Pack v. Santa Fe Minerals

Rule of Law:

In Oklahoma, the term 'production' in an oil and gas lease's cessation of production clause means the well is capable of producing in paying quantities, not the actual marketing or sale of the product. A temporary cessation of marketing from a well that remains capable of production for reasonable business purposes does not trigger the clause to terminate the lease.

Facts:

• Mary Lou Pack and other mineral owners (lessors) entered into oil and gas leases with Santa Fe Minerals and other companies (lessees).
• The leases had primary terms of ten years, to be extended as long thereafter as oil or gas was 'produced.'
• The leases contained a 'cessation of production' clause stating the lease would terminate if production ceased for more than 60 days without the lessee resuming drilling operations.
• After the primary terms expired, the gas wells on the properties remained capable of producing in paying quantities at all times.
• Lessees intentionally stopped marketing gas from the wells for periods exceeding 60 days during the summer months when prices were lower.
• This marketing strategy was a common industry practice to maximize revenue by selling more gas during high-demand winter months while staying within annual production limits set by the Oklahoma Corporation Commission.
• During the summer months when marketing was curtailed, the wells were not profitable on a monthly basis.

Procedural Posture:

• Mary Lou Pack and other lessors filed quiet title actions against Santa Fe Minerals and other lessees in the district court (trial court).
• The trial court entered judgment in favor of the lessors, canceling the oil and gas leases.
• The lessees, as appellants, appealed the judgment to the Court of Appeals.
• The Court of Appeals, an intermediate appellate court, affirmed the trial court's judgment.
• The lessees successfully petitioned the Supreme Court of Oklahoma, the state's highest court, for a writ of certiorari to review the decision.