Stanolind Oil & Gas Co. v. Barnhill
107 S.W.2d 746, 1937 Tex. App. LEXIS 735 (1937)
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Rule of Law:
For an oil and gas lease to extend beyond its primary term under a habendum clause requiring 'production in paying quantities,' the lessee must not only discover gas but also be able to market and sell it for a profit. The mere discovery of gas in a marketable quantity is insufficient if no market exists for it.
Facts:
- On February 4, 1930, J.R. Barnhill and O.B. Carver executed an oil and gas lease to J.A. Batson for a primary term of five years, and as long thereafter as oil or gas was produced from the land.
- Batson assigned an interest in the lease to Stanolind Oil & Gas Company.
- On March 31, 1931, the lessees completed a well that discovered a potential of over 7,000,000 cubic feet of sour gas per day.
- During the entire five-year primary term, which ended February 4, 1935, there was no available market for sour gas from a single, isolated well.
- Despite reasonable efforts, the lessees were unable to sell any gas from the well before the primary term expired.
- In October 1935, months after the primary term ended, Stanolind secured a contract to sell the gas, but Barnhill and Carver informed the buyer that the lease had already terminated.
Procedural Posture:
- Stanolind Oil & Gas Company and J.A. Batson (plaintiffs) sued J.R. Barnhill and O.B. Carver (defendants) in the district court of Potter county, Texas (a trial court).
- The suit was in the form of trespass to try title, seeking to establish the validity of their oil and gas lease.
- The trial court, sitting without a jury, found that the lease had expired on February 4, 1935, due to a lack of production in paying quantities.
- A judgment was entered in favor of the defendants, canceling the lease and clearing their title to the land.
- The plaintiffs (appellants) appealed the trial court's judgment to the Court of Civil Appeals of Texas (an intermediate appellate court).
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Issue:
Does the discovery of gas in large quantities, for which there is no available market, constitute 'production in paying quantities' sufficient to extend an oil and gas lease beyond its primary five-year term?
Opinions:
Majority - Stokes, Justice
No, the discovery of gas in large quantities without an available market does not constitute 'production in paying quantities' sufficient to extend the lease. The term 'production in paying quantities' requires not only discovery but also the ability to market the product with a reasonable expectation of profitable returns in excess of costs. The lease granted a determinable fee, an estate that automatically terminates upon the failure of a stated condition. In this case, the condition was production in paying quantities within the five-year primary term. Since there was no market for the sour gas, there could be no income and thus no profitable production. Therefore, the lease terminated automatically by its own terms on February 4, 1935, and the court will not rewrite the contract to extend the term based on the mere prospect of a future market.
Analysis:
This decision solidifies the principle in Texas oil and gas law that 'production' under a standard habendum clause means more than just discovery; it requires marketability and profitability. The ruling clarifies that the risk of finding a market for the discovered product lies with the lessee. It establishes a strict interpretation of the determinable fee concept, where the lease terminates automatically upon the expiration of the primary term if the condition of profitable production is not met, rather than requiring the lessor to sue for forfeiture. This precedent forces lessees to secure a market for discovered resources before their primary lease term expires to hold the lease by production.
