|Opinion:||Tres C v. Raker Resources, 2023 OK 13|
|Subject Matter:||Oil and Gas Law|
|Date Decided:||February 14, 2023|
|Trial Court:||Tulsa County District Court; J. Huber|
|Route to this Court:||Appeal of trial court’s order following a bench trial; On certiorari from Court of Civil Appeals, Division IV|
|Facts:||Tres C owns certain mineral interests in a 320-acre tract located in Blaine County. The minerals are subject to an Oil and Gas Lease entered into by prior owners in 1955 and a well was drilled, the “Cowan Well.” Under the Lease’s habendum clause, the Lease remains valid as long as “oil, gas…or any of the products covered by this lease is or can be produced. The Lease also contains a “cessation-of-production” clause providing in pertinent part, “[i]f…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…” |
At trial, Tres C presented evidence that he Cowan Well failed to produce in paying quantities for the months of September, October and November 2016. Evidence was also presented that a new well was commenced on the leased lands on January 17, 2016. The new well was drilled by an assignee of lease rights from the owner of the Cowan Well.
Following trial, the trial court found the Cowan Well failed to produce in paying quantities for the months of September, October and November 2016. Further, the trial court found that the Cowan Well was not producing in paying quantities when it was “shut-in” on October 17, 2016. Having two bases for cessation of production, the trial court further found that the operator failed to restore production in paying quantities within the 60-day grace period provided for in the Lease’s cessation-of-production clause and quieted title in Tres C against the Lease. Defendants timely appealed
|Standard of Review:||A quiet title action is a matter of equitable cognizance. Issues of fact are reviewable under the clearly-against-the-weight-of-the-evidence standard, but issues of law are reviewable under the de novo standard.|
|Analysis:||The issue before the Court is whether it was a legal error for the trial court to apply a rule of law that analyzed only a 3-month window of time for assessing whether the Cowan Well had experienced a cessation of production in paying quantities such that the Cowan Lease expired by its own terms. Evidence that a well is operated at a loss for three consecutive months is, as a matter of law, too short a time period for determining whether a cessation of production in paying quantities has occurred. |
First, the Court has repeatedly explained that the cessation-of-production clause is only implicated where production has already ceased. The cessation-of-production clause and the 60-day time period in the Lease have no bearing on anything that is done before the cessation occurs, including the assessment of whether a cessation has occurred.
Second, it is not the purpose of the cessation-of-production clause to establish an accounting period for purposes of determining if production is in paying quantities. Otherwise, operators subject to a 60-day cessation-of-production clause would be required to commence drilling operations immediately upon sustaining a slight loss for one month without regard to whether they believed the next month’s production might be profitable. To do otherwise would risk forfeiture of their lease. The cessation-of-production clause was never designed to eliminate or avoid the operation of the temporary cessation doctrine, which is intended to preserve a lease in order to permit a lessee to restore production if production should cease under circumstances that require drilling or reworking in order to restore production.
Any other result would mean that if a well is capable of producing in commercial quantities at all times, but for a short time is unprofitable, the lessee would be required to begin drilling operations for another well that under the facts would be unnecessary and uneconomical. The cessation-of-production clause was never designed to eliminate or avoid the operation of the temporary cessation doctrine.
When an appellate court is reviewing the period employed by the trial court to determine profitability of a well, the appropriate time period is a time appropriate under all of the facts and circumstances of each case. The reasonable amount of time is typically much longer than three months.
Even if the three month time period were reasonable, that would mean that cessation commenced on December 1, 2016. Therefore, the commencement of new drilling operations on January 19, 2017, would have maintained the Cowan Lease under the 60-day cessation-of-production clause.
The Court quiets the title in favor of appellants. The non-contractual defense of obstruction raised by the appellant need not be addressed as that issue is now moot.
|Outcome:||Opinion of COCA vacated; Trial court reversed and case remanded.|
|Vote:||8-1; J. Combs authored; V.C.J. Rowe concurs in result.|