Archer County v. Webb
161 Tex. 210, 13 Oil & Gas Rep. 280, 338 S.W.2d 435 (1960)
Rule of Law:
The payment of shut-in gas well royalty, as provided in an oil and gas lease, does not extend the term of a separate, pre-existing term royalty deed that requires 'actual production in commercially paying quantities' unless the royalty deed itself contains a specific provision for such extension. A lessor's repudiation of an oil and gas lease excuses the lessee from further tender of royalties.
Facts:
- On May 7, 1929, Margaret A. Shannon, the fee simple owner of League 3 in Crockett County, Texas, conveyed to James E. Ferguson an undivided one-half interest in oil and gas royalty for a term of fifteen years, or so long as oil or gas was produced from the premises in commercially paying quantities.
- The royalty deed stipulated that if no commercially paying oil or gas was produced from the lands within fifteen years, the conveyance would become null and void.
- All interests acquired by Ferguson under this deed passed to the petitioners (Archer County, Fred Turner, Jr., Juliette Turner, and Fay Durham).
- Margaret A. Shannon died on December 13, 1931, and her interest in League 3 passed to the respondents (trustees of her estate and the Shannon West Texas Memorial Hospital).
- On April 24, 1940, respondents, as lessors, executed an oil and gas lease to R.G. Carr covering 202 acres of League 3, for a primary term of ten years and 'as long thereafter as oil, gas or other mineral is produced from said land hereunder,' which included a provision for shut-in gas well royalty if gas was not sold or used.
- Carr assigned his interest in the lease to Phillips Petroleum Company, which in turn assigned an interest in 40 acres to Fred Turner, Jr.
- On September 24, 1943, Phillips and Turner completed a well on the 40 acres as a potential gas producer.
- From September 15, 1948, to January 5, 1949, gas from the well was actually produced and sold, but at other times, no actual production occurred, though Phillips and Turner annually tendered shut-in gas well royalty payments, most of which were refused by respondents.
- Respondents refused to accept tenders of shut-in gas well royalties and royalties from actual sales, indicating a repudiation of the lease.
- The 15-year term of the royalty deed expired on May 7, 1944.
Procedural Posture:
- Petitioners (Archer County et al.) and Phillips Petroleum Company/Fred Turner, Jr. sued respondents (Shannon trustees) in a trial court for trespass to try title and for a declaratory judgment concerning the existence of a term royalty interest and an oil and gas lease.
- The trial court held that the petitioners' royalty interest subsisted as to the 202-acre tract under lease and that the oil and gas lease owned by Phillips and Turner remained in effect.
- The Court of Civil Appeals affirmed the judgment regarding the continuation of the oil and gas lease but reversed and rendered the part of the judgment holding the royalty interest in effect, concluding that all rights under the royalty deed had reverted to respondents.
- Both Archer County et al. (petitioners) and the Shannon trustees (respondents) filed applications for writ of error to the Supreme Court of Texas.
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Issue:
1. Does the payment of shut-in gas well royalty under an oil and gas lease satisfy the 'production in commercially paying quantities' requirement to extend the term of a separate, pre-existing royalty deed beyond its fixed term? 2. Did an oil and gas lease terminate due to the lessee's failure to make subsequent shut-in royalty payments, despite the lessor's prior repudiation of the lease?
Opinions:
Majority - Mr. Chief Justice Hickman
No, the payment of shut-in gas well royalty under an oil and gas lease does not extend the term of a separate royalty deed beyond its fixed term. The royalty deed expressly required 'actual production in commercially paying quantities,' and the absence of such actual production by the end of the fixed 15-year term caused the royalty interest to terminate on May 7, 1944. The lease's shut-in gas well clause, which deems payment as 'production' for the lease's own duration, does not modify or extend the separate term of the royalty deed, as the royalty deed itself contained no such provision. This principle is distinct from unitization cases where parties, including term royalty owners, agree to enlarge the area from which production may continue the term interests. No, the oil and gas lease did not terminate due to the lessee's failure to make subsequent shut-in royalty payments. Respondents, by repeatedly refusing tendered shut-in gas well royalty payments and royalties on actual sales, effectively repudiated the lease. This repudiation excused Phillips and Turner from any further duty to make subsequent tenders of shut-in gas well royalty, thereby preventing the termination of the lease.
Analysis:
This case clarifies the distinct legal interpretations of 'production' in different instruments related to oil and gas interests. It firmly establishes that a shut-in gas well clause in a lease, designed to maintain the lease, generally does not automatically extend a pre-existing term royalty deed unless the deed specifically incorporates such a provision. This distinction is critical for drafting and interpreting oil and gas conveyances, emphasizing the need for explicit language to link the terms of separate instruments. Furthermore, the ruling on repudiation provides important guidance on when a lessor's actions can relieve a lessee of performance obligations, preventing lease termination even in the absence of technical compliance.
