Hydrocarbon Management, Inc. v. Tracker Exploration, Inc.

• Decision Date: 23 August 1993
• Docket Number: No. 07-93-0039-CV,07-93-0039-CV
• Citation: 861 S.W.2d 427
• Parties: HYDROCARBON MANAGEMENT, INC., et al., Appellants, v. TRACKER EXPLORATION, INC., et al., Appellees.
• Court: Texas Court of Appeals

Page 427

861 S.W.2d 427

HYDROCARBON MANAGEMENT, INC., et al., Appellants, v. TRACKER EXPLORATION, INC., et al., Appellees.

No. 07-93-0039-CV.

Court of Appeals of Texas Amarillo.

Aug. 23, 1993.

Rehearing Overruled Sept. 15, 1993.

Harris & Quinn, Steven B. Harris, Steven B. Harris, Jerry V. Walker, Houston, for appellants.

Peterson, Farris, Doores & Jones, Bart N. Pruitt, Amarillo, for appellees.

Before REYNOLDS, C.J., and BOYD and POFF, JJ.

BOYD, Justice.

Appellants ¹ were lessees on two leases known as the "Barnes" and "Newcomer" leases located in Lipscomb County, Texas. Appellees ² are the joint owners and lessors of the working interest in the Barnes and Newcomer leases. Contending the leases had terminated by their own terms, appellees filed suit in January 1990 seeking a declaratory judgment that title to the leasehold was vested in them. Following a bench trial, the trial court entered judgment that the two leases had terminated by their own terms in October 1989, and accordingly ordered payment of all production proceeds to appellees. For the reasons hereinafter expressed, we affirm that judgment.

The leases at issue were signed in April and May of 1976. Both leases contained a five-year primary term which expired no later than May 26, 1981. Only one well, known as the Barnes well, was completed and produced gas on the land covered by the leases, which held the leases beyond their primary terms. The events giving rise to the suit to terminate the lease occurred during the secondary term in 1989. ³

During the first part of 1989, Northampton served as the operator of the well. By letter dated February 23, the Texas Railroad Commission (RRC) notified Northampton that it had violated prior orders by overproducing the well's allowable. The letter instructed Northampton to shut down the well until the overproduction was made up. In response to the RRC letter, Northampton admitted that the overproduction had been for cash flow reasons, and requested that the well be allowed to produce at a reduced rate until the overproduction was made up, rather than shutting in the well. The RRC agreed to the request.

On May 25, the Barnes well stopped producing. Appellants were unable to produce any document or record showing that the well was intentionally turned off or that the purchaser refused to take production. On May 30, the RRC notified Northampton that it had violated the well's reduced rate authority, and as a result, the RRC shut-in the well. The letter was received by Northampton on June 2, seven days after the well ceased to produce.

Effective July 1, Hydrocarbon Management, Inc. (Hydrocarbon) became the successor operator to Northampton of the Barnes well. At trial, the parties stipulated that on July 2, Hydrocarbon shut-in the well for a 24-hour pressure build-up. On the following day, Hydrocarbon attempted to turn on the well and the well would not flow.

In their first fifteen points, appellants contend that the trial court's determination that the leases terminated by their own terms in October 1989, is contrary to law and the undisputed evidence in that they satisfied any of three savings provisions in the leases, thereby holding the leases. In considering appellants' contentions, we will discuss each savings clause independently of the others.

We note initially, as part of their cause of action upon which they bear the burden of proof, appellees must establish the lack of production, and also that the various savings provisions did not maintain the leases. See Morrison v. Swaim, 220 S.W.2d 493, 495 (Tex.Civ.App.--Eastland 1949, writ ref'd n.r.e.).

The following standards of review regarding findings of fact and conclusions of law are well established and will be applied by us in considering this appeal. On appeal, the findings of fact have the same force and dignity as a jury's verdict. Alamo Bank of Texas v. Palacios, 804 S.W.2d 291, 295 (Tex.App.--Corpus Christi 1991, no writ). When supported by some competent evidence, they will not be disturbed on appeal, even though they appear to be against the preponderance of the evidence, unless they are so against the overwhelming weight of the evidence as to be clearly and manifestly wrong. Kodiak 1981 Drill. v. Delhi Gas Pipeline, 736 S.W.2d 715, 720 (Tex.App.--San Antonio 1987, writ ref'd n.r.e.) (cite omitted).

We are not bound by the trial court's conclusions of law. Muller v. Nelson, Sherrod & Carter, 563 S.W.2d 697, 702 (Tex.Civ.App.--Fort Worth 1978, no writ). That is, we review those conclusions de novo.

The findings of fact are reviewable for legal and factual sufficiency of the evidence by the same standards that are applied in reviewing the evidence supporting a jury's answer. Zieben v. Platt, 786 S.W.2d 797, 799 (Tex.App.--Houston [14th Dist.] 1990, no writ). Conclusions of law drawn from findings of fact are reviewed to determine their correctness. Id.; Mercer v. Bludworth, 715 S.W.2d 693, 697 (Tex.App.--Houston [1st Dist.] 1986, writ ref'd n.r.e.).

The evidentiary points are to be decided under the established guidelines and standards of Garza v. Alviar, 395 S.W.2d 821 (Tex.1965); In re King's Estate, 150 Tex. 662, 244 S.W.2d 660 (1951), and their progeny. Throughout this appeal, appellants challenge the legal and factual sufficiency of the evidence to support the judgment.

In reviewing a no evidence or legal insufficiency point, we must examine the record in the light most favorable to the finding to determine if there is any probative evidence, or reasonable inferences therefrom, which supports the finding, and we must disregard all evidence or reasonable inferences therefrom to the contrary. Glover v. Texas Gen. Indem. Co., 619 S.W.2d 400, 401 (Tex.1981); Garza v. Alviar, 395 S.W.2d at 823; Raw Hide Oil & Gas v. Maxus Exploration, 766 S.W.2d 264, 276 (Tex.App.--Amarillo 1988, writ denied).

A factual insufficiency point requires us to examine the entire record to determine if there is some probative evidence to support the finding, and, if there is, we must determine whether the evidence supporting the finding is so weak or the answer so contrary to the overwhelming weight of the evidence as to be clearly wrong and manifestly unjust. Garza v. Alviar, 395 S.W.2d at 823; In re King's Estate, 150 Tex. 662, 244 S.W.2d at 661-62; Raw Hide Oil & Gas v. Maxus Exploration, 766 S.W.2d at 276.

Appellants first argue that the shut-in royalty clauses of the leases maintain the leases. Relevant to our discussion of that argument are the following findings of fact and conclusions of law made by the trial court.

Findings of Fact

13. On May 25, 1989, the Barnes well ceased production. This cessation of production was the result of mechanical difficulties with the well.

16. The Barnes well did not produce gas from May 25, 1989, until December 1989.

22. There was no production and no substitute for production from the leases from May 25, 1989, until the first week of December 1989.

Conclusions of Law

5. The Barnes well was not "shut-in" as that term in [sic] used in the leases, at any time between May 25, 1989, and October 20, 1989.

6. The shut-in clauses contained in the leases do not operate to maintain the leases in effect.

The habendum clause in each lease provided they would remain in force during the primary term and "as long thereafter as oil, gas or other mineral is produced ⁴ from said land ..." It is the rule that a lease may be kept alive after the primary term only by production in paying quantities, or a savings clause, such as a shut-in gas well clause, drilling operations clause, or continuous operations clause. Shown v. Getty Oil Co., 645 S.W.2d 555, 559 (Tex.App.--San Antonio 1982, writ ref'd); see also Watson v. Rochmill, 137 Tex. 565, 155 S.W.2d 783, 784 (1941); W.T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27, 28-29 (1929); Morrison v. Swaim, 220 S.W.2d at 494.

A shut-in royalty clause "provides for a substitute or contractual method of production, which will maintain the lease in force and effect when a gas well is drilled and for which no market exists." Richard W. Hemingway, The Law of Oil and Gas § 6.5, at 304 (2d ed. 1983) (Hemingway). The shut-in royalty is considered constructive production and will maintain the lease if its terms are satisfied. See Archer County v. Webb, 326 S.W.2d 250, 255 (Tex.Civ.App.--El Paso 1959), aff'd, 161 Tex. 210, 338 S.W.2d 435 (1960).

However, contrary to appellants' argument on appeal, for a well to be maintained by the payment of shut-in royalties, it must be capable of producing gas in paying quantities at the time it is shut-in. Kidd v. Hoggett, 331 S.W.2d 515, 519 (Tex.Civ.App.--San Antonio 1959, writ ref'd n.r.e.); Duke v. Sun Oil Company, 320 F.2d 853, 860 (5th Cir.1963); Hemingway, § 6.5, at 304. This is true even though the shut-in royalty clause makes no mention of capacity for paying production. 3 Howard R. Williams, Oil and Gas Law § 632.3 (1992).

These shut-in royalty clauses provide in pertinent part:

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 to the party or parties shown by lessee's records to be entitled to receive royalties on actual production of gas ... 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 any period while lessee's right to pay or tender any shut-in royalty is accruing, lessee may commence or resume operations or production and this lease shall remain in force as though shut-in royalty had been duly paid down to such...