466 S.W.3d 335
Tex. App.2015Background
- BP held a 1962 oil, gas and mineral lease (Vera Murray) on ~2,113 acres; lease continued "as long thereafter as oil, gas or other mineral is produced." BP operated since 2000.
- Three Upper Morrow wells (#9, #10, #11) produced gas; #9 was plugged 2009, #10 plugged 2012 and stipulated non-paying by June 12, 2012; #11 was marginal and declining (under 10 Mcf/day by 2009).
- BP used a plunger-lift on #11; production records (2009–Jan 2013) showed intermittent every-other-day flow and long-term decline; BP reservoir forecasts predicted ~19.3% annual decline and minimal remaining reserves.
- On June 12–13, 2012 BP shut in #11 and tendered shut-in royalty payments; lessors (through Red Deer) did not negotiate checks; #11 remained shut in beyond the lease’s 60-day cessation window.
- Red Deer obtained top leases in 2011 and sued in Aug. 2012 seeking declaration the Vera Murray lease had terminated for failure to produce in paying quantities and that the shut-in royalty tender was ineffective.
- Jury found (1) lease did not fail to produce in paying quantities from Apr. 27, 2009 to Jun. 12, 2012; (3) the #11 well was incapable of producing in paying quantities when shut in on Jun. 13, 2012; (4) a reasonably prudent operator would not operate #11 for profit if turned on. Trial court declared lease terminated; BP appealed.
Issues
| Issue | Plaintiff's Argument (Red Deer) | Defendant's Argument (BP) | Held |
|---|---|---|---|
| 1. Was Question 3 (capability of #11 when shut in) material? | Q3 was necessary because shut-in royalty is ineffective if well not capable of producing in paying quantities when shut in. | Q1’s negative answer (lease did not fail) rendered Q3 immaterial because jury implicitly found profitability up to shut-in. | Q3 was material; Q1’s negative answer was a failure to find Red Deer’s claim, not an affirmative finding that the lease produced in paying quantities. |
| 2. Was there legally sufficient evidence that #11 was incapable of producing in paying quantities at shut-in? | Long-term decline, recent unprofitable months, BP forecasts showing minimal remaining reserves, and BP internal documents and admissions supported incapability. | BP argued Red Deer’s expert relied on speculative assumptions and five months of unprofitability is too short to prove incapability; December 2011 was profitable and could show capability. | Evidence was legally sufficient when viewed favorably to Red Deer: declining production, forecasts of steep decline and minimal reserves, and unprofitable recent months supported jury finding. |
| 3. Did the trial court err in refusing BP’s requested charge instructions on paying quantities and expenses (Question 3)? | (N/A — Red Deer supported the court’s instructions) | The court should have instructed no arbitrary time limit, confined expenses to actual lifting/marketing/taxes attributable to #11, and excluded lease-wide capital expenses. | Court did not abuse discretion: its instruction required profit "over a reasonable period," limited costs to expenses allocated to the well, and correctly excluded original drilling/reworking costs. |
| 4. Did charge errors and evidentiary rulings on Question 4 (reasonably prudent operator) warrant reversal? | Red Deer argued that omitting BP’s proposed instructions (e.g., repudiation, definition of "speculation," lease-wide focus) was proper; jury should consider the well-specific question. | BP argued jury should be instructed that a title challenge justified shutting in, define "speculation," and focus on lease-level development plans (Cleveland/Tonkawa). | No reversible error: court need not inject repudiation absent pleading, "speculation" has ordinary meaning, and Q4 was properly tailored to the #11 well given Q3’s scope. |
Key Cases Cited
- Tracker Exploration, Inc. v. Hydrocarbon Mgmt., 861 S.W.2d 427 (Tex. App. — Amarillo 1993) (shut-in royalty preserves lease only if well is capable of producing in paying quantities)
- Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550 (Tex. 2002) (adopted test that capability means without additional equipment or repairs; discussed distinguishing production-period measurement)
- Clifton v. Koontz, 325 S.W.2d 684 (Tex. 1959) (no arbitrary time limit for determining production in paying quantities; factors for reasonably prudent operator)
- Skelly Oil Co. v. Archer, 356 S.W.2d 774 (Tex. 1962) (treatment of operating and marketing costs and allocation to well for paying-quantities analysis)
- Pshigoda v. Texaco, Inc., 703 S.W.2d 416 (Tex. App. — Amarillo 1986) (limitations on costs considered in paying-quantities and guidance on excluding certain capital/reworking costs)
- Kidd v. Hoggett, 331 S.W.2d 515 (Tex. Civ. App. — San Antonio 1959) (shut-in royalty excused only if well actually capable of producing gas in paying quantities)
- Ridge Oil Co. v. Guinn Investments, Inc., 148 S.W.3d 143 (Tex. 2004) (doctrine of repudiation excusing operations while title dispute is resolved)