## Facts

- Mineral owners leased portions of a 640-acre drilling and spacing unit to an operator under three leases: one lease without a shut-in royalty clause (1965) and two leases with shut-in royalty clauses (1967).
- The operator drilled a unit well in 1970 that was capable of producing gas; gas sales were governed by a long-term gas purchase contract executed in 1971.
- After years of production, the operator stopped producing from the well for more than four years despite the well’s continued capability.
- During the nonproducing period, the operator did not timely pay shut-in royalties under the two leases that required them; after the extended shut-in period, the operator tendered shut-in payments.
- The lessors under the lease without a shut-in clause refused the tendered payments; the lessors under the shut-in leases accepted them.
- The operator attributed the prolonged shut-in and payment failures to a mistaken understanding of its gas purchase contract status during a broader contractual dispute with the purchaser.
- The trial court terminated all leases for failure to produce in paying quantities and failure to exercise due diligence to market gas; the operator appealed on stipulated facts.

## Issues

1. Whether an oil and gas lease may terminate automatically under its habendum clause during the secondary term when production in paying quantities ceases.
2. Whether failure to make timely shut-in royalty payments under a shut-in clause can result in automatic termination.
3. Whether acceptance of shut-in royalty or royalty payments can estop a lessor from asserting lease termination.
4. Whether leaving a capable gas well nonproducing for over four years constitutes breach of the implied covenant to market.

## Decision

- The appellate court affirmed in part and reversed in part the judgment terminating the leases.
- The court recognized that a lease may expire by its own terms in the secondary term when production in paying quantities ceases and no savings provision is satisfied.
- For leases with shut-in clauses, the court held that untimely shut-in payments may be insufficient to preserve the lease and do not retroactively prevent termination if the lease has already expired under the habendum clause.
- The court treated acceptance of late payments as potentially relevant to estoppel, but not as a basis to revive a lease that has ended by its own terms; outcomes differed among lessors based on lease language and acceptance or rejection of payments.
- The court held the operator breached the implied covenant to market by failing for over four years to market gas from a well capable of production; an internal purchaser-contract dispute did not justify the delay.

## Legal Principles

- In the secondary term, an oil and gas lease commonly continues only so long as oil or gas is produced in paying quantities or an agreed substitute condition is satisfied; cessation without a valid savings clause can cause automatic termination.
- A shut-in royalty clause functions as a contractual substitute for production only if its stated conditions, including timeliness, are met.
- Late tender of shut-in royalties generally cannot retroactively maintain a lease that has already terminated under the habendum clause.
- Acceptance of late shut-in royalties or royalties may, depending on the circumstances, support estoppel as to claims of forfeiture or default, but it does not ordinarily resurrect a lease that has ended automatically by its own terms.
- The lessee owes an implied covenant to market production with reasonable diligence; an extended failure to market from a capable well may constitute breach.

## Conclusion

The court held that nonproduction in the secondary term can terminate an oil and gas lease by its own terms absent a properly invoked savings clause, that untimely shut-in payments may not prevent such termination, that estoppel based on payment acceptance is limited, and that a four-year failure to market gas from a capable well violates the implied covenant to market.


Danne v. Texaco Expl. & Prod., Inc., 883 P.2d 210 (Okla. Civ. App. 1994)