Opinion filed October 31, 2014
In The
Eleventh Court of Appeals
___________
No. 11-13-00132-CV
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LANDOVER PRODUCTION COMPANY, LLC, Appellant
V.
ENDEAVOR ENERGY RESOURCES, L.P. AND WELLS
FARGO ENERGY CAPITAL, LLC, Appellees
On Appeal from the 132nd District Court
Borden County, Texas
Trial Court Cause No. 1195
MEMORANDUM OPINION
Endeavor Energy Resources, L.P. and Wells Fargo Energy Capital, LLC
(referred to as Endeavor) were the working interest owners under an 80-acre oil
and gas lease in Borden and Dawson Counties. Landover Production Company,
LLC held a “top lease” on the same 80 acres. Landover sued Endeavor and
claimed that the Endeavor lease had automatically terminated due to a cessation of
production from the one and only well on the property. Therefore, Landover
argues, its “top lease” was the only valid and subsisting oil and gas lease on that
80-acre tract.
After a jury trial, the jury disagreed with Landover and instead agreed with
the position propounded by Endeavor and found that, for the period of May 2001
through the end of August 2001, cessation of production was excused in
accordance with the implied doctrine relating to temporary cessations of
production. The jury also found in favor of Endeavor on adverse possession issues
under the three-year, five-year, and ten-year statutes. In accordance with the
verdict of the jury, the trial court entered a take-nothing judgment against
Landover. It held that the Endeavor lease had not terminated and further that
Endeavor was the owner of the oil, gas, and mineral leasehold estate on the 80-acre
tract by virtue of adverse possession under the three-year, five-year, and ten-year
statutes.1 We affirm.
In a single issue on appeal, Landover maintains that “[t]he jury’s finding
there was a cessation of production is not supported by the evidence.” Although
Landover does not specify whether its claim is a legal insufficiency claim or a
factual insufficiency claim, we take it to be one of legal insufficiency because
Landover asks this court to reverse and render judgment that the “lease terminated
on or about May 1, 2001, and before August 31, 2001, and that [Landover] holds a
valid and existing lease.” Endeavor argues that, while there may have been a
temporary cessation of production during that period of time, there was no
termination of the lease. It further takes the position that, in any event, it owns the
lease by virtue of adverse possession.
We will first discuss the cessation of production issue. We do not find that
there is, in essence, a great deal of disagreement, if any, about whether there was a
1
Landover informs us that there were other defendants to the lawsuit in the trial court but that all
of them except Endeavor and Wells Fargo were dismissed from the suit prior to the entry of judgment.
Landover, Endeavor, and Wells Fargo are the only parties named in the notice of appeal.
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cessation of production under the Endeavor lease. Endeavor basically agrees with
Landover that, during the May 2001 through August 2001 time period, it was
having trouble with a heater-treater used to separate the oil and water that came
from the well. There was a hole in the heater-treater, and the leak made it
impossible or impractical to produce the well. There were other problems such as
access to the site to make repairs during rainy weather. The only real dispute on
appeal is whether the admitted cessation of production terminated the Endeavor
lease. The dispute revolves around the following language in Endeavor’s lease:
If at the expiration of the primary term oil and gas is not being
produced on said land but Lessee is then engaged in drilling or re-
working operations thereon, the lease shall remain in force so long as
operations are prosecuted with no cessation of more than thirty (30)
consecutive days, and if they result in the production of oil and gas so
long thereafter as oil and gas is produced from said land.
The quoted portion of the lease contains what is known as a savings clause.
Savings clauses come in a myriad of forms with a myriad of provisions. In this
case, pursuant to the savings clause, if at the expiration of the primary term there is
no production on the lease, then the lease will nevertheless remain in force, or will
be saved from automatic termination, if the “[l]essee is then engaged in drilling or
re-working operations” on the lease and if such “operations are prosecuted with no
cessation of more than thirty (30) consecutive days.” If production is obtained in
that period of time and under those conditions, the lease will continue, or be saved
from automatic termination, for “so long thereafter as oil and gas is produced
from” the property.
The savings clause never came to fruition in this case because, as is
undisputed, there was production at the end of the primary term. An examination
of the savings provision in this case reveals that the savings clause applies only
“[i]f at the expiration of the primary term oil and gas is not being produced on said
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land” (emphasis added). And, perhaps unlike many other oil and gas leases, there
are no other terms in the lease in this case that would act as a savings clause during
the secondary term of the lease.
When an oil and gas lease does not contain a savings clause applicable to the
secondary term of the lease, absent other considerations not relevant here, it
terminates automatically upon cessation of production during the secondary term.
Watson v. Rochmill, 155 S.W.2d 783, 784 (Tex. 1941). Nonexclusive examples of
savings provisions that will nonetheless keep a lease alive past that point are those
that pertain to shut-in royalties, continuous operations, and drilling operations.
Krabbe v. Anadarko Petroleum Corp., 46 S.W.3d 308, 315 (Tex. App.—Amarillo
2001, pet. denied).
In order to avoid the harsh results brought about by automatic termination of
an oil and gas lease that contains no such express savings clauses, courts have
impressed upon such a lease a “necessarily implied” temporary cessation of
production clause. Id. (citing Midwest Oil Corp. v. Winsauer, 323 S.W.2d 944,
946 (Tex. 1959)). Under the temporary cessation of production doctrine, the
“automatic termination rule is relaxed if the lessee can prove that the cessation of
production is temporary and is due to sudden stoppage of the well, some
mechanical breakdown of the equipment used in connection therewith, ‘or the
like.’” Id. (citing Amoco Prod. Co. v. Brauslau, 561 S.W.2d 805, 809–10 (Tex.
1978); Midwest Oil Corp., 323 S.W.2d at 947; and Watson, 155 S.W.2d at 784).
Again, the only savings clause contained in the lease in this case applied to
the primary term, not to the secondary term. Therefore, in accordance with the
temporary cessation of production doctrine, there was no termination of the lease if
Endeavor “prove[d] that the cessation of production after the primary term [was]
temporary and [that it was] due to sudden stoppage of the well, some mechanical
breakdown of the equipment used in connection therewith, ‘or the like.’” Id. A
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lessee must also prove that it acted with diligence and remedied the cause of the
temporary cessation and resumed production within a reasonable time. Id. at 315–
16.
The first question is, then, did Endeavor prove that the cessation of
production after the primary term was temporary and that the temporary cessation
of production was the result of a sudden stoppage of the well, or a mechanical
breakdown of some of the equipment used in connection with the well, or
something like that? We find ample evidence in this record to support the finding
that the answer to that question is in the affirmative.
As we have indicated, in May 2001 it was discovered that a hole had
developed in the heater-treater used in connection with the well. The well
produced both oil and water, and the heater-treater was used to separate the oil
from the water so that each might be stored in separate storage tanks. Testimony
showed that the oil would not have been marketable in the absence of the
separation process. Because of the hole in the heater-treater, not only could the oil
not be separated as required, but the result also was that the oil and water leaked
onto the surface of the property, a condition that would worsen if production were
continued using the leaking heater-treater. There was testimony that leaks such as
these could also draw fines and sanctions from the Texas Railroad Commission.
The evidence also shows that several attempts were made to repair the leak
in the heater-treater. When Endeavor attempted to make the repairs, it was
necessary to turn off the well. Endeavor turned the well back on when it was
thought that the repairs were successful. When its workers discovered that repair
efforts had been unsuccessful, Endeavor again turned the well off so that the
workers could attempt additional repairs. Endeavor was hampered in its efforts by
uncooperative, wet weather. Finally, in August 2001, after several attempts to
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repair the heater-treater, Endeavor was successful and production from the well
resumed without further cessation.
Endeavor additionally had to prove that it acted with diligence and that it
remedied the cause of the temporary cessation and resumed production within a
reasonable time. However, Landover has not claimed on appeal that Endeavor did
not do that. Landover’s only complaint about Endeavor’s diligence and
reasonableness is that “reasonable production alternatives were not utilized.” We
do not find that to be Endeavor’s burden under the facts of this case.
Landover has cited us to an abundance of cases in which courts address
continuous drilling operations, reworking operations, and repairs to downstream
equipment. Those cases are inapposite to the case before us. In those cases, the
parties to those leases provided for explicit savings clauses; the courts applied and
interpreted those specific clauses under the various facts in those cases. Here,
there are no such clauses applicable to the secondary term. In the absence of any
of those clauses here, the implied temporary cessation of production doctrine
applies. The evidence is more than sufficient to support the answers of the jury
and the judgment of the trial court that Endeavor’s lease did not terminate for
cessation of production because production was excused under the implied
temporary cessation of production doctrine. Landover’s sole issue on appeal is
overruled.
Even if we are in error regarding the application of the temporary cessation
of production doctrine, Landover would not prevail. The jury found, and the trial
court adjudged, that Endeavor alternatively held title to the leasehold estates by
adverse possession. Landover has not challenged those findings or holdings, and
Endeavor holds the lease under the same terms and conditions as its original lease.
See Natural Gas Pipeline Co. of Am. v. Pool, 124 S.W.3d 188, 189 (Tex. 2003).
(termination issue not reached because evidence supported adverse possession, and
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under that adverse possession, lessees held fee simple determinable interests under
the same terms as those under the leases involved).
We affirm the judgment of the trial court.
JIM R. WRIGHT
CHIEF JUSTICE
October 31, 2014
Panel consists of: Wright, C.J.,
Willson, J., and Bailey, J.
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