AUSTIN — In oral arguments set for later this week before the Texas Supreme Court, BP will make another attempt to hold onto an oil and gas lease for a well it shut in more than four years ago.
The court agreed to review a ruling by the 7th Court of Appeals, which terminated BP’s lease of a 2,113-acre plot at the request of another oil and gas company looking to take over rights to drill. Oral arguments are set for Nov. 10 at 9 a.m.
BP has had owned and operated the lease since 2000, including 10 wells in Lipscomb and Hemphill Counties. Just nine years later, only one well was producing gas, and the rate had declined. In 2011, Red Deer Resources went to the people who owned the mineral rights at time and obtained a top lease on the the same plot — meaning it was granted a new lease before BP’s was terminated. Red Deer, which had kept an eye on the wells’ low production, planned to drill new wells in unused formations. BP had similar plans but couldn’t solidify a partner. BP employees said in court that Red Deer’s “threat of litigation” prevented them from moving forward.
BP shut in the last well in June 2012 after eight days in a row without production. It sent notices to the lessors, invoking a shut-in royalty clause of the lease and sending checks for the shut-in royalty. Such a clause keeps the lease in place after a well can no longer produce oil or gas or isn’t in use. It’s often used to prevent the automatic termination of a lease. In this case, it prevented Red Deer from assuming the rights.
In August 2012, Red Deer filed a lawsuit in the 31st District Court of Lipscomb County, asking a judge to rule that BP’s lease had terminated. Red Deer alleged that the lease had terminated because it hadn’t produced “in paying quantities” over a certain period of time. It also claimed BP couldn’t invoke the shut-in royalty clause because the only operating well wasn’t capable of producing in paying quantities when it was shut in.
A jury concluded that the last well was not capable of producing in paying quantities and a reasonable operator would not continue to operate the well. After the court sided with Red Deer, saying the lease had terminated, BP appealed to the appellate court in Amarillo. BP argued that the lease shouldn’t have been terminated because the jury didn’t conclude that the well had stopped producing in paying quantities before it was shut in. Additionally, BP took issue with the jury’s determination that the well wasn’t capable of producing enough and that a reasonable operator would walk away. There wasn’t evidence to back up those findings, the company argued.
The appellate court upheld the previous court’s ruling, saying there was enough evidence to support the jury’s findings. Without the capacity to produce enough to be commercially viable, BP couldn’t invoke the shut-in royalty clause, which allows the lease to lapse.
In appealing to the state Supreme Court, BP asks the court to decide whether a shut-in well’s ability to produce should be measured at the time of the shut in or after. The company says measuring after a well is shut in risks every lease maintained via a shut-in royalty clause.
Red Deer responded by arguing that even if the well were turned back on, it wouldn’t be capable of producing in paying quantities, so BP can’t maintain the lease through the shut-in clause.
