Savings Clauses Flashcards
Savings Clause
a clause in the lease that amends the habendum clause. Serves to keep the lease alive after the occurrence of an event that would without the express clause result in automatic termination of the lease
Continuous Operations Clause
If a lessee commences drilling operatings while the lease is in force, the lease shall remain in force for so long as such operations continue, and if production results, then for so long as the production continues
Sword v. Rains
Kansas
Defendant owned an oil and gas lease that contained a “continuous drilling” provision. A well was completed and efforts were made to market but shut in shortly after due to adverse weather.
The court ruled that a continuos operations clause extends the lease so long as the lessee exercises due diligence in beginning and continuing production, which includes the marketing of gas.
Dry Hole Clause
if a lessee drills a dry hole he has a set period of time in which to commence additional drilling or reworking operations
Cessation of Production Clause
If at any point production production ceases, the lessee has a set period of time in which to commence additional drilling or reworking operations
If there is no production at the end of the primary term, but the lessee is engaged in drilling or reworking operations, the lease will continue for a set period or the cessation of production
Sunac v. Parkes
Texas
The lease provided that the lessee could pool the lease to continue into the secondary term, but for gas purposes only. Defendant drilled a well on pooled land when the primary term ended. When the well turned out to be an oil well the well was claimed to be expired.
The court ruled the lease had terminated. The 30 day provision did not activate because the well did not result in gas. The 60-day provision did not activate because there was no dry hole.
Samano v. Sun Oil Co
Texas
The court found that without express terms providing otherwise, it must be considered applicable to the lease in both the primary and the secondary terms.
Shut-In Gas Royalty Clause
Allows the payment of a shut-in royalty to serve as a substitution for actual production. The well must be capable of production and there must be no market for the gas. Generally only allowed for gas.
Tucker v. Hugoton Energy Corp.
Kansas
The court ruled that the shut-in provision was improperly invoked, as the shut-in royalty clause applied when the well was capable of producing but no market existed.Here, a market existed so the leases terminated due to cessation of production
Pack v. Santa Fe
Oklahoma
The defendant chose to overproduce during the winter to maximize profit by meeting demand, and to curtail marketing during the less profitable summer months, so as not to exceed limits on annual gas production.
Oklahoma law simply requires a well to be capable of production in paying quantities, not actually producing, and marketing is not a necessary component of production
Under the doctrine of Temporary Cessation, a lessee can voluntarily cease production and marketing for a reasonable time period when there are equitable considerations to justify such actions
Force Majuere Clause
Serves to protect the life of the lease by substituting certain events that cause a lessee to fail to perform in some manner of production.
Due diligence is only required if expressly stated
Should include unavailability of equipment due to the nature of the oil & gas industry or rescheduling on the part of the contractors
Sun Operating v. Holt
Texas
Production continued until the pipeline company began major renovations and repairs on its transmission line, causing both leases to cease for more than sixty days
The shut-in royalty clause does not supersede all other clauses and the force majuere clause could be invoked regardless of other provisions. But in this case the issue was not out of the defendants control so force majuere did not protect them
