Pack v. Santa Fe Minerals, a Div. of Santa Fe Intern. Corp.

• Decision Date: 22 February 1994
• Docket Number: Nos. 74605,74606,s. 74605
• Parties: 128 Oil & Gas Rep. 550, 1994 OK 23 Mary Lou PACK, Ann E. Watts, Robert E. Stevens and Jo E. Stevens, Husband and Wife, Appellees, v. SANTA FE MINERALS, A DIVISION OF SANTA FE INTERNATIONAL CORPORATION, Southland Royalty Company, a Delaware Corporation, and Deck Oil Company, an Oklahoma corporation, Appellants, John V. BALZER, an individual, Jake F. Balzer and Lydia Balzer, Husband and Wife, Appellees, v. SANTA FE MINERALS, A DIVISION OF SANTA FE INTERNATIONAL CORPORATION, a Delaware corporation, Hamon Operating Company, a Texas corporation, Frontier Fuels, Inc., a Delaware corporation, Southland Royalty Company, a Delaware Corporation, and Deck Oil Company, an Oklahoma corporation, Appellants.
• Court: Oklahoma Supreme Court

Page 323

869 P.2d 323

128 Oil & Gas Rep. 550, 1994 OK 23

Mary Lou PACK, Ann E. Watts, Robert E. Stevens and Jo E.

Stevens, Husband and Wife, Appellees, v. SANTA FE MINERALS, A DIVISION OF SANTA FE INTERNATIONAL

CORPORATION, Southland Royalty Company, a Delaware

Corporation, and Deck Oil Company, an

Oklahoma corporation, Appellants,

John V. BALZER, an individual, Jake F. Balzer and Lydia

Balzer, Husband and Wife, Appellees, v. SANTA FE MINERALS, A DIVISION OF SANTA FE INTERNATIONAL

CORPORATION, a Delaware corporation, Hamon Operating

Company, a Texas corporation, Frontier Fuels, Inc., a

Delaware corporation, Southland Royalty Company, a Delaware

Corporation, and Deck Oil Company, an Oklahoma corporation,

Appellants.

Nos. 74605, 74606.

Supreme Court of Oklahoma.

Feb. 22, 1994.

Certiorari to the Court of Appeals, Division III Appeal from the District Court of Texas County, Oklahoma; Frank Ogden, Trial Judge.

Certiorari to review opinion of Court of Appeals affirming separate judgments of the trial court which determined that oil and gas leases entered into by the parties had expired under the "cessation of productions" clause for failure of the wells covered by the leases to produce profitably for the specified period. Upon stipulated facts, both the trial court and the Court of Appeals held that the phrase "production in paying quantities" in the subject clause requires more than the well be capable of producing gas in paying quantities, but also requires actual marketing of the production. We hold that failure to market does not in and of itself cancel the lease under the "cessation of production" clause.

CERTIORARI PREVIOUSLY GRANTED. COURT OF APPEALS OPINION VACATED. JUDGMENT OF THE DISTRICT COURT REVERSED AND REMANDED WITH DIRECTIONS.

Gary W. Davis, Mark D. Christiansen, Crowe & Dunlevy, Oklahoma City, James R. Fletcher, Guymon, for appellants, Santa Fe Minerals and Southland Royalty Co.

H. Wayne Cooper, Charles Greenough, Tulsa, for appellant, Deck Oil Co.

George S. Corbyn, Jr., J. Michael DeYong, Joe M. Hampton, Ryan, Corbyn & Geister, Oklahoma City, David K. Petty, Guymon, for appellees.

Eugene Kuntz, Norman, Joseph W. Morris, Gable & Gotwals, Tulsa, John S. Lowe, Dallas, TX, A.P. Murrah, Jr., Murrah & Davis, Oklahoma City, for amicus curiae.

Clifford K. Cate, Jr., Muskogee, for amicus curiae, Atlantic Richfield Co.

Rick A. Mayer, Houston, TX, for amicus curiae, Chevron U.S.A., Inc.

Gary E. Baker, Houston, TX, for amicus curiae, Exxon Corp.

James M. Peters, Gayle Freeman Cook, Monnet, Hayes, Bullis, Thompson & Edwards, Oklahoma City, for amicus curiae, Fina Oil and Chemical Co., Oryx Energy Co., Oxy U.S.A. Inc., Union Pacific Resources Co.

Charles L. Puckett, Houston, TX, for amicus curiae, Conoco, Inc.

Brent Alan Helms, Dallas, TX, for amicus curiae, Fina Oil and Chemical Co.

Charles E. Holmes, New Orleans, LA, for amicus curiae, Freeport-McMoRan Oil & Gas Co.

Steven R. Mackey, Cathy L. Cheney, Tulsa, for amicus curiae, Helmerich & Payne, Inc.

Hugh A. Stowe, Denver, CO, for amicus curiae, Mobil Oil Corp.

Patricia A. Moore, Dallas, TX, for amicus curiae, Oryx Energy Co.

William G. Paul, John L. Williford, Bartlesville, Joe Cochran, Susan L. Heady, Amarillo, TX, for amicus curiae, Phillips Petroleum Co.

William D. Watts, John J. Breathwit, G. Babette Patton, Andrews, Davis, Legg, Bixler, Milsten & Price, Oklahoma City, for amicus curiae, Marathon Oil Co.

David O. Cordell, Oklahoma City, for amicus curiae, Mustang Fuel Corp. Brenton B. Moore, Tulsa, for amicus curiae, OXY U.S.A., Inc.

Randle G. Jones, Jimmy E. Shamas, Jr., Denver, CO, for amicus curiae, Texaco, Inc.

Baxter Brown, Fort Worth, TX, for amicus curiae, Union Pacific Resources Co.

SIMMS, Justice:

Appellants, Santa Fe Minerals and other oil and gas companies, (lessees) appeal the judgments entered by the district court in the quiet title actions instituted by appellees, Mary Lou Pack, Ann E. Watts, Robert E. Stevens, Jo E. Stevens, John V. Balzer, Jake F. Balzer, and Lydia Balzer (mineral rights owners/lessors). These separate actions instituted by Pack, Watts and Stevens (No. 74,605), and by the Balzers (No. 74,606) were consolidated for trial, and are consolidated for purposes of this opinion. The trial court entered judgment in favor of the mineral rights owners, canceling oil and gas leases and quieting title in the lessors.

The Court of Appeals affirmed, holding the leases terminated of their own terms under the provisions of the "cessation of production" clause. Certiorari was granted to consider the first impression question of whether a lease, held by a gas well which is capable of producing in paying quantities but is shut-in for a period in excess of sixty (60) days but less than one year due to a marketing decision made by the producer, expires of its own terms under the "cessation of production" clause unless shut-in royalty payments are made. We find that under such circumstances, the lease does not expire of its own terms. The opinion of the Court of Appeals is vacated, the judgment of the district court is reversed, and this cause remanded with directions to enter judgment in favor of the lessees.

The stipulated facts disclose that in both cases the mineral owners or their predecessors in interest entered into oil and gas leases with the lessees. Each of the leases contained similar provisions including a habendum clause, a shut-in or minimum royalty clause, and a 60-day cessation of production clause.

The habendum clause provides for the primary term of the lease to be for ten (10) years and "as long thereafter as oil, gas, casinghead gas, casinghead gasoline or any of them is produced." The shut-in royalty clause provides for a fifty dollar ($50.00) royalty payment per year for each well from which gas is not sold. When the royalty payment is paid, the well is deemed a producing well for purposes of the habendum clause. The cessation of production clause provides for the lease to continue after the expiration of the primary term as long as production does not cease for more than sixty (60) days without the lessee resuming operations to drill a new well.

The primary terms of each of the leases expired, and the leases continued pursuant to the habendum clause due to the wells' capability to produce in paying or commercial quantities. ¹ Each of the wells continued to be capable of producing in paying quantities up until the time of trial, but lessees have chosen at times not to market gas from the wells for periods exceeding sixty (60) days. The lessees stipulated that they chose to overproduce the wells during the winter months when the demand for gas is higher and the price for gas increases. Because the Oklahoma Corporation Commission imposed annual allowable limitations as to how much gas may be produced from the wells, the lessees curtailed the marketing of gas from the wells during the summer months when prices were lower so as not to exceed the annual allowable limits. The intention and result of this practice was to obtain the highest price for the gas and still stay within the allowable production limits set by the Oklahoma Corporation Commission. Such a practice was common with most of the gas producers in the state. ²

Although some marketing of the gas continued during the warmer months, such sales were exceeded by the monthly expenses, so the wells were not profitable during that period. Additionally, the Pack well was shut-in for one month during this period in order to build up pressure in preparation for an annual well test to determine its annual allowable limit.

The mineral owners filed suit in district court asserting the leases terminated by their own terms when the wells failed to produce for a sixty (60) day period and the lessees neither commenced drilling operations nor paid shut-in royalty payments. The trial court determined that an interruption in the sale and marketing of gas from the wells in excess of sixty (60) days constituted a cessation of production within the meaning of the cessation of production clause resulting in a termination of the leases. Judgment was entered accordingly, and the lessees/producers appealed that judgment.

I.

The term "produced" as used in the lease clauses means

"capable of producing in paying quantities" and

does not include marketing of the product.

A. The Habendum Clause

This Court has long held that the terms "produced" and "produced in paying quantities" have substantially the same meaning. State ex rel. Commissioners of the Land Office v. Carter Oil Co. of West Virginia, 336 P.2d 1086 (Okla.1958). Therein, we construed a typical habendum clause which extended the lease past its ten-year primary term as long thereafter as oil or gas is produced in paying quantities. We held that in order to extend the fixed term of ten years "and acquire a limited estate in the land covered thereby the lessee must have found oil or gas upon the premises in paying quantities by completing a well thereon prior to the expiration of such fixed term." 336 P.2d at 1094. The Court then rejected the lessors' argument that production in paying quantities required the lessees to not only complete a well capable of producing in paying quantities but also remove the product from the ground and market it. Thus, where a well was completed and capable of producing in paying quantities within the primary term, the lease continued, so far as the habendum clause was concerned, as long as the well remained capable of producing in paying quantities, regardless of any marketing of the product. ³

This rule of law has been consistently upheld. See, e.g., Gard v. Kaiser, 582 P.2d 1311 (Okla.1978) and McVicker v. Horn, Robinson and Nathan, 322 P.2d 410 (Okla.1958). Perhaps one of the best explanations for the rule was given in McVicker where we stated:

"To say that marketing during the primary term of the lease is essential to its extension beyond said term, unless the...