David G. Hanlon
Harrisville, West Virginia
Attorney for the Appellant
Larry N. Sullivan
Parkersburg, West Virginia
Attorney for the Appellee
The Opinion of the Court was delivered PER CURIAM.
"When a well is not producing in paying quantities and no
royalties or rentals are being received by the lessors, these being
required by the terms of a lease as necessary to its continuation,
receipt by lessors of free gas for domestic purposes from the well
does not constitute consideration sufficient to keep lessors bound
by the lease, nor does it amount to 'production.'" Syllabus Point
2, Goodwin v. Wright, 163 W. Va. 264, 255 S.E.2d 924 (1979).
Emory C. Currey and Mabel I. Currey, husband and wife,
sued in the Circuit Court of Ritchie County on May 25, 1989, to
void an oil and gas lease in which they were the lessors and North
Hills Investment Company was the original lessee. The lease was
dated December 14, 1981, and was assigned to TNG, Inc., on July 1,
1986.See footnote 1 The lease was in force until July 1, 1982, and "as long
thereafter as operations for oil or gas, or either of them, are
being conducted on the premises, or oil or gas, or either of them,
is being produced in paying quantities." The lease further
provided that free gas be furnished to the lessors for domestic
A well was drilled on the Curreys' property in 1982 and produced oil and gas until 1986. The lessors received their last royalty check in March of that year. The last time an employee of the lessee came to the well site was in February of 1987. At that time, the employee removed a piece of equipment from the well known as a "rabbit,"See footnote 2 which had the effect of shutting the well in.See footnote 3
Even though the well had been shut in, TNG did not tender the $300
per year shut-in rental required by the terms of the lease.See footnote 4
After the well was shut in, Mr. Currey placed a by-pass
regulator on it, which allowed the continued production of gas for
domestic use. Moreover, Mr. Currey diverted the flow of oil from
the well to prevent it from seeping into his home's gas lines. He
stored the oil in tanks. On two occasions, after the tanks were
full, Mr. Currey sold the oil to Main Star Oil Company (Main Star)
and directed that the working-interest share be paid to the
lessees. The lessees did not, as required by the lease, defray the
expense of "producing" this oil.
In May, 1989, the Curreys filed suit requesting that the lease be declared abandoned pursuant to W. Va. Code, 36-4-9(a) (1979), and that title be quieted in them. Following a one-day bench trial, the trial court ruled that because the Curreys had
received free gas from the well, oil and gas was still being
"produced in paying quantities"; thus, the lease had not expired.
W. Va. Code, 36-4-9(a), provides, in pertinent part:
"There shall be a rebuttable legal presumption that the failure of a person, firm, corporation, partnership or association to produce and sell or produce and use for its own purpose for a period of greater than twenty-four months, subsequent to the first day of July, one thousand nine hundred seventy-nine, oil and/or gas produced from such leased premises constitutes an intention to abandon any oil and/or gas well and oil and/or gas well equipment situate on said leased premises[.]" (Emphasis added).See footnote 5
The Curreys argue that because more than two years have
elapsed since oil and gas operations were conducted or oil and gas
was produced in paying quantities, there is a rebuttable
presumption that the lease has been abandoned, and TNG failed to
overcome this presumption. TNG counters that the free gas was a
benefit to the Curreys and constitutes production under the terms
of the lease.
We addressed this issue in Goodwin v. Wright, 163 W. Va.
264, 255 S.E.2d 924 (1979). In Goodwin, the lease was for ten
years "and as long thereafter as oil and gas, or either of them, is
produced from the said lands by the said LESSEE, its successors and
assigns." The lease also contained a free gas provision. Once the
lease was in the secondary term and no oil and gas had been
produced for over three years, the Goodwins filed suit to void the
contract. As in this case, the lessee contended that the Goodwin's
receipt of free gas constituted "production" that extended the
secondary term of the lease.
We rejected the argument and quoted with approval the
following language from Metz v. Doss, 114 Ill. App. 2d 195, 198,
252 N.E.2d 410, 412 (1969):
"'The purpose of an oil and gas lease is to obtain production. Unless lessee obtains production he cannot recover his drilling expense. Lessor depends upon production for receipt of the royalty provided in the lease. This purpose can only be accomplished if the production which can keep the lease effective for an indefinite future period is production
in the ordinary sense of the term and hence
results in royalties to the lessor.
"'From a reading of the entire
instrument it is evident that the royalty
provision is a primary matter, while the free
gas, like the provision for burying lines
below plow depth, is a secondary matter.'"
163 W. Va. at 268-69, 255 S.E.2d at 927.
Accordingly, we held in Syllabus Point 2 of Goodwin:
"When a well is not producing in paying quantities and no royalties or rentals are being received by the lessors, these being required by the terms of a lease as necessary to its continuation, receipt by lessors of free gas for domestic purposes from the well does not constitute consideration sufficient to keep lessors bound by the lease, nor does it amount to 'production.'"See footnote 6
TNG argues that Goodwin is not applicable to the facts presented here. Unlike the lessors in Goodwin, the Curreys sold oil from the well to Main Star and directed the working-interest share be paid to the lessee. Moreover, the Curreys accepted only their one-eighth royalty. Even if we were to assume that this activity is sufficient enough to constitute "produc[tion] in paying quantities," the sale of oil by Mr. Currey occurred more than
Accordingly, we reverse the judgment of the Circuit Court
of Ritchie County and remand this case with directions to enter
judgment for the appellants.
Reversed and remanded
Footnote: 1The remaining appellees are individuals and corporations who have been assigned a share of the working interest in the lease.
Footnote: 2A "rabbit" or "pig" is a "scraping device for cleaning and testing petroleum and natural gas pipelines." 8 H. Williams & C. Meyers, Oil and Gas Law 717 (11th ed. 1987).
Footnote: 3A "shut-in well" is a "producing well that has been closed down temporarily for repairs, cleaning out, building up
pressure, lack of a market, etc." 8 H. Williams & C. Meyers, supra at 909.
Footnote: 4The pertinent lease provision provided:
"LESSEE shall be obligated to pay or tender to LESSOR within sixty (60) days after any such well is shut in and each anniversary thereafter, as royalty, an amount equal to $300 per year it being the intention of the parties that this lease shall remain in full force and effect for sixty (60) days after shutting in any well without payment."
Footnote: 5The statute further provides for several exceptions to the rebuttable presumption:
"This rebuttable presumption shall
not be created in instances (i) of leases for
gas storage purposes, or (ii) where any shut-in royalty, flat rate well rental, delay
rental, or other similar payment designed to
keep an oil and gas lease in effect or to
extend its term has been paid or tendered, or
(iii) where the failure to produce and sell
is the direct result of the interference or
action of the owner of such oil and/or gas or
his subsequent lessee or assignee.
Additionally, no such presumption shall be
created when a delay in excess of twenty-four
months occurs because of any inability to
sell any oil and/or gas produced or because
of any inability to deliver or otherwise
tender such oil and/or gas produced to any
person, firm, corporation, partnership or
None of these exceptions are applicable to the case at bar.
Footnote: 6This holding is in accord with the plain language of W. Va. Code, 36-4-9(a), which creates a rebuttable presumption of abandonment whenever a "person, firm, corporation, partnership or association [fails] to produce and sell or produce and use for its own purpose . . . oil and/or gas produced from said leased premises[.]" (Emphasis added).
Footnote: 7The record is also devoid of any evidence that operations for oil and gas had been conducted within two years before this action was filed. In most instances, the term "operation" as used in an oil and gas lease refers "to activity leading to the production of oil and gas[.]" 8 H. Williams & C. Meyers, supra at 662. The last time an employee of the leasee visited the well site was in February of 1987, and by shutting the well in, he clearly intended to cease operations and not conduct them.
Footnote: 8Nor do we find applicable the case relied on by the trial court, Buckles v. Wil-Mc Oil Corp., 585 P.2d 1360 (Okla. 1978). In Buckles, there were several leases which were to remain in force for two years "and as long thereafter as oil or gas, or either of them, is produced from said lands by the lessee." (Emphasis in original). At the expiration of the primary term, Wil-Mc Oil Corporation assigned its interests to a third party. Mr. Buckles contended that because the lease required production by the lessee, operations by a third-party would not extend the terms of the lease. The Oklahoma Supreme Court rejected this argument because the lease contained a provision allowing the original lessee to assign its interest to third parties.