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Can I Terminate a Producing Oil and Gas Lease?

The Law Office of C. William Smalling, P.C. Sept. 5, 2019

In Texas, mineral owners often sign oil and gas leases that include language requiring oil or gas be produced in commercially paying quantities in order to keep the lease active. When production falls below a contractually mandated level, the lease may lapse or terminate. In addition, such leases often contain what is known as a “shut in royalty” clause. A shut-in royalty is a payment made by a lessee to a lessor in order to keep a lease in force when a well capable of producing gas or oil is not utilized. A recent Texas Supreme Court case addressed the issue of whether a party may terminate a producing oil and gas lease. 

Case Study 

In BP America Production Co. v. Red Deer Resources LLC, a marginal well operated by BP was producing at very low levels. BP then invoked its lease’s shut-in royalty clause with the mineral owners. In this case, the court addressed the question of whether the shut-in royalty clause was valid and whether the lease had actually terminated.

Background of Case

This case is based on a lease owned by BP for approximately two thousand acres of property in Lipscomb and Hemphill counties in Texas. Between 2011 and 2012, BP experienced a decline in production from its remaining wells on the lease, and Red Deer Resources notified BP that the wells on the property had become non-commercial, thus resulting in the termination of BP’s lease. As noted above, BP’s lease contained a shut-in royalty clause. Red Deer Resources claimed that that the shut-in royalty clause didn’t apply because the wells were not producing at paying levels and weren’t capable of producing in payable quantities. 

The Holding

At trial, the court held that BP’s lease had terminated. BP appealed this decision, and the appeals court agreed with the trial court. However, the Texas Supreme Court reversed the decision of the appeals court, holding that the BP lease had not terminated because Red Deer did not demonstrate that the well was incapable of production in paying quantities under the plain language of the lease. 

Contact a Texas Energy, Oil, and Gas Attorney

If you have a lease in which production has significantly slowed down, it’s important to have an experienced energy, oil, and gas attorney review the lease to determine whether the lease has terminated. In other words, it’s imperative that those involved in the energy, oil, and gas industries have reliable, experienced, and knowledgeable legal representation to help guide them through the ever-changing Texas legal landscape.

At the Law Office of C. William Smalling, P.C., we are highly experienced in the drafting and review of energy, oil, and gas contracts, including surface use agreements, joint operating agreements, farm-out agreements, master service agreements, drilling contracts, licensing agreements for use of seismic or technical data, and nondisclosure agreements. If you are in need of expert energy, oil, and gas legal representation in Texas, contact us today for a consultation.