W.3d 550

ANADARKO PETROLEUM CORPORATION, Petitioner, v. Phillip THOMPSON, et al., Respondents.

No. 01-0261.

Supreme Court of Texas.

Argued March 6, 2002.

Decided July 3, 2002.

Opinion Denying Rehearing January 30, 2003.

COPYRIGHT MATERIAL OMITTED

Eric Anthony Hillerman, Harlow Sprouse, Charles Wade Miller, Sprouse

Smith & Rowley, Amarillo, J. Kyle McClain, Anadarko Petroleum Corp., David M. Gunn, Hogan Dubose & Townsend, L.L.P., Houston, for Petitioner.

Joe L. Lovell, Lovell Lovell & Newsom, Amarillo, Donald M. Hunt, Mullin Hoard Brown Langston Carr Hunt & Joy LLP, Lubbock, J.R. Lovell, Lovell & Lyle, Dumas, for Respondents.

Justice BAKER delivered the opinion of the Court.

In this case, we decide whether a gas mining lease terminated when actual production ceased longer than sixty days. The lease expressly states that it lasts for one year and "as long thereafter as gas is or can be produced." The lease also provides that, if production ceases for any reason, the lease "shall not terminate provided lessee resumes operations for drilling a well within sixty (60) days from such cessation." The lessees began producing gas in 1936. However, in 1981 and again in 1985, actual production ceased longer than sixty days. The court of appeals held that these cessations terminated the lease. 60 S.W.3d 134, 141. We disagree. We conclude that a well that is capable of production sustains this particular lease even if actual production ceases longer than sixty days. Accordingly, we reverse the court of appeals' judgment and remand to the trial court for further proceedings consistent with this opinion.

I. BACKGROUND

In 1936, Thompson's and Anadarko's predecessors entered into a lease "for the purpose of mining and operating for and producing gas." The lease allows either production or the lessees' beginning drilling operations to maintain the lease beyond its one-year primary term.

Two provisions in the lease are pertinent here. The lease's "habendum clause" states:

This lease shall remain in force for a term of one (1) year and as long thereafter as gas is or can be produced.

The lease also has a "cessation-of-production clause," which provides:

If, after the expiration of the primary term of this lease, production on the leased premises shall cease from any cause, this lease shall not terminate provided lessee resumes operations for drilling a well within sixty (60) days from such cessation, and this lease shall remain in force during the prosecution of such operations and if production results therefrom, then as long as production continues.

Anadarko's predecessors began producing gas in 1936. However, it is undisputed that production totally ceased for sixty-one days in 1981 and ninety-one days in 1985 while the gas purchaser conducted pipeline repairs. In 1997, Thompson sued for a declaration that the lease terminated when production ceased in 1981 and for conversion damages.

On Thompson's motion, the trial court granted partial summary judgment that the lease terminated due to one or more cessations of production. After a bench trial, the court rejected Anadarko's affirmative defenses of limitations, laches, quasi-estoppel, unjust enrichment, adverse possession, revivor, judicial estoppel, and promissory estoppel. Accordingly, the trial court awarded damages and attorney's fees to Thompson.

Anadarko appealed. After considering the lease's implicit and explicit objectives, language in the lease's continuous operations clause, and other jurisdictions' case law, the court of appeals construed the lease's habendum clause to require actual production in paying quantities. 60 S.W.3d at 140-41. Accordingly, it affirmed the trial court's partial summary judgment that the lease terminated when actual production ceased longer than sixty days. 60 S.W.3d at 141. The court of appeals also determined that the evidence supported the trial court's denying Anadarko's affirmative defenses. 60 S.W.3d at 145.

We granted Anadarko's petition to consider whether the court of appeals properly construed the lease to conclude that it terminated.

II. APPLICABLE LAW

A. LEASE CONSTRUCTION

Construing an unambiguous lease is a question of law for the Court. Luckel v. White, 819 S.W.2d 459, 461 (Tex. 1991). Accordingly, we review lease-construction questions de novo. See El Paso Natural Gas Co. v. Minco Oil & Gas, Inc., 8 S.W.3d 309, 312 (Tex.1999). In construing an unambiguous lease, our primary duty is to ascertain the parties' intent as expressed within the lease's four corners. Luckel, 819 S.W.2d at 461; see also Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368, 372-73 (Tex.2001). We give the lease's language its plain, grammatical meaning unless doing so would clearly defeat the parties' intentions. Fox v. Thoreson, 398 S.W.2d 88, 92 (Tex.1966). We examine the entire lease and attempt to harmonize all its parts, even if different parts appear contradictory or inconsistent. Luckel, 819 S.W.2d at 462. That is because we presume that the parties to a lease intend every clause to have some effect. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex.1996). However, we will not hold the lease's language to impose a special limitation on the grant unless the language is so clear, precise, and unequivocal that we can reasonably give it no other meaning. Fox, 398 S.W.2d at 92.

B. OIL AND GAS LEASE PROVISIONS

A Texas mineral lease grants a fee simple determinable to the lessee. See Texas Co. v. Davis, 113 Tex. 321, 254 S.W. 304, 309 (1923). Consequently, the lessee's mineral estate may continue indefinitely, as long as the lessee uses the land for its intended purpose. Davis, 254 S.W. at 306. However, a mineral estate will automatically terminate if the event upon which it is limited occurs. Gulf Oil Corp. v. Reid, 161 Tex. 51, 337 S.W.2d 267, 269 (1960).

A lease's habendum clause defines the mineral estate's duration. Gulf Oil Corp. v. Southland Royalty Co., 496 S.W.2d 547, 552 (Tex.1973). For instance, a typical habendum clause states that the lease lasts for a relatively short fixed term of years (primary term) and then "as long thereafter as oil, gas or other mineral is produced" (secondary term). See, e.g., Reid, 337 S.W.2d at 269 n. 1; see also 1 SMITH & WEAVER, TEXAS LAW OF OIL & GAS § 4.3 (1996). In Texas, such a habendum clause requires actual production in paying quantities. Reid, 337 S.W.2d at 269-70; Garcia v. King, 139 Tex. 578, 164 S.W.2d 509, 512 (1942). Thus, a typical Texas lease that lasts "as long as oil or gas is produced" automatically terminates if actual production permanently ceases during the secondary term. See Amoco Prod. Co. v. Braslau, 561 S.W.2d 805, 808 (Tex.1978).

Although the habendum clause generally controls the mineral estate's duration, other clauses may extend the habendum clause's term. Southland Royalty, 496 S.W.2d at 552. When a lease terminates "is always a question of resolving the intention of the parties from the entire instrument." Southland Royalty, 496 S.W.2d at 552.

III. ANALYSIS

A. LEASE CONSTRUCTION

Here, we decide whether the lease terminated when actual production ceased longer than sixty days. Both parties' arguments about what triggers the lease's termination rely upon the lease's habendum and cessation-of-production clauses.

Anadarko contends that the habendum clause's plain language allows production or the capability of production to sustain the lease. Thus, Anadarko argues, the court of appeals incorrectly concluded that the habendum clause requires actual production. Anadarko urges us to give the clause's "can be produced" language its full effect. See Fox, 398 S.W.2d at 92. According to Anadarko, the cessation-of-production clause does not contradict the habendum clause's plain meaning, because the cessation-of-production clause is a savings provision that only applies if the habendum clause's special limitation occurs and threatens to terminate the lease. In other words, the cessation-of-production clause only applies if the well holding the lease becomes incapable of production. Because the well holding the lease has always been capable of production, Anadarko asks us to reverse the partial summary judgment that the lease terminated due to one or more cessations of production.

In response, Thompson asserts that both the lease's terms and existing Texas law support the court of appeals' conclusion that actual production is required to sustain the lease after the primary term. See 60 S.W.3d at 140. According to Thompson, the cessation-of-production clause applies whenever actual production ceases rather than when actual production and capability of production cease. Moreover, Thompson argues, allowing the capability of production to sustain the lease indefinitely would render the cessation-of-production clause meaningless.

Here, the habendum clause expressly states that the lease lasts as long as gas "is or can be produced." For several reasons, the court of appeals rejected Anadarko's argument that capability of production sustained the lease and, instead, concluded that the habendum clause requires actual production. 60 S.W.3d at 140. First, citing Garcia v. King, the court of appeals reasoned that the habendum clause must require actual production to further the lease's objective — to reap economic gain. 60 S.W.3d at 140. Second, the court of appeals construed the habendum clause in light of the lease's continuous operations clause, which sustains the lease so long as drilling operations continue "and if production results therefrom, then as long as production continues." See 60 S.W.3d at 140. The court of appeals determined that the continuous operations clause shows that the parties intended that "the continuation of actual production was and is necessary to prolong the life of the lessee's interest." 60 S.W.3d at 140. And third, the court of appeals relied on decisions from other jurisdictions that have interpreted similar habendum clauses. 60...