Today, the North Dakota Supreme Court, in the case of Fleck v. Missouri River Royalty Corp., 2015 ND 287, interpreted the habendum clause and a savings clause provision in an oil and gas lease and in doing so provided definition and context to the lease's use of the term "production."
The habendum clause in the lease at issue provided for a secondary term "as long thereafter as oil or gas, or either of them, is produced from said lands by the lessee, its successors and assigns." Id. ¶ 9. Thus, the lease at issue in Fleck did not contain the "production in paying quantities" language often found in habendum clauses.
Nevertheless, noting that the lease did not define the term "production," the court held that in construing oil and gas leases, the term production as used in the "so long thereafter" provisions of typical habendum clauses is "'generally interpreted to mean production in paying quantities." Id. ¶ 11 (quoting Tank v. Citation Oil & Gas Corp., 2014 ND 123, ¶ 12, 848 N.W.2d 691 (internal citation in Tank omitted)).
The court then looked at a variety of authority, including an extensive discussion of Texas law, to find that, in determining whether a well is producing in paying quantities, "[a] court must consider whether the well yielded a profit over operating costs over a reasonable period of time and whether a reasonable and prudent operator would continue to operate a well in the manner in which the well was operated under the relevant facts and circumstances." Fleck, 2015 ND 287, ¶ 18.
Furthermore, the lease at issue in Fleck had a savings clause that provided that the lease would not expire if after the primary term "production shall cease from any cause" in the event the "lessee resumes operations for the drilling of a well or restoration of production" within 90 days of such cessation. Id. ¶ 20.
In considering the savings clause, the court concluded that for the reasons it interpreted the term production in the habendum clause to require production in paying quantities, "'production' in the savings clause must be interpreted in the same manner." Id.
Thus, "if production in paying quantities ceases after the primary term expires, the lease will not terminate if the lessee resumes operations to drill a well or to restore production within ninety days of cessation." Id. ¶ 21. Furthermore, the "lessee is not required to restore production in paying quantities within ninety days, but is required to begin operations to drill a well or to restore production to paying quantities. The lease will remain in force and effect during the prosecution of the operations to drill a new well or to restore production and, if production results, then as long as production continues in paying quantities." Id.
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