capable of producing sour gas. There was no market in the area for sour gas produced in the volumes that the well at issue could produce. Even though the lessee attempted to sell the gas throughout the primary term of the lease, the primary term came to an end with no production in paying quantities having ever been established. The lessee argued that under the oil and gas lease it held a determinable fee simple interest in the oil and gas conveyed by its lessor via said lease; that the determinable fee simple interest was not terminated by the lessee’s failure to sell the sour gas due to a non-existent market for same and thus there was no abandonment of the lease. The lessee concluded that the lessor’s remedy for its failure to sell the sour gas was for damages and not for cancellation of the lease. The court clearly and succinctly held that the lease at issue was determined (terminated) at the expiration of its primary term for failure to produce oil and/or gas in paying quantities. The lack of a market for the sour gas did not excuse the lessee from complying with the terms of the lease ie producing in paying quantities. Implicit in its decision is its refusal to recognize that a lack of a market for the sour gas was tantamount to a temporary cessation of production. The third case is Giles v. McKanna, 200 S.W.2d 709 (Tex.Civ.App. 1947). Gas was produced from the leased premises from December 1929 to August 1932. Since that date no gas had been produced due to lack of an available market for the gas. No gas production occurred for over twelve (12) years prior to the institution of the suit to terminate the lease. The court cited Watson v. Rochmill, 155 S.W.2d 783 (Tex. 1941) for the specific holding that, after the expiration of the primary term of the lease and in the absence of a temporary cessation of production due to a sudden stoppage of the well or a mechanical breakdown of the equipment used in connection with production from the well, the lease automatically terminated. If there was a temporary cessation of production due to a mechanical issue with the well, the lessee would have a reasonable time to remedy the problem and restore production.
The court holds in this case that the cessation of production was not merely a temporary cessation of production but rather a permanent cessation of production. The court cites Watson v. Rochmill, 155 S.W.2d 783 (Tex. 1941) and Stanolind Oil & Gas Co. v. Barnhill, 107 S.W.2d 746 (Tex.Civ.App. 1937) as precedents for this conclusion. There was no production for over twelve (12) years. The lack of production was NOT due to any mechanical issue with the well or pipeline connection. Rather, it was due solely to a lack of a market for the gas. Although the lease involved was a State of Texas lease, containing somewhat different provisions than a “standard” Texas oil and gas lease, the court held that: (i) the specific agreement between the State and the lessee allowing the lease to be maintained for a ‘limited period’ was too vague and indefinite to allow the lease to be maintained for twelve (12) or more years coupled with (ii) the fact that there was nothing in the record to indicate that a market for the gas would ever be found, resulting in a refusal to enforce the apparent agreement of the parties. This case is not as clear as the first two cases since it rests in large part on contractual language agreed to by the State of Texas and the lessee. However, it appears to the author to clearly reinforce the general principle that a mechanical issue with the well/pipeline connection must be involved before a temporary cessation of production can be found to exist. Stated another way, the TCPD cannot be applied where the only cause of the lack of production is the lack of an oil or gas market.
Conclusion
Thus, on the very limited issue of whether the TCPD applies to Texas oil and gas leases where there is a lack of a market for oil, which leases do NOT contain a savings clause governing the commencement of drilling/ re-working operations in the secondary term of an oil and gas lease, it does not appear that the TCPD applies. The legal underpinning of the doctrine first requires that any loss of production must be due to a mechanical failure of the well or pipeline connection and not the loss of the oil market.
© 2020 Terry E. Hogwood
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G r o w t h T h r o u g h E d u c a t i o n - A p r i l / M a y / J u n e 2 0 2 0
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