Can ninety days of unprofitable production automatically terminate an oil and gas lease? According to the Beaumont Court of Appeals, not necessarily. In Zarvona Energy LLC v. Black Stone Minerals Company, L.P., the court held that a lease providing for termination after a 90-day cessation of production in paying quantities did not automatically terminate the lease simply because the wells were unprofitable during a 90-day period. Instead, the court held that the lease’s 90-day cessation provision did not displace the longstanding Clifton standard for determining production in paying quantities, as articulated in Clifton v. Koontz.
The decision also reinforces another familiar principle of Texas oil and gas law: because forfeitures are disfavored, lease language creating a special limitation must be clear, precise, and unequivocal. Where competing lease provisions create ambiguity, Texas courts will not construe the lease in favor of automatic termination.
Background of the Dispute
Zarvona Energy LLC acquired the lessee’s interest in oil and gas leases covering pooled acreage in the Clarke and Simmons Units in Tyler County, Texas. The leases were originally executed with Blackstone Minerals Company, L.P. (“Blackstone”) and Sugarberry Minerals L.P.
In 2023, Blackstone notified Zarvona that approximately three years earlier the lease had automatically terminated as to the Clarke Unit because the wells allegedly failed to produce in paying quantities for more than 90 consecutive days. After Zarvona refused to execute a release, Blackstone recorded a partial release of lease in the county records. Zarvona then filed suit seeking declaratory relief and damages, asserting that the leases remained in full force and effect.
The dispute centered whether a continuous 90-day period during which the wells allegedly failed to produce in paying quantities automatically terminated the lease, or whether the court was also required to apply the reasonably prudent operator standard established in Clifton.
The Competing Lease Provisions
Two provisions of the lease appeared to point in different directions.
The habendum clause provided that, after the primary term, the lease would continue so long as oil or gas was produced in paying quantities. Like most Texas leases, this language invokes the judicial definition of production in paying quantities developed through Clifton, which asks whether a reasonably prudent operator would continue operating the well for the purpose of making a profit rather than for mere speculation.
The lease also contained a cessation-of-production clause providing that the lease would terminate following a continuous 90-day cessation of production in paying quantities. However, that clause began with the phrase, “Unless maintained by other provisions of this Lease ….”
Conversely, the habendum clause itself began with the phrase, “Subject to the other provisions of this Lease ….”
Because each provision expressly subordinated itself to the other, the court concluded that neither provision clearly controlled the question of lease termination.
The Court Rejects a Mechanical 90-Day Rule
Blackstone argued that the lease established a straightforward rule: if the wells failed to produce in paying quantities during any continuous 90-day period, the lease automatically terminated.
Zarvona argued that “production in paying quantities” remained subject to the longstanding Clifton standard, requiring courts to evaluate more than a single quarter’s profitability. Under Clifton, courts consider whether a reasonably prudent operator would continue operating the lease after evaluating factors such as operating expenses, market conditions, depletion, and the reasonable expectation of future profitability.
The Beaumont Court of Appeals agreed with Zarvona.
The court explained that Texas courts do not mechanically total ninety days of revenues and expenses to determine whether production in paying quantities has ceased. Rather, an isolated unprofitable period does not automatically terminate a lease. Instead, courts must determine whether, under all circumstances, a reasonably prudent operator would have continued operating the wells in anticipation of future profits.
The court distinguished Ridenour v. Herrington, where the Waco Court of Appeals held that a lease defining a specific cessation period eliminated the need to determine what constituted a “reasonable time.” Unlike the lease in Ridenour, however, the lease before the Beaumont court contained competing provisions that expressly subordinated one another, creating ambiguity regarding the applicable standard.
Because Texas law disfavors forfeitures and requires special limitations to be stated clearly and unequivocally, the ambiguity was resolved against automatic termination.
Why Clifton Still Controls
Although the lease established a 90-day measuring period, it did not redefine what “production in paying quantities” meant. Under Texas law, that phrase has long carried the meaning established in Clifton: whether a reasonably prudent operator would continue operating the well with a reasonable expectation of future profit.
Because the lease did not clearly replace that standard, and because the habendum and cessation-of-production clauses each deferred to the other, the court declined to treat the 90-day period as a self-executing forfeiture provision. Instead, the alleged cessation had to satisfy both the contractual 90-day period and the Clifton reasonably prudent operator test.
Key Takeaway
Zarvona illustrates that cessation-of-production clauses should not be read in isolation. Even where a lease specifies a 90-day cessation period, Texas courts will examine the lease as a whole before concluding that a special limitation has terminated valuable leasehold rights. Unless the lease clearly and unequivocally provides otherwise, a temporary period of unprofitable production alone may not be enough to terminate the lease.
As always, the outcome turned on the specific language of these leases. For lessors and lessees alike, Zarvona underscores the importance of carefully drafting habendum clauses, cessation-of-production provisions, and other savings clauses to ensure the parties’ intent is clearly expressed, and to avoid costly litigation over whether a lease has terminated.
Kuiper Law Firm, PLLC specializes in oil and gas issues; if you have any questions about the information in this article, or how it applies to you and your operations, do not hesitate to contact us.