Editor’s Note: Law Week Colorado edits court opinion summaries for style and, when necessary, length.
This case concerned the interpretation of two oil and gas leases negotiated in Boulder County in the 1980s. According to the opinion, each lease conveyed an interest for a determinate primary term of two years and an indeterminate secondary term for “as long thereafter as oil or gas … is produced” from the leased land. In 2014, during the secondary terms of the leases, necessary repairs to a third party’s sales pipeline forced the lessee to shut in otherwise commercially viable wells on the leased properties for approximately four months. A shut-in is a routine process by which the operator of a well closes one or more flow valves at the well site, the opinion noted.
The question before the Colorado Supreme Court was whether this four-month shut-in caused the leases to terminate under their respective cessation-of-production clauses.
In answering this question, the Colorado Supreme first determined whether the Court of Appeals’ broad adoption of the “commercial discovery” rule to define “production” in Colorado was appropriate. It concluded it was not, and instead reaffirmed the well-established tradition in Colorado of interpreting each oil and gas lease on its own terms. Examining the specific leases at issue here, the Colorado Supreme Court concluded the four-month shut-in didn’t trigger termination under their cessation-of-production clauses. It affirmed the judgment of the Court of Appeals, but vacated the division’s opinion to the extent it adopted the commercial discovery rule to universally define the term “production” in Colorado oil and gas leases as “capable of production.”
The oil and gas leases before the Colorado Supreme Court involved the lessor Board of County Commissioners of Boulder County and lessee Crestone Peak Resources Operating LLC. Both parties obtained rights under the leases via their predecessors-in-interest, the opinion added.
In 1980, the parties’ predecessors-in-interest recorded a lease covering property owned by James Haley. In 1982, the parties’ predecessors-in-interest recorded a second lease covering property owned by G.B. Henderson. Through a series of transactions during the 1980s and 1990s, Boulder purchased the property and mineral rights in the Haley lease. In 1998, Boulder also purchased the property and mineral rights in the Henderson lease, making Boulder the successor lessor for both leases. In 2015, Crestone purchased the lease rights under the Haley and Henderson leases, becoming the successor lessee for both.
In Colorado, the State Supreme Court interprets each oil and gas lease on its own terms. This leads to the conclusion that the division erred in broadly adopting the “commercial discovery” rule to define “production.” The State Supreme Court vacated that portion of the division’s opinion and declined to adopt any universal definition for “production” in oil and gas leases in Colorado, but rather determine the parties’ meaning within the context of the lease.
In this case, the opinion noted, the ultimate question the Colorado Supreme Court must answer is whether the cessation-of-production clauses triggered termination. The Haley and Henderson leases make clear their cessation-of-production clauses are triggered only when a cessation of production that would be permanent without reworking or drilling occurs.
The Colorado Supreme Court concluded the 2014 shut-in necessitated by a third party’s maintenance operations didn’t trigger termination under the cessation-of-production clauses.
After evaluation, the Colorado Supreme Court affirmed the judgment of the Court of Appeals, but under different reasoning.