Mineral owners in Texas often sign oil and gas leases that include language that requires that oil or gas be produced in commercially paying quantities in order to keep the lease alive. When production falls below that level, the lease may terminate or lapse, and the mineral interest reverts to the landowner, or to other leases with subsequent rights to the property (i.e., top lease holders). In addition, many leases contain what is called a “shut in royalty” clause, which often goes something like this: “where gas from any well or wells capable of producing gas . . . is not sold or used during or after the primary term and this lease is not otherwise maintained in effect, the lessee may pay or tender … shut-in royalty . . . , and if such shut-in royalty is so paid or tendered
and while lessee’s right to pay or tender same is accruing, it shall be considered that gas is being produced in paying quantities, and this lease shall remain in force during each twelve-month period for which shut-in royalty is so paid or tendered . . .” . It is important to notice that the shut in royalty clause can only be invoked if the well in question is capable of producing in paying quantities.
BP America Production Co. v. Red Deer Resources LLC is a case involving a marginal well operated by BP that was producing at very low levels. BP invoked the shut-in royalty clause of their lease with the mineral owners. However, questions arose as to whether BP’s use of the shut in royalty clause was valid and whether the lease had actually terminated.
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