February 27, 2015 Articles

Litigation Update on Select Oil and Gas Contract Disputes

A rundown of several cases impacting the industry.

By Mark D. Christiansen – February 27, 2015

PNP Petroleum I, LP v. Taylor

Court determines whether the special provisions of the oil and gas lease required that a well be “capable of producing in paying quantities” before the payment of shut-in royalties could extend the term of the lease.

In PNP Petroleum I, LP v. Taylor, 438 S.W.3d 723 (Tex. Ct. App.—San Antonio 2014, petition filed), the parties to an oil and gas lease dated June 1, 2009, had included the following special savings clause:

ii. SHUT-IN ROYALTY (Savings) If, at the expiration of the primary term there is located on the lease premises a well or wells not producing oil/gas in paying quantities, Lessee may pay as royalty a sum of money equal to Twenty ($20) dollars per proration acre associated with each well not producing. The shut-in well royalty payment will extend the term of this lease for a period of one (1) year. . . .

Id. at 727.

At the time the oil and gas lease was negotiated and signed, 13 wells that were not actually producing oil or gas were already located on the leased premises. Those wells had been drilled by a prior lessee whose lease had expired.

On May 12, 2010, PNP sent the mineral owner-lessors payment under the above savings clause with the stated purpose of extending the term of the lease. The mineral owners rejected the tendered payment and took the position that no well located on the leased premises was “capable” of producing oil or gas in paying quantities, and that a “shut-in royalty” payment would extend a lease under Texas law only if the well that was shut in was “capable” of producing in paying quantities. At the time the payment was rejected, the only wells located on the leased premises were the same 13 preexisting wells that had been drilled by the prior lessee, and those wells were not producing in paying quantities.

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