Lease Maintenance Analysis Guide
ARTICLE I
Temporary Cessation of Production Doctrine As Applied To A Lack Of A Market
gas lease containing a habendum clause similar to that set out above but without any savings clause governing operations(re-drilling or workover operations) necessary to keep the oil and gas lease in full force and effect after the expiration of the primary term of the lease. The purpose of the paper is to negative the application of the Temporary Cessation of Production Doctrine to: (i) the present forced shutting in of oil wells due to lack of a market and (ii) the attempted application of the cessation of production doctrine as a faux implied force majeure doctrine (See Article II by this author) where production is shut in for lack of a market and not because the well(s) are physically incapable of producing.
Introduction
Early Texas oil and gas leases typically contained significantly fewer provisions governing the relationship of the lessor and lessee as well as the continuing viability of the oil and gas lease than today’s leases. As was discussed in a related paper ( THE PRECIPITOUS 2020 OIL PRICE DROP - RISKS IN THE UNILATERAL REDUCTION OF LEASE/UNIT OIL PRODUCTION, by the author ) : “First, and foremost, a Texas mineral lease grants a fee simple determinable interest in the oil and gas to the lessee. The lessee’s fee simple determinable estate may continue for so long as the lessee uses the leased premises for its intended purpose ie production of oil and gas. A lessee’s mineral/leasehold estate will automatically terminate if the event upon which it is limited occurs ie cessation of production of oil and gas. An oil and gas lease habendum clause defines the mineral/leasehold estate’s duration. For example, a typical habendum clause may provide: “Subject to the other provisions as contained herein, this lease shall be for a term of ??? years from this date (“the primary term”) and for so long thereafter as oil or gas of whatsoever nature is produced from the leased premises.” In Texas, such a habendum clause requires actual production in paying quantities . More significantly, although the habendum clause generally controls the mineral estate’s duration, other clauses found in an oil and gas lease may extend the habendum clause’s term. The issue of when a lease terminates is always a question of resolving the intention of the parties based upon all of the terms and provisions contained in the oil and gas lease.”
The Law Regarding the Temporary Cessation of Production Doctrine
The development of the law regarding the Temporary Cessation of Production Doctrine (“TCPD”) commenced early in Texas jurisprudence and continues to this date. The following is a review of the legal principles which govern the imposition/non-imposition of the TCPD to oil and gas leases today.
Factually:
1. Due to a precipitous drop in the price of oil, oil purchasers are refusing to take delivery of lease production, causing the lessee(s) whose leases are in their secondary term, to have to shut-in their oil wells. None of the impacted oil and gas leases contain a shut-in oil royalty provision. Thereafter, oil is not produced, on a lease or unit basis, in paying quantities for a period of time (30, 60, 90 ??? days). NOTE: If the wells being shut in are gas wells with a high GOR content, additional lease research must be conducted to determine if there is a shut-in gas royalty provision and/or a savings clause in the lease. This article is specifically directed at lease/unit oil production only.
This paper will analyze a typical Texas oil and
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N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s
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