Legal Definitions - cessation-of-production clause

Term: cessation-of-production clause

In the context of oil and gas leases, a cessation-of-production clause is a specific provision that outlines the steps a drilling company (the lessee) must take to keep their lease valid if the extraction of oil or gas temporarily stops. Its purpose is to provide clear rules and avoid uncertainty about whether a pause in production means the lease is terminated. This clause typically specifies a timeframe within which production must resume, or alternative operations (like drilling a new well or performing repairs) must begin, to prevent the lease from expiring.

Here are some examples illustrating how a cessation-of-production clause might apply:

• Example 1: Equipment Failure

  An oil well operated by "PetroCorp" experiences a catastrophic pump failure, halting all production. Their lease with the landowner, Ms. Davies, includes a cessation-of-production clause stating that if production ceases for more than 90 days, PetroCorp must either restore production or commence new drilling operations within that period to maintain the lease. PetroCorp immediately orders replacement parts and begins repair work, ensuring that operations are underway well before the 90-day deadline, thus keeping their lease active.

  This example demonstrates the clause in action because it sets a clear timeframe (90 days) and specifies the required actions (restoring production or commencing new drilling) that PetroCorp must take to prevent the lease from terminating due to the unexpected halt in oil extraction.

• Example 2: Market Downturn

  Due to a sudden global oversupply, crude oil prices plummet, making it temporarily unprofitable for "Energy Solutions Inc." to operate several of its wells in a particular field. Their lease with the local ranching family includes a cessation-of-production clause that allows for a temporary shutdown of up to 180 days without lease termination, provided that Energy Solutions Inc. continues to pay a specified shut-in royalty and maintains the wells in good working order. Energy Solutions Inc. opts to shut in the wells, pays the required royalty, and performs routine maintenance, confident that their lease remains valid until market conditions improve.

  This scenario illustrates the clause's role in providing flexibility during economic challenges. It allows the lessee to pause production without losing the lease, provided they meet the specific conditions (paying shut-in royalties and maintaining the wells) outlined in the clause.

• Example 3: Regulatory Compliance

  A new environmental regulation requires "Frontier Energy" to upgrade its wastewater treatment facilities at an existing gas field, necessitating a temporary shutdown of production for 60 days while the upgrades are installed. The lease agreement with the state land office contains a cessation-of-production clause that grants Frontier Energy 120 days to resume production after a regulatory-mandated shutdown, provided they diligently pursue compliance and notify the lessor. Frontier Energy promptly begins the upgrades, keeps the state land office informed of their progress, and resumes gas flow within the 60-day window, well within the clause's allowance.

  Here, the clause provides a defined period (120 days) for the lessee to address external requirements (regulatory upgrades) that cause a production halt. By diligently working towards compliance and communicating, Frontier Energy fulfills the clause's conditions and preserves its lease.