Lead Opinion
delivered the opinion of the Court.
In this case, we decide whether a gas mining lease terminated when actual production ceased longer than sixty days. The lease expressly states that it lasts for one year and “as long thereafter as gas is or can be produced.” The lease also provides that, if production ceases for any reason, the lease “shah not terminate provided lessee resumes operations for drilling a well within sixty (60) days from such cessation.” The lessees began producing gas in 1936. However, in 1981 and again in 1985, actual production ceased longer than sixty days. The court of appeals held that these cessations terminated the lease.
I. BACKGROUND
In 1936, Thompson’s and Anadarko’s predecessors entered into a lease “for the purpose of mining and operating for and producing gas.” The lease allows either production or the lessees’ beginning drilling operations to maintain the lease beyond its one-year primary term.
Two provisions in the lease are pertinent here. The lease’s “habendum clause” states:
This lease shall remain in force for a term of one (1) year and as long thereafter as gas is or can be produced.
The lease also has a “cessation-of-production clause,” which provides:
If, after the expiration of the primary term of this lease, production on the leased premises shall cease from any cause, this lease shall not terminate provided lessee resumes operations for drilling a well within sixty (60) days from such cessation, and this lease shall remain in force during the prosecution of such operations and if production results therefrom, then as long as production continues.
Anadarko’s predecessors began producing gas in 1936. However, it is undisputed that production totally ceased for sixty-one days in 1981 and ninety-one days in 1985 while the gas purchaser conducted pipeline repairs. In 1997, Thompson sued for a declaration that the lease terminated when production ceased in 1981 and for conversion damages.
On Thompson’s motion, the trial court granted partial summary judgment that the lease terminated due to one or more cessations of production. After a bench trial, the court rejected Anadarko’s affirmative defenses of limitations, laches, quasi-estoppel, unjust enrichment, adverse possession, revivor, judicial estoppel, and promissory estoppel. Accordingly, the trial court awarded damages and attorney’s fees to Thompson.
Anadarko appealed. After considering the lease’s implicit and explicit objectives, language in the lease’s continuous operations clause, and other jurisdictions’ case law, the court of appeals construed the lease’s habendum clause to require actual production in paying quantities.
We granted Anadarko’s petition to consider whether the court of appeals properly construed the lease to conclude that it terminated.
II. APPLICABLE LAW
A. Lease Construction
Construing an unambiguous lease is a question of law for the Court. Luckel v. White,
B. Oil and Gas Lease Provisions
A Texas mineral lease grants a fee simple determinable to the lessee. See Texas Co. v. Davis,
A lease’s habendum clause defines the mineral estate’s duration. Gulf Oil Corp. v. Southland Royalty Co.,
Although the habendum clause generally controls the mineral estate’s duration, other clauses may extend the habendum clause’s term. Southland Royalty,
III. ANALYSIS
A. Lease Construction
Here, we decide whether the lease terminated when actual production ceased
Anadarko contends that the habendum clause’s plain language allows production or the capability of production to sustain the lease. Thus, Anadarko argues, the court of appeals incorrectly concluded that the habendum clause requires actual production. Anadarko urges us to give the clause’s “can be produced” language its full effect. See Fox,
In response, Thompson asserts that both the lease’s terms and existing Texas law support the court of appeals’ conclusion that actual production is required to sustain the lease after the primary term. See
Here, the habendum clause expressly states that the lease lasts as long as gas “is or can be produced.” For several reasons, the court of appeals rejected Anadarko’s argument that capability of production sustained the lease and, instead, concluded that the habendum clause requires actual production.
We disagree with the court of appeals’ lease construction. Here, neither party contends that the lease is ambiguous. Consequently, in construing the lease, we first consider the parties’ intentions as expressed in the lease’s four corners. See Yzaguirre,
Additionally, the court of appeals reasoned that allowing the ability to produce gas to prolong the lease would “effectively erase” the eessation-of-production clause from the lease.
The fact that the event which is designed to prevent termination is the commencement of drilling or reworking operations gives some indication of the purpose of the clause and the intention of the parties. It indicates that the parties are concerned with a situation where cessation of production is of the type that is remedied by drilling or reworking operations. Thus, the parties must have intended that the clause would become operative if a dry well is drilled or if a producing well ceases to be capable of producing in paying quantities. A literal application of the clause to every temporary cessation of production could lead to absurd and unintended results.
2 Kuntz, A Treatise on the Law of Oil & Gas 416-17.
Construing the cessation-of-production clause to apply when a well holding the lease ceases to be capable of production— and not simply when actual production ceases — accords with the cessation-of-production clause’s plain language. Moreover, this construction avoids imposing an unnecessary limitation on the grant. See Fox,
The court of appeals also misplaced its reliance on cases from other states. See
Furthermore, the court of appeals erroneously relied upon an Oklahoma court of appeals opinion to support its view that the Anadarko habendum clause requires actual production. See Fisher,
In Pack, the Oklahoma Supreme Court considered whether a lease held by a gas well capable of production but shut-in for more than sixty days expired under the cessation-of-production clause. Pack,
Finally, we reject Thompson’s contention that allowing the capability of production to sustain the lease would allow the lessees to sustain the lease indefinitely— without actual production. Rather, the implied duty to manage and administer the lease as a reasonably prudent operator, which encompasses the implied duty to market the gas reasonably, would limit the lessees’ ability to sustain the lease based on a well’s capability of production. See Yzaguirre,
For these reasons, we hold that a well actually producing or capable of producing gas sustains this particular lease under the habendum clause. We also hold that the cessation-of-production clause only applies if the lease would otherwise terminate under the habendum clause. Consequently, the court of appeals erred in holding that, under this lease, “can be produced” means “actual production.”
B. Capability of Production
Because we conclude that actual production was not necessary to sustain the lease, we next consider whether the 1981 and 1985 cessations terminated the lease. This depends upon whether the well holding the leased premises was capable of production during the two periods when actual production ceased longer than sixty days. According to Anadarko’s brief, “[t]he evidence is undisputed here that the well was capable of production during the two periods when no production was shown,” because the evidence shows that the well was shut-in for pipeline repairs. In response, Thompson contends that the well was not capable of production, because the well would not have produced if it had been “turned on.” See Hydrocarbon Mgt., Inc. v. Tracker Exploration, Inc.,
We have determined that “the completion of a gas well capable of producing in paying quantities but shut-in due to lack of pipe line facilities or for other reasons is not considered production” and therefore does not sustain a mineral interest that lasts as long as oh or gas “is produced.” Peveto v. Starkey,
One court of appeals considered this issue in deciding whether a lessee’s paying shut-in royalties maintained a lease even though actual production had ceased. Hydrocarbon,
We believe that the phrase “capable of production in paying quantities” means a well that will produce in paying quantities if the well is turned “on,” and it begins flowing, without additional equipment or repair. Conversely, a well would not be capable of producing in paying quantities if the well switch were turned “on,” and the well did not flow, because of mechanical problems or because the well needs rods, tubing, or pumping equipment.
Hydrocarbon,
We approve the Hydrocarbon definition, because it is consistent with existing cases that discuss the difference between actual production and capability of production. See Peveto,
IV. CONCLUSION
Here, the lease’s habendum clause expressly states that the lease lasts as long as gas “is or can be produced.” Based on the habendum clause’s plain meaning, we hold that a well actually producing gas or capable of producing gas sustains this particular lease. To be “capable of producing gas,” we conclude that a well must be capable of producing gas in paying quantities without additional equipment or repairs. Accordingly, we reverse the court of appeals’ judgment and remand to the trial court for further proceedings consistent with this opinion. See Tex.R.App. P. 60.2(d). Because we resolve this case based on the lease-construction issue, we do not reach Anadarko’s affirmative defenses.
Lead Opinion
ON MOTION FOR REHEARING
We deny the motion for rehearing but write to clarify our decision.
In defining “capable of production” in our original opinion, we approved this definition from Hydrocarbon Management, Inc. v. Tracker Exploration, Inc.,
We believe that the phrase “capable of production in paying quantities” means a well that will produce in paying quantities if the well is turned “on,” and it begins flowing, without additional equip*559 ment or repair. Conversely, a well would not be capable of producing in paying quantities if the well switch were turned “on,” and the well did not flow, because of mechanical problems or because the well needs rods, tubing, or pumping equipment.
In the case of a marginal well, such as we have here, the standard by which paying quantities is determined is whether or not under all the relevant circumstances a reasonably prudent operator would, for the purpose of making a profit and not merely for speculation, continue to operate a well in the manner in which the well in question was operated.
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The term “paying quantities” involves not only the amount of production, but also the ability to market the product (gas) at a profit. Whether there is a reasonable basis for the expectation of profitable returns from the well is the test. If the quantity be sufficient to warrant the use of the gas in the market, and the income therefrom is in excess of the actual marketing cost, and operating costs, the production satisfies the term “in paying quantities”. In the Hanks case, [24 S.W.2d 5 , 6 (Tex. Comm’n App.1930, judgm’t adopted)], the trial court found that the well completed by Hanks did not produce in paying quantities within the contemplation of the terms of the lease, and this Court upheld such finding, holding that there was no evidence showing that there were any facilities for marketing the gas or any near-by localities or industries which might have furnished a profitable market therefor. The Court went further and pointed out the complete failure of the evidence to show what the gas could have been sold for at any probable market, and that there was no evidence “tending to show that the well was situated in such proximity to any prospective market which would justify the construction of a pipe line for marketing same.”
Id. at 691 (quoting Hanks v. Magnolia Petroleum Co.,
In our original opinion in this case, we also said,
we reject Thompson’s contention that allowing the capability of production to sustain the lease would allow the lessees to sustain the lease indefinitely — without actual production. Rather, the implied duty to manage and administer the lease as a reasonably prudent operator, which encompasses the implied duty to market the gas reasonably, would limit the les*560 sees’ ability to sustain the lease based on a well’s capability of production.
[I]f reasonable diligence in performing every one of the lessee’s exploring, developing, producing, and marketing operations was the test, neither lessor nor lessee could at any time have clearly or certainly known whether the estate granted was alive or ended. Such a test must inevitably diminish — if not destroy — the value of the rights of all parties derived from a mineral lease.
W.T. Waggoner Estate,
We meant in our original decision that, as a practical matter, a lessee will not sustain a lease based on a well’s capability of production without actual production of the well because the payment of damages for the failure to reasonably market the gas would be a strong incentive to connect the well to facilities that would permit actual production. And, in an extraordinary case, when damages would not furnish an adequate remedy, a court could conditionally order termination if a connection and actual production were not commenced within a reasonable time. See id. at 32.
Finally, the motion for rehearing contends that several decisions of this Court and other courts compel a different result in this case. We disagree. The cases on which Thompson and the other Respondents rely are distinguishable because they involved different lease provisions, different facts, or both. The leases at issue in many of the cases said that the lease would remain in effect as long as oil or gas “is produced.” See Haby v. Stanolind Oil & Gas Co.,
Only two decisions relied on by Thompson and the other Respondents involved leases that contained a “can be produced” provision. Davis,
Accordingly, we deny the motion for rehearing.
Notes
. Justice Baker, author of the Court's original opinion, resigned effective August 31, 2002, and therefore did not participate on rehearing.
