## Facts

- Multiple lessors (landowners) and a lessor-related party leased mineral rights to various lessees and working-interest owners for gas production in the Bradshaw Field in Hamilton County, Kansas.
- The leases’ primary terms had expired; continuation depended on production in paying quantities or operation of savings provisions such as shut-in royalty clauses.
- The wells produced gas (with substantial water) for many years, but by the mid-1980s industrial gas sales declined and revenues dropped.
- Mechanical and equipment problems arose; in response to poor market conditions, the operator ceased production on certain wells rather than making repairs.
- For leases containing shut-in royalty clauses, lessees tendered shut-in royalty payments to lessors during periods of nonproduction.
- Lessors filed eight consolidated actions seeking declaratory judgments that certain leases had terminated for lack of production in paying quantities and that shut-in royalties could not maintain leases where wells were not capable of paying-quantity production.
- Lessees contended the wells were producing or capable of producing in paying quantities, that shut-in clauses applied where invoked, and that lessors were estopped from asserting termination after accepting shut-in royalties.

## Issues

1. Whether the evidence supported findings that particular wells were producing, or were capable of producing, in paying quantities after the primary terms expired.
2. Whether payment of shut-in royalties maintained leases when actual production ceased, and under what conditions shut-in clauses operate as savings provisions.
3. Whether the dispute should be treated purely as automatic lease termination or whether equitable doctrines may affect relief and defenses.
4. Whether lessors’ acceptance of shut-in royalties and related conduct estopped them from asserting lease termination.

## Decision

- The court affirmed in part and reversed in part the trial court’s judgments across the consolidated cases.
- It upheld lease continuation where evidence supported production in paying quantities, or where wells were capable of such production and the shut-in royalty clause was properly invoked.
- It rejected lease continuation based solely on shut-in royalties where the well was not capable of producing in paying quantities.
- It recognized that while leases may terminate by their own terms upon cessation of required production, equitable defenses such as estoppel may apply depending on the factual record.
- It evaluated estoppel lease-by-lease, giving effect to it only where the lessors’ conduct, knowledge, and the lessees’ reliance and prejudice justified the defense.

## Legal Principles

- After the primary term, an oil and gas lease continues only through production in paying quantities or by valid operation of a contractual savings clause.
- “Paying quantities” turns on profitability over a reasonable period, assessed from the viewpoint of a reasonably prudent operator acting to make a profit rather than to hold for speculation.
- A shut-in royalty clause preserves a lease only if the well is physically and economically capable of producing in paying quantities but is shut-in for a reason contemplated by the clause (commonly lack of market).
- Shut-in royalty payments cannot maintain a lease tied to a well that is not capable of paying-quantity production; the clause is a temporary savings device, not a substitute for capability.
- Estoppel may bar a lessor from asserting termination where the lessor knowingly accepts lease benefits (including shut-in royalties) or otherwise acts inconsistently with termination, and the lessee reasonably relies to its detriment; application is fact-specific.

## Conclusion

The court held that lease continuation after the primary term depends on actual or capable paying-quantity production, that shut-in royalties preserve leases only when the well is capable of paying-quantity production and shut-in for a covered reason, and that equitable defenses such as estoppel may defeat termination claims when supported by the parties’ conduct and reliance.


Tucker v. Hugoton Energy Corp., 855 P.2d 929 (Kan. 1993)