## Facts

- Mineral lessors executed oil and gas leases in 1978 and 1980 covering approximately 133 acres in Jackson Parish, Louisiana.
- Gas from the leased premises was “wet gas” that had been marketed by commingling it with “dry gas” from another well to meet pipeline specifications for sale to a pipeline purchaser.
- The dry-gas well ceased producing; the pipeline purchaser refused to accept the wet gas alone because it did not meet quality specifications.
- Production from the leased premises ceased because there was no purchaser able and willing to take the gas under the existing well/pipeline configuration.
- The lessee invoked the leases’ shut-in royalty provisions and sought to reestablish a market by requesting an exception from the pipeline purchaser, attempting to rework the dry-gas well, and contacting other purchasers/transporters.
- A different purchaser expressed interest, but selling to it required a new pipeline connection; the lessee ultimately contracted for the sale and constructed a new pipeline.
- Roughly one year after the original purchaser stopped taking gas, the lessee reopened the well and resumed production and marketing.
- The lessee tendered shut-in royalties in January 1991 and asserted the leases remained in force due to the shut-in/force-majeure-type provisions and the lack of a market at the well.
- The lessors claimed the leases expired under a 90-day cessation-of-production clause and alleged breach of the implied covenant to diligently market under Louisiana Mineral Code art. 122.
- The lessors sought judicial cancellation without first giving formal notice placing the lessee in default.

## Issues

1. Whether the leases terminated under a 90-day cessation-of-production clause or were maintained by shut-in royalties where there was no market at the well or available pipeline.
2. Whether the lessee breached the implied covenant to diligently market production under Louisiana Mineral Code art. 122 under a reasonably prudent operator standard.
3. Whether cancellation for alleged breach of an implied covenant was available absent prior notice placing the lessee in default and an opportunity to cure.

## Decision

- The appellate court reversed the trial court and denied cancellation of the leases.
- The court held the leases did not expire because the shut-in royalty provisions applied where the well was capable of production but there was no market at the well or available pipeline, and the lessee’s shut-in royalty payment maintained the leases.
- The court held the lessee did not breach the implied covenant to diligently market because its actions reflected continuous, reasonable efforts consistent with a reasonably prudent operator.
- The court further held cancellation was improper because the lessors did not place the lessee in default before seeking the harsh remedy of lease cancellation.

## Legal Principles

- A shut-in royalty clause may maintain a gas lease when the well is capable of production but there is no practicable, current market at the well or via an available pipeline under existing conditions.
- For shut-in and marketing analyses, the existence of potential purchasers elsewhere does not necessarily establish a “market” unless a market is available to take production from the well (i.e., the market must be practicably brought to the well).
- Louisiana Mineral Code art. 122 measures the lessee’s marketing obligation by the reasonably prudent operator standard; sustained good-faith efforts to secure a market, including negotiations and necessary midstream construction, can satisfy the duty despite a temporary shut-in.
- Lease cancellation for breach of an implied obligation generally requires the lessor to place the lessee in default (notice and opportunity to perform); absent default, cancellation is not an available remedy.

## Conclusion

The court reinstated the leases, concluding that shut-in royalties preserved them during a market outage at the well, the lessee’s marketing efforts met the reasonably prudent operator standard, and the lessors’ failure to place the lessee in default barred cancellation.


McDowell v. PG & E Res. Co., 658 So. 2d 779 (La. Ct. App. 2d Cir. 1995)