Blair v. Natural Gas Anadarko Co.
406 P.3d 580, 2017 OK CIV APP 57, 2016 Okla. Civ. App. LEXIS 91 (2016)
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Rule of Law:
An oil and gas lease's cessation of production clause is not triggered by temporary periods of unprofitability, provided the well remains capable of producing in paying quantities. The term 'production' in such a clause means the capability of production, not necessarily continuous marketing or profitability.
Facts:
- On June 12, 1981, the predecessors of Plaintiffs Edward Arden Blair et al. executed an oil and gas lease with the predecessors of Defendants Natural Gas Anadarko Company et al.
- The lease contained a clause stating that if production ceased for any cause after the primary term, the lease would not terminate if the lessee resumed operations within 90 days.
- A well, the Blair No. 1-33, was completed and began producing during the lease's three-year primary term, extending the lease into its secondary term.
- During 2012, there were several 90-day periods where the cumulative cost of operating the well exceeded the revenue generated from the oil sold during those same periods.
- Despite the lack of profitability during these periods, the well never physically ceased production for 90 consecutive days and remained capable of producing oil.
- Defendants did not commence new drilling or reworking operations on the well during the periods of unprofitability.
Procedural Posture:
- Plaintiffs Edward Arden Blair et al. filed suit against Defendants Natural Gas Anadarko Company et al. in the District Court of Beaver County, Oklahoma (trial court).
- Plaintiffs sought cancellation of an oil and gas lease and an order to quiet title.
- Both Plaintiffs and Defendants filed motions for summary judgment.
- The trial court granted summary judgment for Plaintiffs, holding that the lease had terminated by its own terms due to unprofitability.
- The trial court denied Defendants' motion for summary judgment.
- Defendants, as appellants, appealed the trial court's order to the Oklahoma Court of Civil Appeals.
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Issue:
Does a temporary period where an oil well's operating costs exceed its revenue for 90 days constitute a 'cessation of production' that automatically terminates the lease, even if the well remains physically capable of producing in paying quantities?
Opinions:
Majority - Goodman, C.J.
No. A temporary period of unprofitability does not constitute a 'cessation of production' sufficient to terminate an oil and gas lease so long as the well remains capable of producing in paying quantities. The court found that the terms 'produced' and 'produced in paying quantities' are synonymous and refer to the well's capability to produce, not its actual day-to-day profitability or continuous marketing. Relying on the precedent set in Pack v. Santa Fe Minerals, the court reasoned that because the Blair No. 1-33 well was completed in the primary term and remained capable of production, the habendum clause preserved the lease. The cessation of production clause is not triggered by temporary unprofitability or a lack of marketing; it requires a complete, uninterrupted cessation of the well's capability to produce. Since the well physically produced oil at various times during the alleged 90-day unprofitable periods, production never ceased in a way that would trigger the termination clause. The trial court's reliance on Hoyt v. Continental Oil Co. was erroneous because that case involved a complete failure to produce in paying quantities, which was not the situation here.
Analysis:
This decision solidifies the legal principle in Oklahoma that the 'capability' of a well to produce in paying quantities is the key determinant for holding a lease in its secondary term, not short-term profitability. It clarifies that a cessation of production clause is not a tool for lessors to terminate leases based on temporary market fluctuations or operational cost spikes. The ruling provides significant protection and stability for lessees, ensuring that their multi-million dollar investments are not jeopardized by arbitrary 90-day accounting periods, so long as the underlying asset remains viable. This precedent reinforces the distinction between a temporary economic loss and a permanent cessation of a well's productive capacity.
