## Facts

- Mineral owners leased oil and gas rights to working-interest owners under leases containing a habendum clause, a cessation-of-production clause (60-day period), and a shut-in royalty clause.
- After the primary terms expired, the wells remained physically capable of producing gas in paying quantities.
- Lessees intentionally curtailed production and marketing for extended periods (sometimes more than 60 days) to take advantage of seasonal price differences and to comply with regulatory annual production limits.
- During these shut-in periods, lessees did not pay shut-in royalties.
- Lessors sued for cancellation, arguing that lack of marketed production for more than 60 days triggered termination under the cessation clause and that shut-in royalties were required to maintain the leases.
- The trial court and the court of appeals ruled for lessors, construing “production in paying quantities” to require actual marketing.

## Issues

1. Whether “production in paying quantities” in a cessation-of-production clause requires actual marketed production, or whether a well’s capability to produce in paying quantities is sufficient.
2. Whether an economically motivated failure to market gas for more than the cessation period terminates a lease when the well remains capable of paying production.
3. Whether shut-in royalty payments are the exclusive means of maintaining the lease during periods when gas is not marketed.

## Decision

- The Oklahoma Supreme Court granted certiorari, vacated the court of appeals’ opinion, reversed the trial court, and remanded with directions to enter judgment for the lessees.
- The court held that a failure to market, by itself, does not cancel a lease under the cessation-of-production clause when the well remains capable of producing in paying quantities.
- The court construed “production in paying quantities,” in the habendum/cessation framework, to focus on capability to produce in paying quantities rather than continuous actual sales within the cessation period.
- The court rejected treating “marketing” as part of “production” for purposes of the cessation-of-production clause.
- The court treated the shut-in royalty clause as an alternative method of lease maintenance and declined to read it to impose automatic termination for an extended marketing shut-in without payment.

## Legal Principles

- In interpreting habendum and cessation-of-production clauses, “production in paying quantities” may be satisfied by a well’s capability to produce in paying quantities, not necessarily by continuous marketed production.
- “Marketing” is not synonymous with “production” for purposes of applying a cessation-of-production clause where a well remains capable of paying production.
- The implied covenant to market governs a lessee’s marketing decisions; absent an unreasonable or bad-faith failure to market, cancellation is not the automatic remedy.
- Lease forfeitures are disfavored; ambiguous lease language is not construed to create termination absent clear terms.
- A shut-in royalty clause generally provides an additional method to preserve a lease; it is not necessarily the exclusive mechanism that must be satisfied in every nonmarketing period.

## Conclusion

The court held that leases did not terminate under a cessation-of-production clause solely because lessees temporarily shut in and did not market gas for economic and regulatory reasons beyond the stated period, where the wells remained capable of producing in paying quantities and the circumstances did not justify cancellation under implied marketing duties.


Pack v. Santa Fe Mins., 869 P.2d 323 (Okla. 1994)