## Facts

- A landowner executed an oil and gas lease covering 160 acres in Meade County, Kansas for a one-year primary term beginning July 23, 1971, later extended to October 23, 1972.
- The lease contained a continuous-operations clause extending the lease if drilling began before the primary term expired and operations were prosecuted, and if production resulted, so long as production continued.
- The lessees/assignees began drilling a test well on September 23, 1972.
- A drill-stem test indicated gas on October 7, 1972; total depth was reached and casing set by October 15, 1972.
- By November 8, 1972, the well was completed, flowing gas, and ready for pipeline connection subject to final testing.
- After completion, the lessees contacted potential purchasers, including Panhandle Eastern Pipe Line Company, and negotiated a gas purchase contract signed June 6, 1973.
- The lessees then laid a pipeline approximately 0.7 miles to connect with Panhandle’s gathering system, and deliveries began August 20, 1973.
- The landowner sued on October 23, 1973 (one year after the extended primary term ended), seeking a declaration of termination and to quiet title, arguing the lessees failed to meet lease “deadlines,” particularly regarding marketing.

## Issues

1. Whether the lease terminated at the end of the primary term despite drilling and gas discovery within the term under the continuous-operations clause.
2. Whether the lessees’ post-discovery activities (completion, contracting, and pipeline connection) constituted continuous operations and due diligence under Kansas law sufficient to keep the lease in force.

## Decision

- The Tenth Circuit affirmed the judgment for the lessees, holding the lease did not terminate under its terms.
- Drilling and gas discovery within the primary term triggered the continuous-operations clause.
- The lessees’ efforts to secure a purchaser and connect the well to a pipeline were part of “operations” and were pursued with reasonable diligence.
- The time taken to negotiate a purchase contract and commence deliveries was reasonable given practical and regulatory conditions affecting gas marketing.

## Legal Principles

- A continuous-operations clause extends an oil and gas lease beyond the primary term when drilling is commenced within the term and operations continue, and when production results, for so long as production continues.
- Under Kansas law, “operations” may include post-drilling activities reasonably necessary to obtain production and a market, including negotiations for a gas purchase contract and securing pipeline connection.
- The lessee must act in good faith and with reasonable diligence; whether diligence exists is assessed from the factual timeline and surrounding conditions affecting marketing.

## Conclusion

Because drilling and gas discovery occurred before the primary term expired and the lessees then acted with reasonable diligence to complete the well, secure a purchaser, build a connecting line, and begin deliveries, the lease remained in effect under the continuous-operations clause and did not terminate as the lessor claimed.


Sword v. Rains, 575 F.2d 810 (10th Cir. 1978)