Factual background
A mineral estate lessee began producing oil before the end of its lease’s primary term, but in May 2011, the lessee was forced to temporarily cease production due to an equipment failure. The equipment in question was a heater treater, which was used to separate oil from produced water. The lessee admitted that oil was not produced on the lease for approximately four months due to the heater treater’s failure.Another entity with an interest in the mineral estate (“Plaintiff”) filed suit alleging that the lessee’s failure to produce oil for four months terminated the lease. In response, the lessee argued that Texas’ temporary cessation of production doctrine applied and that its lease was therefore still in effect. The lessee highlighted the fact that the heater treater was difficult to fix and that rainy weather made it difficult to access the leasehold. The jury found in the lessee’s favor, and Plaintiff appealed on the ground that the evidence did not substantiate the jury’s finding.
The opinion
In addressing the appeal, the Eastland Court of Appeals first noted that Texas law necessarily implies a temporary cessation of production clause into oil and gas leases that do not contain express savings clauses in order to “avoid the harsh results brought about by automatic termination.” As the Court explained, “[u]nder the temporary cessation of production doctrine, the automatic termination rule is relaxed if the lessee can prove that the cessation of production is temporary and is due to sudden stoppage of the well, some mechanical breakdown of the equipment used in connection therewith, or the like.”The Court then highlighted evidence supporting the jury’s finding, including testimony that:
- oil is not marketable absent a separation process like that done by the heater treater;
- continued use of the heater treater would have polluted the leasehold and potentially drawn regulatory fines;
- the lessee attempted to fix the heater treater several times before successfully doing so;
- rainy weather hampered the efforts to fix the heater treater; and
- production resumed once the heater treater was fixed. The Eastland Court of Appeals held that this constituted “ample evidence . . . to support the finding that” the cessation of production was temporary and was the result of a mechanical breakdown of some of the equipment used in connection with the well. The Court therefore affirmed the jury’s verdict that the temporary cessation of production doctrine applied and that the lease was still in effect.
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Jim Hartle (jim.hartle@nortonrosefulbright.com or 713 651 5695) from Norton Rose Fulbright's Energy Practice Group.
