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BP America Production Co. v. Red Deer Resources, LLC

Supreme Court of Texas

April 28, 2017

BP America Production Company, Petitioner,
v.
Red Deer Resources, LLC, Respondent

          Argued January 12, 2017

         On Petition for Review from the Court of Appeals for the Seventh District of Texas

          Paul W. Green Justice.

         In this case, we must determine whether a jury's finding that a gas well was incapable of production in paying quantities the day after the producer closed the valve, and eight days after the last gas was sold or used, can support a judgment terminating the producer's lease in its secondary term. Because we conclude that the top-lease holder did not obtain a finding that the well was incapable of production in paying quantities on the material date under the plain language of the lease, we hold that the producer's lease remains valid without reaching the parties' other issues. Accordingly, we reverse the judgment of the court of appeals and render judgment in the producer's favor.

         I. Background

         This case involves the shutting-in of the Vera Murray #11 gas well. BP America Production Company owns an oil and gas lease covering approximately 2, 113 acres in Lipscomb and Hemphill Counties, Texas (the Vera Murray lease). The lease originated in 1962, and BP has owned and operated the lease since 2000. The lease has a five-year primary term and lasts "as long thereafter as oil, gas or other minerals is produced." In 1986, the lessee drilled three wells in the Upper Morrow formation-the Vera Murray #9, #10, and #11. The three wells initially produced oil but were reclassified as gas wells in 1989. The #9 well was plugged in April 2009, and the parties stipulated at trial that the #10 well (which was plugged in June 2012) was not capable of production in paying quantities without additional equipment or repairs on June 12, 2012-the date BP shut in the #11 well. All other previously drilled wells were plugged by 2009. Thus, only the #11 well could have sustained the lease on and after June 12, 2012.

         The Vera Murray #11 was a marginal well. By 1994, production from the well was averaging about 200 Mcf per day, but that production gradually declined over the next few years, with the well having several consecutive days without any flow, followed by several days with flow. Production had declined to less than 100 Mcf per day when BP acquired the lease in 2000. By 2009, production had declined to less than 10 Mcf per day.

         Red Deer Resources, LLC discovered the low production from the Vera Murray lease and obtained top leases in June 2011. The top leases contain an assignment provision giving Red Deer the right to file suit to terminate BP's lease. In July 2011, Red Deer notified BP of its top leases, asserting that BP's wells were "non-commercial."

         In May 2012, the #11 well experienced a seven-day period with no production. In the following days, the well resumed a general pattern of flowing gas for a period of time every other day.[1] The well produced 10 Mcf of gas on June 4, 2012, but then went eight days with no production. On June 12, BP turned off the well valve. On June 13, BP sent notice to the lessors that it was invoking the shut-in royalty clause, enclosing checks for the shut-in royalty owed. On the shut-in royalty checks, BP designated June 13, 2012, as the beginning of the shut-in period. The #11 well has remained shut in ever since.

         BP's lease contains a sixty-day cessation-of-production clause, which states, "[I]f production . . . should cease, and this lease is not otherwise maintained in force . . . after the primary term, this lease shall not terminate if lessee commences mining, drilling, or reworking operations on or before the expiration of sixty days from . . . cessation of production." It is undisputed that the #11 well was the only well potentially capable of production in paying quantities on June 12, 2012, and that BP did not commence any production operations during the sixty days after it closed the valve to the sales line on June 12. Therefore, the lease would terminate for a total failure of production or a failure of production in paying quantities unless BP properly invoked the shut-in royalty clause to maintain it. The shut-in royalty clause reads, in relevant 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 . . ., 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 each twelve-month period for which shut-in royalty is so paid or tendered . . . .

         Red Deer sued BP in August 2012, more than sixty days after BP shut in the #11 well, and asked the trial court to declare that BP's lease had terminated. The case was tried to a jury in 2013. Red Deer asserted two separate theories of lease termination: (1) BP's lease had terminated because the lease had not produced in paying quantities, based on a period of time ending on June 12, 2012; and (2) BP's lease terminated from an unexcused total cessation of production, and the shut-in clause did not save it because the #11 well was incapable of producing in paying quantities on June 13, 2012.[2] Four questions were submitted to the jury-Questions 1 and 2 related to Red Deer's claim that production in paying quantities had ceased by June 12, 2012, and Questions 3 and 4 were shut-in questions to determine whether the #11 well was capable of producing in paying quantities as of June 13, 2012. Questions 1 and 3, and the jury's answers, were as follows:

Question 1: From April 27, 2009 to June 12, 2012, did the Vera Murray lease fail to produce oil and gas in paying quantities?
Answer: No, the Very Murray lease did not fail to produce in paying quantities.
Question 3: Was the Vera Murray #11 well incapable of producing in paying quantities when it was shut-in on June 13, 2012?
Answer: Yes, the Vera Murray #11 well was incapable of producing in paying quantities when it was shut-in on June 13, 2012.

         Based on these answers, and after overruling BP's objection to entry of judgment on Questions 3 and 4, the trial court signed a judgment declaring that BP's lease had "lapsed and terminated for the lease being incapable of producing in paying quantities when the Vera Murray Well #11 was shut-in on June 13, 2012 and that a reasonably prudent operator would not continue to operate the well."

         The court of appeals rejected BP's arguments and affirmed the trial court's judgment, concluding that BP could not avoid lease termination by invoking the shut-in royalty clause. 466 S.W.3d 335, 352 (Tex. App.-Amarillo 2015, pet. granted). The court of appeals upheld the jury's answer to Question 3 that the #11 well lacked the capability to produce gas in paying quantities on June 13, 2012, enabling Red Deer to enforce its top leases. Id. at 347. In effect, the court of appeals held that the lease could be ...


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