Cessation Of Production Clause

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Cessation Of Production Clause

 

Many Alabama oil and gas leases contain cessation of production clauses such as:

 

If at the expiration of the primary term, oil, gas or other mineral is not being produced on said land, or on acreage pooled therewith, but Lessee is then engaged in drilling or reworking operations thereon . . . the lease shall remain in force so long as operations are prosecuted with no cessation of more than sixty (60) consecutive days, and if they result in the production of oil, gas or other mineral, so long thereafter as oil, gas or other mineral is produced from said land or acreage pooled therewith.

 

Sheffield v. Exxon Corp., 424 So.2d 1297, 1300 (Ala. 1982)

 The cessation of production clauses give lessees a grace period to restore production from a well that has stopped flowing for one reason or another. The clauses also permit the lessee to extend the term of the lease beyond the primary term by conducting operations. Cessation of production clauses must be evaluated on a case by case basis because the language of each clause differs. Id.  In Alabama, absent a contrary definition in a lease, the word “drilling” has the following definition in the context of the cessation of production clause: “the act of boring a hole through which oil and/or gas may be produced if encountered in commercial quantities.” Id., at 1302.  When considering what operations constitute “drilling,” “the key element is whether the operation is associated or connected with the physical site of the well or unit.” Id.  Likewise, reworking operations turn on what activities are conducted at the site of the well. Id.  Rigging up at the well qualifies, but negotiations for purchases or contracts do not qualify. Id.

Copyright 2011 by Edward G, Hawkins. All rights reserved.