ConocoPhillips Company v. Vaquillas Unproven Minerals, LTD. ( 2015 )

ACCEPTED
04-15-00066-CV
FOURTH COURT OF APPEALS
SAN ANTONIO, TEXAS
4/9/2015 3:46:42 PM
ORAL ARGUMENT REQUESTED KEITH HOTTLE
CLERK
No. 04-15-00066-CV
FILED IN
In the Court of Appeals
4th COURT OF APPEALS
SAN ANTONIO, TEXAS
for the Fourth District of Texas
4/9/2015 3:46:42 PM
KEITH E. HOTTLE
San Antonio, Texas Clerk
CONOCOPHILLIPS COMPANY,
Appellant,
V.
VAQUILLAS UNPROVEN MINERALS, LTD.,
Appellee.
From Cause No. 2014 CVQ000 438 D4
406th Judicial District Court, Webb County, Texas
Honorable Oscar J. Hale, Jr., Presiding Judge
BRIEF OF APPELLANT, CONOCOPHILLIPS COMPANY
Michael V. Powell Adolfo Campero
State Bar No. 16204400 State Bar No. 00793454
Email: mpowell@lockelord.com Email: acampero@camperolaw.com
Cynthia K. Timms Campero & Associates, P.C.
State Bar No. 11161450 315 Calle Del Norte, Suite 207
Email: ctimms@lockelord.com Laredo, Texas 78041
Elizabeth L. Tiblets Tel: 956-796-0330
State Bar No. 24066194 Fax: 956-796-0399
Email: etiblets@lockelord.com
Locke Lord LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201-6776
Tel: 214-740-8520
Fax: 214-740-8800
ATTORNEYS FOR APPELLANT
CONOCOPHILLIPS COMPANY
IDENTITY OF PARTIES AND COUNSEL
Party Counsel
ConocoPhillips Company, Michael V. Powell
State Bar No. 169204400
Appellant mpowell@lockelord.com
Cynthia K. Timms
State Bar No. 11161450
ctimms@lockelord.com
Elizabeth L. Tiblets
State Bar No. 24066194
etiblets@lockelord.com
LOCKE LORD LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201-6776
Telephone: (214) 740-8000
Telecopier: (214) 740-8800
Adolfo Campero
State Bar No. 00793454
acampero@camperolaw.com
Campero & Associates, P.C.
315 Calle Del Norte, Suite 207
Laredo, Texas 78041
Telephone: (956) 796-0330
Telecopier: (965) 796-0399
ii
Party Counsel
Vaquillas Unproven Minerals, Ltd., Raul Leal
State Bar No. 24032657
Appellees rleal@rl-lawfirm.com
RAUL LEAL INCORPORATED
5810 San Bernardo, Suite 390
Laredo, Texas 78041
Telephone: (956) 727-0039
Telecopier: (956) 727-0369
Armando X. Lopez
State Bar No. 12562400
mandox@rio.bravo.net
LAW OFFICES OF ARMANDO X.
LOPEZ
1510 Calle Del Norte, Suite 16
Laredo, Texas 78041
Telephone: (956) 726-0722
Telecopier: (956) 726-6049
Gregg Owens
State Bar No. 15383500
gregg.owens@haysowens.com
Robert G. Hargrove
State Bar No. 09303300
rob.hargrove@haysowens.com
Alicia R. Ringuet
State Bar No. 24074958
alicia.ringuet@haysowens.com
HAYS & OWENS L.L.P.
807 Brazos Street, Suite 500
Austin, Texas 78701
Telephone: (512) 472-3993
Telecopier: (512) 472-3883
iii
Party Counsel
P. Michael Jung
State Bar No. 11054600
michael.jung@strasburger.com
STRASBURGER & PRICE, LLP
901 Main Street, Suite 4400
Dallas, Texas 75202-2794
Telephone: (214) 651-4724
Telecopier: (214) 659-4022
iv
TABLE OF CONTENTS
IDENTITY OF PARTIES AND COUNSEL ........................................................... ii
TABLE OF CONTENTS ...........................................................................................v
INDEX OF AUTHORITIES.....................................................................................vi
STATEMENT OF THE CASE .................................................................................. 1
STATEMENT REGARDING ORAL ARGUMENT ............................................... 2
ISSUE PRESENTED .................................................................................................3
STATEMENT OF FACTS ........................................................................................4
SUMMARY OF THE ARGUMENT ......................................................................11
ARGUMENT ...........................................................................................................14
1. The Field Rules did not “establish” different units of acreage per well. ...... 14
A. The parties’ competing interpretations................................................14
B. Analysis of the retained acreage clause in light of the Field
Rules ....................................................................................................16
2. If there were any doubt about the proper interpretation of Sentence
(2), the Court should apply the strong presumption in Texas law
against making that sentence a “limitation on the grant.” .............................27
PRAYER FOR RELIEF ..........................................................................................31
CERTIFICATE OF COMPLIANCE .......................................................................33
CERTIFICATE OF SERVICE ................................................................................34
APPENDIX TO APPELLANT’S BRIEF................................................................35
v
INDEX OF AUTHORITIES
Page(s)
CASES
Anadarko Petroleum Corp. v. Thompson,
94 S.W.3d 550 (Tex. 2002)....................................................................13, 27, 29
Birnbaum v. SWEPI LP,
48 S.W.3d 254 (Tex. App.—San Antonio 2001, pet. denied)............................16
Chesapeake Exploration, L.L.C. v. Energen Resources Corp.,
445 S.W.3d 878 (Tex. App.—El Paso 2014, no pet.) ..................................13, 30
Clifton v. Koontz,
325 S.W.2d 684 (Tex. 1959) ..............................................................................23
ConocoPhillips Co. v. Ramirez,
No. 04-05-00488-CV, 2006 WL 1748584 (Tex. App.—San Antonio,
2006) (not designated for publication) .........................................................21, 22
EOG Resources, Inc. v. Killam Oil Co., Ltd.,
239 S.W.3d 293 (Tex. App.—San Antonio 2007, pet. denied)....................21, 27
Fox v. Thoreson,
398 S.W.2d 88 (Tex. 1966).................................................................................29
Halbouty v. Railroad Commission,
357 S.W.2d 364 (Tex. 1962) ..............................................................................23
Heritage Resources, Inc. v. NationsBank,
939 S.W.2d 118 (Tex. 1996) ..............................................................................16
Humphrey v. Seale,
716 S.W.2d 620 (Tex. App.—Corpus Christi 1986, no writ) ............................28
Jones v. Killingsworth,
403 S.W.2d 325 (Tex. 1965) ..............................................................................18
Knight v. Chicago Corp.,
183 S.W.2d 666 (Tex. Civ. App.—San Antonio 1944), aff’d, 188 S.W.2d
564 (Tex. 1945)...................................................................................................30
vi
Knight v. Chicago Corp.,
188 S.W.2d 564 (Tex. 1945) ........................................................................29, 30
Matthews v. Sun Oil Co.,
425 S.W.2d 330 (Tex. 1968) ..............................................................................28
Natural Gas Pipeline Co. v. Pool,
124 S.W.3d 188 (Tex. 2003) ..............................................................................27
Prize Energy Resources, L.P. v. Cliff Hoskins, Inc.,
345 S.W.3d 537 (Tex. App.—San Antonio 2011, no pet.) ................................28
Railroad Commission v. Woods Exploration and Producing Co.,
405 S.W.2d 313 (Tex. 1966) ..............................................................................23
Rogers v. Ricane Enterprises, Inc.,
773 S.W.2d 76 (Tex. 1989).................................................................................29
Rowley v. Braley,
286 S.W. 241 (Tex. Civ. App—Amarillo 1926, writ dism’d)............................17
Shown v. Getty Oil Co.,
645 S.W.2d 555 (Tex. App.—San Antonio 1982, writ ref’d.) ...........................28
Springer Ranch, Ltd. v. Jones,
421 S.W.3d 273 (Tex. App.—San Antonio 2013, no pet.) ..............14, 16, 18, 27
State v. Bilbo,
392 S.W.2d 121 (Tex. 1965) ..............................................................................16
Tomlin v. Petroleum Corp. of Texas,
694 S.W.2d 441 (Tex. App.—Eastland 1985, no writ) ......................................30
STATUTES AND RULES
TEX. CIV. PRAC. & REM. CODE § 37.009..................................................................32
TEX. CIV. PRAC. & REM. CODE § 51.014(d) ............................................................... 1
TEX. R. APP. P. 43.2(c) .............................................................................................14
16 T.A.C. §3.38(b)(1) ..............................................................................................10
vii
OTHER AUTHORITIES
BLACK’S LEGAL DICTIONARY at 626 (9th ed. 2009) ..........................................17, 18
J. Hayes, Texas Railroad Commission: Some Basics Every Practitioner
Should Know, 28 State Bar of Texas, Oil, Gas and Mineral Law Section
Report 3, 20 (June 2004).....................................................................................23
WEBSTER’S THIRD NEW INTERNATIONAL UNABRIDGED DICTIONARY (1993) .......... 18
viii
STATEMENT OF THE CASE
This interlocutory appeal requests the Court to interpret, de novo, near-
identical “retained acreage clauses” in two oil and gas leases. Plaintiff-Appellee
Vaquillas Unproven Minerals, Ltd. (“Vaquillas”), the Lessor, claims the retained
acreage clauses caused Defendant-Appellee ConocoPhillips Company
(“ConocoPhillips”), a Lessee, to forfeit substantially more acreage than
ConocoPhillips voluntarily released when ConocoPhillips’ program of continuous
drilling ended. ConocoPhillips disagrees, saying it retained the proper blocks of
acreage under the leases.
Vaquillas sued ConocoPhillips in the 406th District Court, Webb County.
(CR:190). ConocoPhillips filed a traditional motion for summary judgment based
on its interpretation of the leases. (CR:27). Vaquillas filed a traditional cross-
motion for partial summary judgment based on its interpretation of the retained
acreage clause. (CR:200). The trial court, The Honorable Oscar J. Hale, Jr.,
denied ConocoPhillips’ motion for summary judgment and granted Vaquillas’
cross-motion. (CR:433, Appendix (“App.”) B).
The trial court granted ConocoPhillips’ unopposed motion for interlocutory
appeal under TEX. CIV. PRAC. & REM. CODE § 51.014(d). (Id.) By Order dated
February 13, 2015, this Court granted ConocoPhillips’ Petition for Permission to
Appeal. (App. A).
1
STATEMENT REGARDING ORAL ARGUMENT
Appellant ConocoPhillips requests oral argument.
The question presented by this interlocutory appeal comes before the Court
on cross-motions for summary judgment and presents a question of law.
Nevertheless, the appeal requires the Court to construe retained acreage clauses in
oil and gas leases in light of field rules adopted by the Railroad Commission of
Texas, as well as that Commission’s Statewide Rule 38.
ConocoPhillips believes oral argument could be helpful to the Court as the
Court considers various provisions of the oil and gas leases and the Commission’s
rules. There is also a great deal at stake in this appeal. The trial court has decreed
that ConocoPhillips has forfeited approximately 15,000 acres from decades-old
Webb County oil and gas leases on which ConocoPhillips has drilled over 200
natural gas wells.
2
ISSUE PRESENTED
Did the trial court err by denying ConocoPhillips’ Motion for Summary
Judgment and by granting Vaquillas’ Cross-Motion for Partial Summary
Judgment? (App. B).
More specifically, the retained acreage clauses authorize ConocoPhillips to
retain 640 acres around each existing gas well at the end of the continuous drilling
program, unless Railroad Commission field rules provide for spacing or proration
“establishing different units of acreage per well.” If that exception is triggered,
those “established different acreages” are held in lieu of 640 acres. Did the trial
court err by holding that spacing requirements in the field rules, which require a
minimum of 40 acres in order to obtain a drilling permit for a new well, caused
ConocoPhillips’ leases to terminate except for 40 acres around each existing gas
well?
3
STATEMENT OF FACTS
The Oil and Gas Leases. ConocoPhillips is Lessee, and Vaquillas the
Lessor, under two oil and gas leases covering Webb County land. Sworn copies of
the leases are in the record at CR:47-88 and 283-323, and copies are attached as
Appendices C and D to this Brief (the “Leases”) (CR:192).
By the Lease at Appendix C, granted in 1974 and amended in 1987,
Vaquillas (and its predecessors) conveyed to ConocoPhillips’ predecessor the
mineral estate underlying 26,622.79 acres for “five years . . . and as long thereafter
as oil, gas or other mineral is produced from said land or land with which said land
is pooled hereunder.” (CR:192, 209). By the Lease at Appendix D, dated 1987,
Vaquillas granted the mineral estate under an additional 6,740 acres, except the
term of that Lease was for “three years . . . and as long thereafter as oil, gas or
other mineral is produced from said land or land with which said land is pooled.”
(Id.)
All of the wells at issue in this case are natural gas wells. For gas wells,
both Leases authorize ConocoPhillips to pool units up to 640 acres in size.
Paragraph 4 of the Leases, which grants pooling authority, states:
. . .units pooled for gas hereunder shall not substantially exceed
in area 640 acres each plus a tolerance of ten percent (10%) thereof,
provided that should governmental authority having jurisdiction
prescribe or permit the creation of units larger than those specified, for
the drilling or operation of a well at a regular location or for obtaining
maximum allowable from any well to be drilled, drilling or already
4
drilled, units thereafter may conform substantially in size with those
prescribed or permitted by governmental regulation.
Paragraph 4 gives the Lessee “the right and power to pool or combine the
acreage covered by this lease or any portion thereof as to oil and gas, or either of
them, with any other land covered by this lease and/or with any other land, lease,
or leases in the immediate vicinity thereof . . . .” Paragraph 16 restricts that power
somewhat by restricting pooling only to other lands owned in whole or part by
Vaquillas, but that restriction is not pertinent here.
Vaquillas’ claim in this action is based on one isolated provision in
Paragraph 18, the retained acreage clause, of the Leases. In order to facilitate the
discussion in this Brief, ConocoPhillips will separate and number the four phrases
or sentences of that clause that are pertinent here, and then refer to those
“Sentences” by number: 1
Sentence (1): “On November 1, 1990, Lessee covenants and agrees
to execute and deliver to Lessor a written release of any and all
portions of this lease which have not been drilled to a density of at
least 40 acres for each producing oil well and 640 acres for each
producing or shut-in gas well,”
1
The provisions quoted are from the 26,622.79-acre Lease at Appendix C. The
only difference between the language of Paragraph 18 in the two Leases is that
Paragraph 18 of the 6,740-acre Lease (App. D) starts with: “At the end of the
primary term, Lessee covenants and agrees . . . .”
5
Sentence (2): “except that in case any rule adopted by the Railroad
Commission of Texas or other regulating authority for any field on
this lease provides for a spacing or proration establishing different
units of acreage per well, then such established different units shall be
held under this lease by such production, in lieu of the 40 and 640-
acre units above mentioned;”
Sentence (3): “provided, however, that * * * if, after the completion
or abandonment of any such well Lessee commences the drilling of an
additional well within Ninety (90) days from the completion or
abandonment of the preceding well, or continuously conducts drilling
operations in good faith and with reasonable diligence on said lease
without any cessation for longer than Ninety (90) days, said lease
shall remain in full force and effect during such drilling operations
and until the end of Ninety (90) days after the completion or
abandonment of the final well, at which time Lessee shall execute and
deliver to Lessor said written release, releasing all portions of the
lease not then so developed.”
Sentence (4): “Each retained unit shall contain at least one (1) well
producing or capable of producing oil or gas in paying quantities, and
the acreage within a unit shall be contiguous.”
6
(Emphasis added).
Sentence (3), quoted above, established the continuous drilling program that
extended the date after which ConocoPhillips had to release acreage. There is no
dispute that by continuous drilling, ConocoPhillips maintained the 26,622.70-acre
Lease in full force and effect for many years after November 1, 1990, and the
6,740-acre Lease in full force and effect many years after the end of its primary
term. ConocoPhillips’ continuous drilling program ended at or about the date
alleged in Vaquillas’ Petition, June 21, 2012. (CR:193; 242). Vaquillas counted
that by that date, ConocoPhillips had drilled 208 wells on the two Leases.
(CR:203, 224).
In early 2014, ConocoPhillips filed Partial Releases in the Webb County
deed records that released all acreage covered by the Leases except for 640 acres
around each producing or shut-in gas well, as permitted by Sentence (1) of the
retained acreage clause. (CR:194; 90-179). Vaquillas contends those Partial
Releases were insufficient and asserts that at the end of the continuous drilling
program, ConocoPhillips’ Leases terminated as to all acreage except 40 acres
around each producing or shut-in gas well. (CR:195-96; 227). Vaquillas moved
for summary judgment that 25,042 of the total 33,363 acres Vaquillas granted to
ConocoPhillips by the Leases “reverted” to Vaquillas when the continuous drilling
7
program ended, and consequently, ConocoPhillips must release 15,351 more acres
than those released by the Partial Releases it already filed. (CR:203, 204-05).
The Field Rules. Vaquillas bases its contention on the exception in
Sentence (2) of Paragraph 18, quoted above, and the Railroad Commission’s Field
Rules for the Vaquillas Ranch (Lobo Cons.) Field, Webb County, Texas (the
“Field Rules”). The Commission initially adopted Field Rules for the Lobo
Consolidated Field in 1998 (App. E, CR:183, 245). It amended those rules in
2010 (App. F, CR:181, 254). There is no dispute that these Field Rules apply to
the field that includes the Leases.
The Field Rules do not “establish” any mandatory units of acreage per well.
Neither the Commission’s adoption of Field Rules in 1998, nor its amendment of
those rules in 2010, required ConocoPhillips to make any changes to its gas wells
on the Leases.
Rule 3 in the original 1998 Field Rules is the proration rule for the field.
(App. E). Unlike other forms of proration rules, Rule 3 of these Field Rules does
not specify a maximum amount of acreage that may be allocated to a well as a
factor in the proration formula. 2 Vaquillas correctly explains proration rules as
2
There is an example in the record of another field rule that does limit the size of
proration units to 160 acres. (CR:188-89). Rule 2 of the Temporary Field
Rules for the Big Reef (Edwards) Field, Webb County, adopted June 2002,
states: “No proration unit shall consist of more than ONE HUNDRED SIXTY
(160) ACRES [plus a 10 percent tolerance].” Id.
8
follows: “[a] prescribed proration unit does not address the number of acres
necessary to drill a well. It simply specifies the maximum amount of acres that an
operator may assign to a well as a proration unit for that well. * * * Prescribed
proration units are by their nature maximum-sized units, because they prescribe the
maximum acreage that an operator may assign to a well as a proration unit for
production allowable purposes.” (CR:208-09, emphasis added). ConocoPhillips’
point is that the Field Rules for this field contain no “prescribed proration units,”
and they do not specify, in any other way, a maximum amount of acres
ConocoPhillips may pool for any well.
In the trial court, Vaquillas did not base its argument on the proration rule,
Rule 3 of the Field Rules. Rather, it based its argument on Rule 2, the spacing
rule. (CR:211-13; 222 n.59).
Rule 2 provides no different spacing from the Statewide Rules applicable
before field rules were adopted for this field, i.e., the spacing in the rule requires a
minimum of 40 acres for obtaining a permit to drill a new well. (App. E). Rule 2
accomplishes that result by providing that wells may not be drilled closer than 467
feet to any lease line, or 1,200 feet from another well in the same reservoir. (App.
F). These are the same spacing distances that are found in the Statewide Spacing
Rule applicable in the absence of field rules. See 16 T.A.C. § 3.37(a)(1).
9
When, as here, a field rule contains only spacing rules, a Table in the
Commission’s Statewide Rule 38(b)(2) supplies the minimum acreage necessary
for obtaining a Commission permit to drill a new well.3 For the 467 and 1,200 feet
spacing in these Field Rules, the Table specifies a minimum drilling unit of 40
acres. (Statewide Rule 38 and its Table are attached as Appendix G). The Table
shows the number of acres that are included in the “standard unit” associated with
various spacing rules, i.e., the smallest amount of acreage required for obtaining a
drilling permit for a well, irrespective whether the well is ultimately completed as
an oil or gas well. But the only prohibition established by Rule 38 is that “[n]o
well shall be drilled on substandard acreage.” 16 T.A.C. §3.38(b)(1).
“Substandard acreage” means “[l]ess acreage than the smallest amount established
for standard or optional drilling units.” Id. at §3.38(a)(4). Thus, as pertinent here,
3
The Table is as follows:
10
the only prohibition regarding acreage that may be derived from these Field Rules
is that the Commission will not issue a permit for drilling a new well on less than
40 acres.
Statewide Rule 38 is titled “Well Densities,” 16 T.A.C. §3.38 (App. G), and
the 40-acre requirement for a drilling unit is a density, not a spacing, requirement.
Statewide Rule 38 defines a “drilling unit” as “the acreage assigned to a well for
drilling purposes.” 16 T.A.C. § 3.38(a)(2) (App. G, emphasis added). As
Vaquillas correctly explains: “[t]he density requirement [prescribes] the minimum
number of acres the operator must have to drill a well. * * * Such units are by the
nature minimum-sized units, because they prescribe the minimum acreage required
to obtain a Railroad Commission permit to drill a well.” (CR:208).
The Field Rules establish no density requirement, or other unit size
requirement, that extends beyond the issuance of a drilling permit.
SUMMARY OF THE ARGUMENT
The Leases granted ConocoPhillips a fee simple determinable estate in the
minerals in and under 33,363 acres of Webb County land. By the time
ConocoPhillips’ continuous drilling program ended in 2012, ConocoPhillips had
drilled more than 200 gas wells on that land. Under Sentence (1) in the retained
acreage clause, ConocoPhillips was entitled to retain, under lease, 640 acres for
11
each gas well. ConocoPhillips was obligated to release the remainder of the
acreage back to Vaquillas, which it did.
Contrary to Vaquillas’ argument, the exception in Sentence (2) of the
retained acreage clause does not apply. The Railroad Commission’s Field Rules,
adopted in 1998, did not provide “a spacing or proration establishing different units
of acreage per well.” The Field Rules did nothing but carry forward from the
Statewide Spacing Rule the same requirement that an operator must assemble a
minimum of 40 acres before the Commission will issue a permit to drill a new
well. The Field Rules effected no change to ConocoPhillips’ gas wells in the field.
Consequently, when ConocoPhillips’ continuous drilling program ended, no units
different from 640 acres had been “established” in the field by Field Rules.
If Vaquillas were correct in contending that Sentence (2) of the retained
acreage clause limits ConocoPhillips to retaining only the minimum acreage
required to obtain a permit to drill a new well, that minimum acreage will likely be
less than 640 acres. Accordingly, Vaquillas’ interpretation erroneously makes the
exception in Sentence (2) swallow the 640-acre general rule in Sentence (1).
In addition, Vaquillas’ proposed interpretation would render illusory the
pooling clause’s authority to pool up to 640 acres for gas wells, and render
superfluous Sentence (4)’s statement that ConocoPhillips must have at least one
12
well per block of retained acreage. ConocoPhillips could not drill more than one
well on Vaquillas’ proposed retained 40-acre blocks.
Vaquillas’ interpretation would also obliterate the parties’ clear
differentiation between the acreage assigned to oil wells (40 acres) and gas wells
(640 acres) that is stated twice in the Leases. Under Vaquillas’ interpretation, both
oil and gas wells would retain only 40 acres.
But most significantly, Vaquillas’ erroneously interpretation of Sentence (2)
violates the established rule of Texas law that “we will not hold the lease’s
language to impose a special limitation on the grant unless the language is so clear,
precise, and unequivocal that we can reasonably give it no other meaning.” E.g.,
Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002). This
rule applies when interpreting retained acreage clauses. E.g., Chesapeake
Exploration, L.L.C. v. Energen Resources Corp., 445 S.W.3d 878, 883 (Tex.
App.—El Paso 2014, no pet.).
Specifically, Vaquillas claims Sentence (2) results in more than 15,000
additional acres “reverting” to Vaquillas under the retained acreage clause. But
Sentence (2) does not mandate that result “so clearly, precisely, and
unequivocally” so that the Court could “reasonably give it no other meaning.”
13
ARGUMENT
Standard of Review. This Court reviews the trial court’s summary
judgment ruling de novo. E.g., Springer Ranch, Ltd. v. Jones, 421 S.W.3d 273,
279 (Tex. App.—San Antonio 2013, no pet.). When, as here, both parties moved
for summary judgment and the trial court granted one motion and denied the other,
this Court considers the summary judgment evidence presented by both sides,
determines all questions presented, and if the Court determines the trial court erred,
renders the judgment the trial court should have rendered. Id. See TEX. R. APP. P.
43.2(c).
1. The Field Rules did not “establish” different units of acreage per
well.
A. The parties’ competing interpretations
In Sentence (1) of the retained acreage clause, the parties agreed that
ConocoPhillips was entitled to retain 640 acres “for each producing or shut-in gas
well” when its continuous drilling program ended. Consequently, when
ConocoPhillips filed its Partial Releases of the Leases, it correctly retained 640
acres per gas well as agreed in Sentence (1).
Vaquillas, on the other hand, contends the exception in Sentence (2)
controls. Vaquillas claims that under the exception, the Field Rules “provide for a
spacing or proration establishing different units of acreage per well,” and thus,
14
“such established different units shall be held” in lieu of the 640-acre units
specified in Sentence (1).
In the trial court Vaquillas offered no substantial analysis of the Field Rules,
except to say those rules identify one kind of unit—a minimum 40-acre drilling unit
to obtain a Commission permit to drill a new well. (CR:215). From that
observation, Vaquillas leapt, erroneously, to the conclusion that the minimum 40-
acre requirement for a drilling permit in those rules triggered the exception in
Sentence (2). Vaquillas moved for (and was granted) partial summary judgment
that ConocoPhillips “retains only 40 acres for each producing and shut-in-gas well
drilled by [ConocoPhillips] on the oil and gas leases that are the subject of this
lawsuit.” (CR:202).
Consequently, the lease interpretation question for this Court is whether
ConocoPhillips correctly retained 640 acres per well under Sentence (1) of the
retained acreage clause, or whether (as Vaquillas contends) the Field Rules
triggered the exception in Sentence (2) of that clause? As will be discussed in
greater detail below, Vaquillas maintains that Sentence (2) operates as a limitation
on the grant ConocoPhillips received by virtue of the Leases. Consequently,
Vaquillas argues that all acreage granted by the Leases to ConocoPhillips
“reverted” to Vaquillas at the end of the continuous drilling program, except for 40
acres around each existing well. Vaquillas’ Petition expressly states: “At the
15
Release Date, the Reverted Minerals automatically reverted to Vaquillas.”
(CR:195, see also CR:196).
B. Analysis of the retained acreage clause in light of the Field
Rules
The general rules for construing oil and gas leases are well known. The
Court examines the entire lease “and consider[s] each part with every other part so
that the effect and meaning of one part on any other part may be determined.”
Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996);
Birnbaum v. SWEPI LP, 48 S.W.3d 254, 257 (Tex. App.—San Antonio 2001, pet.
denied). The Court gives terms in the lease “their plain, ordinary, and generally
accepted meaning unless the instrument shows that the parties used them in a
technical or different sense.” Heritage, 939 S.W.2d at 121; Birnbaum, 48 S.W.3d
at 257. When construing oil and gas leases, the Court should “avoid when possible
a construction which is unreasonable, inequitable, and oppressive. Springer
Ranch, 421 S.W.3d at 287.
Neither party contends the retained acreage clause is ambiguous, so the
Court may interpret the clause as a matter of law. E.g, Springer Ranch, 421
S.W.3d at 279. Furthermore, the Court may interpret the Commission’s Field
Rules as a matter of law. See, e.g., State v. Bilbo, 392 S.W.2d 121, 122 (Tex.
1965) (interpretation of certificate issued by the Commission presents a question of
law).
16
“Establishing” and “established” different units. The contested language
in the retained acreage clause is Sentence (2)’s statement that “in case any rule
adopted by the [Commission] . . . provides for a spacing or proration establishing
different units of acreage per well, then such established different units shall be
held under this lease by such production, in lieu of the . . . 640-acre units above
mentioned.”
In that language, the parties twice used forms of the word, “establish.” The
first time “establish” is used, the form is “establishing,” which modifies the phrase
“rule adopted by the Commission [that] provides for a spacing or proration.” That
usage suggests the “establishing” of different units of acreage per well occurs
when the Commission adopts a field rule.
The second time the parties used a version of “establish,” they employed the
past tense, i.e., they referred to “established different units,” suggesting that
different units had already been “established” in the past. In the context of the
entire phrase, the meaning is that different units were “established” when the Field
Rules were adopted, as a result of the Field Rules.
The ordinary meaning of “establish” is “to settle, make, or fix firmly.”
BLACK’S LEGAL DICTIONARY at 626 (9th ed. 2009). Similarly, an old Texas case
says “established” means “[m]ake steadfast, firm, or stable, to settle on a firm or
permanent basis.” Rowley v. Braley, 286 S.W. 241, 245 (Tex. Civ. App—Amarillo
17
1926, writ dism’d). WEBSTER’S THIRD NEW INTERNATIONAL UNABRIDGED
DICTIONARY (1993) says “establish” means either “to make firm or stable,” or to
“settle or fix after consideration by enactment or agreement.” Id. at 778.4
These Field Rules did not “establish” different units. Using those
common definitions of “establish,” it is incorrect to argue that the Field Rules
“made firm or stable,” “settled on a permanent basis,” or “settled or fixed after
consideration by enactment or agreement” a requirement that units for gas wells
must be different from the 640 acres granted by the pooling authority of the Leases
and specified for retention under Sentence (1) of the retained acreage clause. Upon
the Commission’s adopting of the Field Rules, those rules neither required nor
made any change to ConocoPhillips’ gas wells in the field, i.e., the Field Rules
imposed no requirement that different units be “established” for wells in
production or shut-in awaiting production.
The Field Rules contain only one requirement that pertains to quantity of
acreage. They do that by means of the spacing rules—at least 467 feet from lease
4
The Supreme Court’s opinion in Jones v. Killingsworth, 403 S.W.2d 325 (Tex.
1965), illustrates the importance of focusing on the specific words parties
employ in oil and gas leases. In Jones, the Court held that the word
“prescribed” did not mean “permitted.” Consequently, before Sentence (2)
comes into play, the Commission must “establish” units of a different size than
640 acres. The parties did not say the exception in Sentence (2) comes into
play if the Commission adopts a Field Rule that merely permits drilling on units
of fewer than 640 acres, and that is all the Field Rules do. They permit
operators to drill on a minimum of 40 acres, but they do not “establish” 40-acre
units.
18
lines and 1,200 feet from other wells—found in Rule 2. By applying those
minimum spacing rules to the Table in Statewide Rule 38, 16 T.A.C. § 3.38(b)(2)
(App. G, fn. 3, infra), one sees that the minimum density, or drilling unit size, is 40
acres. As Vaquillas correctly explains: “[t]he density requirement [prescribes] the
minimum number of acres the operator must have to drill a well.” (CR:208).
Thus, the sole acreage requirement imposed by the Field Rules is a minimum
acreage requirement for the obtaining of a permit to drill a new well. The Field
Rules do not say there is anything wrong with a 640-acre unit for any producing or
shut-in gas well. Simply put, nothing in the Field Rules “established” different
units from the 640-acre retained acreage units to which the parties agreed in
Sentence (1) of the retained acreage clause.
Two additional rules of oil and gas lease construction. There are two
additional reasons why Vaquillas’ proposed interpretation of the retained acreage
clause is wrong:
First, under Vaquillas’ interpretation that minimum drilling units
control, the exception in Sentence (2) would swallow the general rule in Sentence
(1). Whether a particular field is governed by a special field rule or by Statewide
Rules 37 and 38, the Commission requires an operator to assemble a minimum
number of acres before the Commission will issue a drilling permit for a new well.
And it is unlikely that the minimum number of acres the Commission would
19
require for a drilling permit would be more than 640. One may see that by
reviewing the Table in Statewide Rule 38 on which Vaquillas relies, reproduced at
fn. 3, infra. The largest “standard drilling unit” in the entire Table is 40 acres. See
16 T.A.C. § 3.38(b)(2)(A) (App. G). All other drilling units listed in the Table are
smaller, ranging from 2 to 20 acres. Id.
Consequently, if what Vaquillas claims were correct—i.e., that one would
look to the minimum acreage required for a drilling unit by a Field Rule—then the
general rule of 640-acres in Sentence (1) likely would never apply. Under
Vaquillas’ argument, if a field rule exists, one first would look to see what
minimum drilling units were triggered by the spacing rules in that rule, by
consulting either the rule itself or Statewide Rule 38’s Table. Then as Vaquillas
wants this Court to interpret the retained acreage clause, that minimum drilling
unit—usually 40 acres, likely never more than 640 acres—will always prevail.
Sentence (1)—the 640-acre general rule—would become meaningless. The
exception will have swallowed the rule.
It would have been simple for the parties to write the interpretation for
which Vaquillas contends into the retained acreage clause. To capture Vaquillas’
proposed interpretation, the parties needed to write only that when the retained
acreage clause operates, the lessee may retain around each well only the minimum
amount of acreage required by the Commission to obtain a drilling permit. That is
20
the construction for which Vaquillas contends and the construction the trial court
adopted. But as this Court has said, courts may not rewrite leases in the guise of
interpreting them. E.g., EOG Resources, Inc. v. Killam Oil Co., Ltd., 239 S.W.3d
293, 300 (Tex. App.—San Antonio 2007, pet. denied). Yet that is what Vaquillas
wants this Court to do.
This Court considered a retained acreage clause very similar to the one in
these Leases in ConocoPhillips Co. v. Ramirez, No. 04-05-00488-CV, 2006 WL
1748584 (Tex. App.—San Antonio, 2006) (not designated for publication). For
one of the wells at issue in Ramirez, the Serafin No. 1, there were no applicable
field rules. Instead, the Commission’s Statewide Rules applied. Ramirez sought to
limit ConocoPhillips’ retained acreage for the Serafin No. 1 to 40 acres by relying
on the minimum 40-acre drilling units resulting from application of Statewide Rule
37’s spacing requirements to the Table in then-existing Statewide Rule 38. See
2006 WL 1748584 at *1. The spacing required by Statewide Rule 37 was 467 and
1,200 feet, the same spacing carried into the Field Rules at issue in this appeal. See
16 T.A.C. §3.37(a)(1). The Table in Statewide Rule 38 expressly applies both to
Statewide Rules and field rules, so Statewide Rule 37’s spacing triggered 40-acre
drilling units, just like the Field Rules at issue here. See Ramirez, 2006 WL
1748584 at *3.
21
Although the trial court ruled for Ramirez, this Court reversed, rejecting
Ramirez’s attempt to limit ConocoPhillips to 40 acres of retained acreage around
the Serafin No. 1 well by application of Statewide Rule 38 through the spacing
requirements stated in Statewide Rule 37. The exception in the retained acreage
clause in Ramirez required, as does the retained acreage clause here, for the
Commission to adopt a rule “for a field.” In Ramirez, this Court gave meaning to
the phrase, “for a field,” and held the Commission’s Statewide Rules were not
adopted “for a field.” Consequently, Ramirez’s attempt to apply the exception in
that retained acreage clause failed at the threshold. 2006 WL 1748584 at *2.
But one of the reasons this Court gave for its holding in Ramirez is
applicable here. This Court observed that if Ramirez’s arguments had been
correct, “the structure of [the retained acreage clause] is turned on its head: the
first clause [here Sentence (1)] would never apply, while the ‘except’ clause [here
Sentence (2)] would state both the general rule . . . and the exception.” If
Vaquillas were correct, the exact same would be true in this appeal. The general
rule in Sentence (1) would never apply. The exception in Sentence (2) always will.
As this Court wrote in Ramirez, that construction “would be not only nonsensical
but contrary to general rules of construction.” Ramirez, 2006 WL 1748584 at *3.
This certainly does not mean, as Vaquillas argued below, that the word
“spacing” in Sentence (2), where that sentence refers to “spacing or proration,” has
22
no meaning. Over the years, the Commission has adopted field rules that establish
maximum densities for wells in specific fields. There are mentions of such field
rules in decided cases. See, e.g., Railroad Commission v. Woods Exploration and
Producing Co., 405 S.W.2d 313, 326 (Tex. 1966) (Smith, J., dissenting) (stating
that field rules at issue “established a 320-acre spacing unit rule.”); Halbouty v.
Railroad Commission, 357 S.W.2d 364, 368 (Tex. 1962) (quoting field rule
stating: “the above spacing rule and the other rules to follow are for the purpose of
permitting only one well to each one hundred and sixty (160) acre proration unit”);
Clifton v. Koontz, 325 S.W.2d 684, 695 (Tex. 1959) (stating that field rules at issue
“provide for 320-acre units with 10 percent tolerance so that a maximum of 352
acres may be assigned.”). 5 But the Commission did not include such a provision in
the Field Rules at issue in this appeal.
If the Field Rules for the Lobo Consolidated Field had established a
maximum unit size for gas wells different from 640 acres (which they did not),
ConocoPhillips would have been required to conform to the rules as soon as they
became effective. Different units would have been “established,” and Sentence (2)
would then apply when the continuous drilling program ended. In other words, if
5
“Rule 38 establishes the minimum number of acres that must be assigned to
each well in order to obtain a drilling permit. In the absence of special field
rules, the minimum requirement is 40 acres per well.” J. Hayes, Texas Railroad
Commission: Some Basics Every Practitioner Should Know, 28 State Bar of
Texas, Oil, Gas and Mineral Law Section Report 3, 20 (June 2004) (emphasis
added).
23
the Field Rules had “established” different units, those different units would have
taken effect when the Field Rules were adopted. But the Field Rules effected no
changes to acreages for producing wells.
Second, under Vaquillas’ interpretation, the power granted in
Paragraph 4 of the Leases to pool up to 640 acres for gas wells would be
destroyed. As explained above, Paragraph 4 of both Leases granted
ConocoPhillips the power to pool for gas wells up to 640 acres. Paragraph 4 also
provides that if the Commission “prescribes or permits” the creation of larger units,
ConocoPhillips’ power to pool would include those larger units. (App. C & D).
Also as explained above, the general rule in Sentence (1) of the retained acreage
clause allows ConocoPhillips to retain 640 acres for each gas well.
That both Paragraphs associate gas wells with 640-acre blocks of acreage is
not coincidence. Vaquillas’ proposed interpretation of Sentence (2) would create
three surprisingly negative results for the lessee.
(A) Even though the Lessor granted the right to pool up to 640 acres for
gas wells, each 640-acre unit, although properly pooled and operated in good faith,
would abruptly shrink to 40 acres when the retained acreage clause operates. 6 This
6
Vaquillas argued in the trial court that ConocoPhillips would had to drill 16 gas
wells per 640-acres in order to “fully develop the acreage” and thereby earn the
right to retain that 640 acres under the retained acreage clause. (CR:379). That
argument conflicts with the authority Vaquillas granted ConocoPhillips in
Paragraph 4 to pool 640 acres for gas wells, and it also directly conflicts with
24
would be true—and oddly so—even though Rule 2 of the Field Rules, on which
Vaquillas relies, has been in effect since February 24, 1998, yet this “shrinking”
did not occur when (or since) those Field Rules were adopted.
(B) The retained acreage clause does not operate to terminate the Leases;
it requires only a release of certain acreage from the Leases. Consequently, after
the retained acreage clause operates, the pooling clause in Paragraph 4 should
remain in full force in effect.
But, under Vaquillas’ erroneous interpretation, the pooling clause becomes a
dead letter. Under Vaquillas’ interpretation, ConocoPhillips would retain under
lease only 40 acre blocks around individual wells. It will be impossible for
ConocoPhillips to exercise the power granted in Paragraph 4 to pool up to 640
acres, or even to drill a new gas well on an existing 640 acre unit. Consequently,
Vaquillas’ proposed interpretation of Paragraph 18, the retained acreage clause,
cannot be harmonized with Paragraph 4 of the same Leases.
Furthermore, under Vaquillas’ erroneous interpretation of Sentence (2), two
words in Sentence (4) of the retained acreage clause are rendered superfluous.
the general rule in Sentence (1) of the retained acreage clause. Under
Vaquillas’ contentions, the pooling authority for gas wells under Paragraph 4
and Sentence (1) of the retained acreage clause would become illusory.
The Leases do not state, as Vaquillas erroneously claims, that ConocoPhillips
was obligated to “drill . . . additional wells to develop the leasehold acreage to
the density provided by Railroad Commission rules.” (CR:203).
25
Sentence (4) states there must be “at least” one well per block of retained acreage.
If Vaquillas’ 40-acre argument were correct, there could never be more than one
well per 40-acre block of retained acreage because the Commission would not
issue a permit for a second well, either for oil or gas.
On the other hand, all paragraphs of the Leases harmonize under
ConocoPhillips’ interpretation of the retained acreage clause. ConocoPhillips
retains 640-acre blocks of acreage around wells, the same as Paragraph 4, the
pooling authority, allows it to do. Consequently, ConocoPhillips may continue to
pool and maintain 640-acre gas units. Furthermore, ConocoPhillips may obtain
permits to drill new wells on those 640-acre blocks, so as long as the Field Rule’s
from-lease-line and between-well spacing requirements are met.
(C) The Leases plainly contemplate that the operator will assign different
acreages to oil and gas wells. Paragraph 4 restricts pooling for oil wells to 40
acres, but allows pooling for gas wells up to 640 acres. Sentence (1) of the
retained acreage clause allows ConocoPhillips to retain only 40 acres around
producing oil wells, but 640 acres around gas wells. Vaquillas’ proposed
interpretation of Sentence (2) would completely destroy the differentiation the
parties clearly intended between acreages assigned to producing oil and gas wells.
Vaquillas’ argument causes that result by relying, at bottom, on Statewide Rule 38,
which does not distinguish, for drilling permit purposes, between oil and gas wells.
26
As this Court frequently has observed, courts should strive to harmonize and
give effect to all provisions of the Leases “so that none will be rendered
meaningless.” E.g., Springer Ranch, 421 S.W.3d at 279; EOG Resources, 239
S.W.3d at 300. ConocoPhillips’ is the only interpretation that gives meaning to all
provisions of the Leases. Vaquillas’ incorrect interpretation does not. Indeed, it is
simply impossible to find within Sentence (2) the wholesale revisions to the Leases
Vaquillas’ erroneous interpretation would make.
2. If there were any doubt about the proper interpretation of
Sentence (2), the Court should apply the strong presumption in
Texas law against making that sentence a “limitation on the
grant.”
For the reasons above, the Commission’s Field Rules covering these Leases
do not trigger the exception in Sentence (2) of the retained acreage clause in the
Leases. But even if there were any doubt, this Court should apply the strong Texas
law presumption against construing a lease provision to effect a limitation on the
grant. Under that presumption, the Court should not interpret Sentence (2) to work
the forfeiture for which Vaquillas contends.
By way of background, these Texas oil and gas leases were conveyances by
which Vaquillas and its predecessors granted to ConocoPhillips’ predecessor the
fee simple determinable in the mineral estate under the land described in the
Leases. Natural Gas Pipeline Co. v. Pool, 124 S.W.3d 188, 192 (Tex. 2003);
accord Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002);
27
Prize Energy Resources, L.P. v. Cliff Hoskins, Inc., 345 S.W.3d 537, 551-52 (Tex.
App.—San Antonio 2011, no pet.). As described above, the Leases at issue
conveyed mineral estates to ConocoPhillips for five and three year primary terms
and “as long thereafter as oil, gas, or other mineral is produced from said land or
land with which said land is pooled hereunder.” 7
Furthermore, “an oil, gas and mineral lease is indivisible by its nature.
Production from any part of the lease keeps the lease in effect during the primary
term as for so long as oil, gas and other minerals are being produced as to all lands
described in the instrument.” Shown v. Getty Oil Co., 645 S.W.2d 555, 560 (Tex.
App.—San Antonio 1982, writ ref’d.); accord, Matthews v. Sun Oil Co., 425
S.W.2d 330, 333 (Tex. 1968); Humphrey v. Seale, 716 S.W.2d 620, 622 (Tex.
App.—Corpus Christi 1986, no writ). ConocoPhillips had completed more than
two hundred gas wells on the Leases by the time its continuous drilling program
ended. (CR:203).
Accordingly, ConocoPhillips’ production from the two Leases entitles
ConocoPhillips to maintain the Leases in full force and effect until an event of
7
Vaquillas attempted to minimize the legal effect of the Leases in the trial court,
suggesting the Leases merely “transferred the rights to explore, drill, produce,
and market the minerals to an oil and gas company with the skill and financial
ability to do so.” (CR:206). No doubt the Leases did that, but as discussed
above, they did more. They conveyed the mineral estate in fee simple
determinable to ConocoPhillips. The significance is that, as discussed in this
section of this Brief, the presumption against construing lease clauses to effect
limitations on the grant is fully applicable to the retained acreage clause.
28
defeasance, or limitation on the grant, occurs. The first limitation on the grant,
found in the habendum clause in Paragraph 2 of the Leases, is cessation of
production in paying quantities, which has not occurred. The second limitation on
the grant is in Sentence (1) of the retained acreage clause, which obligates
ConocoPhillips to release all but 640 acres around producing or shut-in gas wells.
ConocoPhillips has complied. Under Vaquillas’ erroneous argument, Sentence (2)
of the retained acreage clause would operate as a third, very substantial “limitation
on the grant.” Consequently, in “limitation-on-the-grant” terminology, the
question posed by this appeal is whether because of Sentence (2), ConocoPhillips
forfeited and must now release over 15,000 additional acres because that
additional, alleged limitation on the grant caused ConocoPhillips to forfeit all but
40 acres around producing and shut-in gas wells?
Texas law creates a strong presumption against giving Sentence (2) the
limitation-on-the-grant effect for which Vaquillas contends. As the Supreme Court
has held time and again, “we will not hold the lease’s language to impose a special
limitation on the grant unless the language is so clear, precise, and unequivocal that
we can reasonably give it no other meaning.” Anadarko Petroleum Corp., 94 S.W.
3d at 554; accord, Rogers v. Ricane Enterprises, Inc., 773 S.W.2d 76, 79 (Tex.
1989); Fox v. Thoreson, 398 S.W.2d 88, 92 (Tex. 1966); Knight v. Chicago
Corp., 188 S.W.2d 564, 566 (Tex. 1945).
29
When the Knight case was before this Court, Justice Norvell, then a member
of this Court, held that even if there are two reasonable constructions of a lease, the
Court will choose the one that does not result in “a forfeiture (or termination of the
estate upon limitation).” Knight v. Chicago Corp., 183 S.W.2d 666, 671 (Tex. Civ.
App.—San Antonio 1944), aff’d, 188 S.W.2d 564 (Tex. 1945).
Texas courts apply the presumption against a limitation on the grant when
interpreting retained acreage clauses. See Chesapeake Exploration, L.L.C. v.
Energen Resources Corp., 445 S.W.3d 878, 883 (Tex. App.—El Paso 2014, no
pet.) (citing Anadarko Petroleum Corp., 94 S.W.3d at 554, and stating “adopting
the construction [of a retained acreage clause] urged by Chesapeake imposes an
unnecessary limitation on the kind and character of the estate the parties chose to
convey, i.e., an expansive one maintained by production from any part of pooled
lands unless limited by language so clear, precise, and un-equivocal that no other
conclusion could be reached.”); Tomlin v. Petroleum Corp. of Texas, 694 S.W.2d
441, 442 (Tex. App.—Eastland 1985, no writ) (citing Fox, 398 S.W.2d at 92, and
applying the presumption against a limitation on the grant to hold that retained
acreage clause expressly referring only to oil wells did not mandate release of
acreage around gas wells).
ConocoPhillips requests the Court to apply the presumption in this appeal.
ConocoPhillips does not agree that Vaquillas’ construction of Sentence (2) is
30
reasonable, equitable or unoppressive. Indeed, as described above in this Brief,
when one gives the words “establishing” and “established” their plain and ordinary
meaning, the exception in Sentence (2) is not triggered, and the general rule of
Sentence (1) prevails. But whatever else one may say about Vaquillas’
interpretation of Sentence (2), one certainly cannot say that sentence, when viewed
in light of the Field Rules, is so clear and precise that no conclusion other than
Vaquillas’ proposed reading can be reached. Consequently, Vaquillas’
interpretation of Sentence (2)—which would create a very significant additional
limitation on ConocoPhillips’ grant—should be rejected.
PRAYER FOR RELIEF
ConocoPhillips prays this Court will reverse the trial court’s Amended order
on Cross-Motions for Summary Judgment (CR:433, App. B), grant
ConocoPhillips’ Motion for Summary Judgment, and deny Vaquillas’ Cross-
Motion for Partial Summary Judgment. The Court should reverse the declaration
on page 1 of the trial court’s Order and declare that ConocoPhillips did not breach
the Leases by retaining 640 acres per producing and shut-in gas wells when
ConocoPhillips’ continuous drilling program ended, and is not required to release
additional acreage, as Vaquillas contends.
ConocoPhillips also prays for recovery of its costs on appeal, remand to the
trial court for determination whether ConocoPhillips is entitled to costs, including
31
reasonable attorneys’ fees, under Texas Civil Practice & Remedies Code § 37.009,
and for all other relief to which it is entitled.
Respectfully submitted,
/s/ Michael V. Powell
Michael V. Powell
State Bar No. 16204400
Email: mpowell@lockelord.com
Cynthia K. Timms
State Bar No. 11161450
Email: ctimms@lockelord.com
Elizabeth L. Tiblets
State Bar No. 24066194
Email: etiblets@lockelord.com
Locke Lord LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201-6776
Tel: 214-740-8520
Fax: 214-740-8800
Adolfo Campero
State Bar No. 00793454
Email: acampero@camperolaw.com
Campero & Associates, P.C.
315 Calle Del Norte, Suite 207
Laredo, Texas 78041
Tel: 956-796-0330
Fax: 956-796-0399
ATTORNEYS FOR APPELLANT
CONOCOPHILLIPS COMPANY
32
CERTIFICATE OF COMPLIANCE
Pursuant to Texas Rule of Appellate Procedure 9.4(i)(3), as amended
effective December 1, 2012, the undersigned certifies that this Petition complies
with the length limitations of Rule 28.3(g) (which the undersigned understands
now to be stated in Rule 9.4(i)) and the typeface requirements of Rule 9.4(e).
1. Exclusive of the contents excluded by Rule 9.4(i)(1), this Brief
contains 7,189 words as counted by the Word Count function (including textboxes,
footnotes, and endnotes) of Microsoft Office Word 2010.
2. This Brief has been prepared in proportionally spaced typeface using:
Software Name and Version: Microsoft Office Word 2010
Typeface Name: Times New Roman
Font Size: 14 point
/s/ Michael V. Powell
Michael V. Powell
33
CERTIFICATE OF SERVICE
I hereby certify that on the 9th day of April 2015, a true and correct copy of
Brief of Appellant, ConocoPhillips Company, was served by eFile Texas and/or
pdf on Appellees through its counsel of record listed below:
Gregg Owens Raul Leal
Email: gregg.owens@haysowens.com Email: rleal@rl-lawfirm.com
Robert G. Hargrove Raul Leal Incorporated
Email: rob.hargrove@haysowens.com 5810 San Bernardo, Suite 390
Hays & Owens L.L.P. Laredo, Texas 78041
807 Brazos Street, Suite 500 Tel: 956-727-0039
Austin, Texas 78701 Fax: 956-727-0369
Tel: 512.472.3993
Fax: 512.472.3883
A. Michael Jung Armando X. Lopez
Email: michael.jung@strasburger.com Email: mandox@rio.bravo.net
Strasburger & Price, LLP Law Offices of Armando X. Lopez
901 Main Street, Suite 4400 1510 Calle Del Norte, Suite 16
Dallas, Texas 75202-3794 Laredo, Texas 78041
Tel: 214-651-4724 Tel: 956-726-0722
Fax: 214-651-4330 (main) Fax: 956-726-6049
Fax: 214-659-4022 (direct)
Counsel for Vaquillas Unproven
Minerals, Ltd.
/s/ Michael V. Powell
Michael V. Powell
34
No. 04-15-00066-CV
In the Court of Appeals
for the Fourth District of Texas
San Antonio, Texas
CONOCOPHILLIPS COMPANY,
Appellant,
V.
VAQUILLAS UNPROVEN MINERALS, LTD.,
Appellee.
From Cause No. 2014 CVQ000 438 D4
406th Judicial District Court, Webb County, Texas
Honorable Oscar J. Hale, Jr., Presiding Judge
APPENDIX TO APPELLANT’S BRIEF
Tab
Court of Appeals Order Granting Petition for Permission to
Appeal.......................................................................................................... A
Trial Court Amended Order on Cross-Motions for Summary Judgment........ B
Oil, Gas and Mineral Lease (26,622.79 acres)......................................... C
Oil, Gas and Mineral Lease (6,740 acres)....................................................... D
Railroad Commission Order Adopting Field Rules for the
Vaquillas Ranch (Lobo Cons.) Field Dated February 24, 1998 .................. E
Railroad Commission Final Order Amending Field Rules for the
Vaquillas Ranch (Lobo Cons.) Field Dated November 2, 2010 .................... F
Railroad Commission Statewide Rule 38......................................................... G
35
FILE COPY
ConocoPhillips
CompanyAppellant/s
Fourth Court of Appeals
San Antonio, Texas
February 13, 2015
No. 04-15-00066-CV
CONOCOPHILLIPS COMPANY,
Appellant
v.
VAQUILLAS UNPROVEN MINERALS, LTD.,
Appellee
From the 406th Judicial District Court, Webb County, Texas
Trial Court No. 2014CVQ000438-D4
Honorable Oscar J Hale, Jr., Judge Presiding
ORDER
Sitting: Sandee Bryan Marion, Chief Justice
Karen Angelini, Justice
Marialyn Barnard, Justice
The appellant’s unopposed petition for permission to appeal from an interlocutory order
is GRANTED. TEX. R. APP. P. 28.3. “A separate notice of appeal need not be filed” as “a notice
of appeal is deemed to have been filed on [the date of this order].” Id. at 28.3(k). This appeal is
governed by the rules for accelerated appeals. Id.
The clerk’s record is due no later than February 23, 2015. Id. at 35.1(b). The clerk of
this court is directed to file a copy of this order with the trial court clerk. Id. at 28.3(k).
_________________________________
Sandee Bryan Marion, Chief Justice
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the said
court on this 13th day of February, 2015.
___________________________________
Keith E. Hottle
Clerk of Court
:;
CAUSE NO. 2014CVQ000438 D4
VAQUILLAS UNPROVEN MINERALS, § IN THE DISTRICT COURT
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AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JU ..
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On October 30,2014, Defendant's Motion for Summary Judgment and lai tiffs Cross-
Motion for Partial Summary Judgment were heard. The Court, having reviewed the motion,
briefs, responses, competent summary judgment evidence, and argument of counsel, rules on
"
these motions as follows.
IT IS ORDERED, ADJUDGED, AND DECREED that Defendant's Motion for
Summary Judgment is DENIED.
IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Plaintiffs Cross-
Motion for Partial Summary Judgment is GRANTED. The Court DECLARES that Defendant
has breached the 26,622.79-acre Lease and the 6,740-acre Lease by failing to release all acreage
in excess of 40 acres for each producing and shut-in natural gas well capable of producing in
paying quantities.
This Order of the Court decides the central question in this case, which is the number of
acres under two oil and gas leases that Defendant ConocoPhillips Company retains under the
"retained acreage" clauses of the leases at the conclusion of ConocoPhillips' continuous drilling
operations. The Court finds that the question decided by this order is a controlling question of
AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGEl
433
law as to which there is a substantial ground for difference of opinion. The Court also fmds that
I
.,'.'1
immediate appeal of the order will materially advance the ultimate termination of this litigation.
This Court's Order, and the underlying controlling question of law, involve the parties'
competing legal interpretations of the language of the "retained acreage" clauses and certain
Field Rules adopted by the Railroad Commission of Texas. Although the Court has ruled in
favor of the Plaintiff lessor, Vaquillas Unproven Minerals, Ltd., the Court concludes there are
substantial grounds for difference of opinion regarding whether the leases allow ConocoPhillips
to retain 40 acres per well, as Plaintiff contends, or 640 acres, as ConocoPhillips contends.
An immediate appeal from this Court's Order will materially advance the final
conclusion of litigation. Plaintiff seeks judgment ordering ConocoPhillips to execute releases of
over 15,000 acres described in the leases, as well as possible direct and consequential damages
flowing from ConocoPhillips' alleged breach of the "retained acreage" clauses of the leases. If
ConocoPhillips is forced to release the acreage but later wins an appeal determining that
ConocoPhillips' original interpretation is correct, significant problems could develop. On the
.; other hand, the lessor, Vaquillas Unproven Minerals, Ltd. is interested in having the release of
.,:]
acreage as soon as possible. Furthermore, the Court and the parties anticipate that a
determination of Plaintiffs damages, if any, will be costly and time-consuming.
ConocoPhillips desires to take an interlocutory appeal. The Court rules that such appeal
shall be defined by the lease interpretation question addressed in the parties' cross-motions for
summary judgment. More specifically, the question is whether the leases' retained acreage
clause allows ConocoPhillips Company to retain only 40 acres per each producing or shut-in gas
well it has drilled on the two leases, or whether ConocoPhillips is allowed to retain 640 acres
(Plus I 0% tolerance) for each wells.
AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGE 2
434
IT IS HEREBY ORDERED that, pursuant to Texas Civil Practice & Remedies Code §
51.014(d) (West. Supp. 2014) an interlocutory appeal is ALLOWED from this Order.
IT IS FURTHER ORDERED that trial of this action is stayed pending the interlocutory
,j appeal. The Court's Pre-Trial Guideline Order and Scheduling Order are hereby VACATED.
-:1
The parties may proceed with discovery and pretrial proceedings by agreement or with leave of
Court.
SIGNED this 4- day Of9"'=".jI.tAA-..,=="T\------' 2015.
( )~,,~
Ho1:"Oscar 1. Hale, Jr.
Judge Presiding
AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGE 3
435
·,.,
'l
APPROVED AS TO FORM:
'
."!
.;
I
~ ``p'<..q
Michael V Powell
State Bar No. 16204400
Email: mpowell@lockelord.com
-I Elizabeth L. Tiblets
.,, State Bar No. 24066194
Email: etiblets@lockelord.com
.~
LOCKE LORD LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201-6776
Tel: 214-740-8520
Fax: 214-740-8800
Adolfo Campero
State Bar No. 00793454
Email: acampero@camperolaw.com
CAMPERO & ASSOCIATES, P.c.
'I 315 Calle Del Norte, Suite 207
I Laredo, Texas 78041
j
] Tel: 956-796-0330
Fax: 956-796-0399
ATTORNEYS FOR DEFENDANT
CONOCOPHILLIPS COMPANY
)
•
AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGE 4
436
- ---- - - - - - - -- -- ---
APPROVED AS TO FORM:
I
-, /s/ P. Michael lung
P. Michael lung
State Bar No. 11054600
Email: michael.jung@strasburger.com
STRASBURGER & PRICE, LLP
901 Main Street, Suite 4400
Dallas, Texas 75202-3794
Tel: 214-651-4724
Fax: 214-651-4330 (main)
Fax: 214-659-4022 (direct)
Gregg Owens
State Bar No. 15383500
Email: gregg.owens@haysowens.com
Robert G. Hargrove -
State Bar No. 09303300
Email: rob.hargrove@haysowens.com
i
-I
HAYS & OWENS L.L.P.
807 Brazos Street, Suite 500
I Austin, Texas 78701
-j Tel: 512-472-3993
.1 Fax: 512-472-3883
Annando X. Lopez
State Bar No. 12562400
Email: mandox@rio.bravo.net
LA W OFFICES OF ARMANDO X. LOPEZ
1510 Calle Del Norte, Suite 16
Laredo, Texas 78041
Tel: 956-726-0722
Fax: 956-726-6049
Raul Leal
State Bar No. 24032657
Email: rleal@rl-lawfirm.com
RAUL LEAL INCORPORATED
5810 San Bernardo, Suite 390
Laredo, Texas 78041
Tel: 956-727-0039
Fax: 956-727-0369
ATTORNEYS FOR V AQUILLAS
UNPROVEN MINERALS, LTD.
AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGES
437
.'" ~-'. '~wWi
P'i>du~tn U {'"'' ?O,~lnllnll ~ SI'lionlr, Co •• 1l0UI\0~. T'~II
uo ACAI PoOUnr- Pr:ovilion _, I
~!, " OIL, GAS AND Mliu(RAL LEASE AMENDING OIL', GAS AND''ntNERAL.
LEASE DATED JUNE 15, 1974 (AS AMENDED) BETWEEN LESSOR-AND LESSEE HEREIN
26,622.79-acres of land, more or less, situated'in Webb County. Texas more
fully described in Exhibit "A" attacli"ed"'he'reto and made a part of this Lease
for all relevant purposes. including limitations upon warranty as specifically
set out therei~.
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".
ADDENDUM TO AMENDED OIL AND GAS LEASE
From Vagui11as Ranch Co., Ltd. et a1
To Conoco Inc., Oated November 1, 1987
12. Should Lessee be prevented from complying with covenants of this
lease by reason of conditions or acts set forth in Paragraph '11' hereof,
then Lessee agrees annually to pay to Lessor an amount equal to the delay
rentals herein provided for during such period of prevention, whether same
be during or subsequent to the primary term, and such payment shall be made
at the end of each year of prevention either to Lessor or to the depository
above named for credit to the account of Lessor.
13. This lease does not cover or include any right or privilege of
hunting or fishing on any part of the above described land, cwd Lessee
agrees with lessor that neither he nor his assigns or agents or employees
of his aSSigns, will bring firearms or dogs upon the leased premises, and
should this provision against hunting and fishing be violated by any
agents I servants, employees or contractors of Lessee's assigns, any such
person so Violating same shall have no further right to enter upon the
leased premises, and such person shall be regarded as and shall be a
trespasser on the premises of Lessor and be subject to the penalties
imposed upon trespassers under the laws of the State of Texas.
14. It Is expressly agreed and understood that after production of
oil and gas in commercial quantities is obtained from the leased premises,
the mi nimum annua 1 income to Lessor from payment of renta 1s , shut- i n
royalty and royalty on production shall be sum of not less than Two ($2.00)
Dollars per acre on the total acreage retained and then covered by this
lease, but this provision shall not impair the right and privilege of
Lessee, his successors and aSSigns, to release and surrender any part of
the above described leased premises as herein provided. Lessee, his
successors and aSSigns, shall determine within 90 days from the expiration
of any lease year during which royalties have been paid on actual
production the amount of any deficiency, and shall within said gO-day
period pay such deficiency to Lessor or deposit same to Lessor's credit at
i-CIlP
- -0012146i
----
-1-
GWB2/dm 130(1)
, -,- ,.. , , 49
the depository hereinabove designated. Default in the payment of such
deficiency shall "at operate to tenllinate this lease or any part hereof,
but Lessee, his successors and assigns, agrees to personally pay such
deficiency to Lessor at Laredo in Webb County, Texas, together with any
reasonable cost, including attorney's fees, incurred by Lessor in
collecting such deficiency if not paid within the gO-day period hereinabove
provided for.
15. Nothwithstanding any other provision herein contained, this oil,
gas and mineral lease is limited to oil, gas and sulphur and minerals
produced with oil and gas, and does not include minerals other than oil,
gas and sulphur and minerals produced with oil and gas, as Lessor herein
excludes from the leasehold estate herein granted, and reserves unto
himself, his heirs and assigns, all minerals other than oil, gas and
sulphur and minerals that may be produced with oil and gas, but it is
expressly agreed that 'gas' as used herein includes gas, condensate,
distillate or any other gaseous substance or any other mineral produced
with oil and gas, including sulphur.
16. The right to pool under Paragraph '4' of this Oil, gas and
mineral lease shall be limited to lease or leases on land belonging ·to
Lessor herein, or in which lessor owns an interest in the oil, gas and
other minerals.
17. For the purposes of the annual renta 1 payments due under
paragraph 5, Lessor and Lessee agree that said payments have been timely
paid and received, and that this Lease is perpetuated, without the
necessity of further delay rental payments, until the expiration of the
primary term.
18. On November 1, 1990, Lessee covenants and agrees to execute and
deliver to Lessor a written release of any and all portions of this lease
which have not been drilled to a density of at least 40 acres for each
producing oil well and 640 acres for each producing or shut-in gas well,
except that in case any rule adopted by the Railroad Commission of Texas or
other regulating authority for any field on this lease provides for a
!CiiP" ooi21471
-2- -----~-----
GWB2/dm 130(1)
50
spacing or proration establishing different units of acreage per well, then
such established different units shall be held under this lease by such
production, in lieu of the 40 and 640-acre units above mentioned; provided,
however, that if at such date lessee is engaged in drilling or reworking
operations the date for the execution and delivery of such release shall be
postponed and the entire lease shall remain in force so long "as operations
on said well or wells are prosecuted with reasonable diligence, and if,
after the completion or abandonment of any such well lessee commences the
drilling of an additional well within Ninety (90) days from the completion
or abandonment of the preceding well, or continuously conducts drilling
operations in good faith and with reasonable diligence on said lease
"Without any cessation for longer than Ninety (90) days, said lease shall
remain in full force and effect during such drilling operations and until
the end of Ninety (90) days after the completion or abandonment of the
final well, at which time lessee shall execute and deliver to lessor said
written release, releasing all portions of the lease not then so developed.
Each retained unit shall contain at least one (1) well producing or capable
of producing oil or gas in paying quantities, and the acreage within a unit
shall be contiguous.
If, after the date the partial release called for under this Paragraph 18
takes affect, all production from a retained unit around a well or wells
cease to produce oil or gas in commercial or in paying quantities, Lessee
shall have one hundred eighty (180) days thereafter within which to
commence operations to establish or re-establish production therein in
commercial or paying quantities, whether such production be from the same
wellbore or other wellbore. If such operations result in commercial
producti on, then thi s 1ease, as it app 1 i es to such un it sha 11 continue
until such commercial or paying production again ceases. However, if such
operations do not result in commercial production, then Lessee shall have
ninety (90) days after completion of such operations within which to
commence drilling or reworking operations within such unit, and this lease,
as it applies to said unit, shall remain in force so long as operations on
said well or for drilling or reworking of any additional well therein are
prosecuted with no cessation of more than ninety (90) consecutive days, and
if they result in the production of oil or gas therein, so long thereafter
lCOPOo121"~
-3- --------:--
GWB2/dm 130(1)
51
as oil or gas is produced from said unit. As to any unit upon which
commercial production may periodically terminate, the above right to timely
resume operations and continue this lease as to such unit shall be
reoccurring right.
The stipulation above as to the size of retained tracts around wells shall
never be construed as a satisfaction of Lessee's right, duty and obligation
to reasonably develop the leasehold held by Conoco or its successors or
assigns. After November 1, 1990, Lessee agrees to drill such additional
wells on the leased premises or such portions thereof as may be in force
and effect from time to time, as may be necessary to reasonable develop the
same for the production of oil and/or gas as a reasonable prudent operator.
19. A portion of paragraph 3 has been deleted and the following is in lieu
thereof.
(b) ,on gas, including caSinghead gas or other gaseous substances,
produced from said land, the Lessors royalty shall be calculated and
paid as follows:
a) Sales To Non-Affiliated Third Parties:
In the event Lessee enters into a gas sales contract with a
non-affiliated third party, Lessor's royalty shall be one-sixth
(1/6) of the gross proceeds received by Lessee from the sale of
such gas.
b) Sales To Related Or Affiliated Entities For Resale:
In the event Lessee enters into a gas sales contract to sell gas
to a related or affiliated entity, then Lessor's royalty shall be
computed on the greater of the following:
1. One-sixth (1/6) of the gross proceeds received by lessee or
any affiliate or related entity from the sale of such gas to
the first non-affiliated entity, or
2. One-sixth (1/6) of the highest price reasonably obtainable
for gas by Lessee and other producers or operators in the
-4-
GWB2/dm 130(1)
52
east one-fourth of Webb County, Texas, who are producing gas
of like kind, quality and quantity.
In this regard, it is understood that the "highest price
reasonably obtainable" may be equal to, but is not
necessarily, the highest price then being obtained by other
producers or operators in the east one-fourth Of Webb
County, Texas, who are producing gas of 11ke kind, quality
and quantity.
c) Taking, Selling Or Delivery Of Gas To Lessee Or Its Related Or
Atfil iated Entities For Use (Not For Resale):
In the event Lessee takes gas for its own use, or sells or
transfers gas to a related or affiliated entity for use, then
Lessor's royalty shall be computed on tbe greater of the
following:
1. One-sixth (1/6) of the highest price reasonably obtainable
for gas by Lessee and other producers 01" operators in the
east one-fourth of Webb County, Texas, who are producing gas
of like kind, quality and quantity.
In this regard; it is understood that the "highest price
reasonably obtainable" may be equal to but is not
necessarily the highest price then being obtained by other
producers or operators in the east one-fourth of Webb
County, Texas, who are producing gas of like kind, quality
and quantity, or
2. One-sixth (1/6) of the quarterly weighted average of the
pri ces being pa i d by "purchasers" (as here; nafter defi ned)
in the east one-fourth of Webb County, Texas, who are
purchas i ng gas of 1i ke ki nd and qua 1i ty. For the purposes
of calculating the average price under this Paragraph c2,
prices paid shall be those as reported in the Energy
Planning Book publ ication or as reported to the State of
-5-
GWB2/dm 130(1)
53
Texas for severence tax purposes. uPurchasers" shall mean
the. three largest purchasers based on volume of gas
purchased for such calendar quarter, in the east one-fourth
of Webb County, Texas. For an example of the calculation of
the quarterly weighted average of such price, see Exhibit
UB"
Lessor and Lessee shall meet within eleven (11)· months after the end
of each calander year. At least thirty (30) days prior to such meeting,
Lessee should furnish to Lessor a statement or other documentation of the
basis upon which royalties accrued to lessor under the terms of the Lease
for the previous calender year. Any additional royalties calculated by
Lessee to be due, if any, shall be paid at such meeting. Within one (1)
year from delivery of the above referred to statement or other
documentation, lessor shall notify Lessee of any discrepancies. Failure to
notify lessee timely of any discrepancies shall constitute final acceptance
of royalty payments as covered by such s~atements or other documentation.
The first period for which Lessee shall prepare such statements or other
documentation shall begin on April 1, 1988 and end on December 31, 1988.
Nothing in this paragraph shall preclude Lessor from claiming any royalty
which Lessor is entitled to as a result of mistake in computation,
oversight in computation, or error in computation of royalty or which may
result from the subsequent disclosure of a discrepancy.
LESSOR'S royalty shall be without deduction for any costs. such as,
but not limited to, costs of producing, gathering, storing, separating,
treating, dehydrating, compreSSing, processing, transporting and otherwise
making the oil, gas and associated substances ready for sale or use, except
for a) severance and related taxes, and b) reasonable transportation
expenses which may be necessary to be paid to non-affiliated third parties
or entities to get Lessor's gas to a market or point of sale off the leased
premises and which sale or sales will result in a net price equal to or
higher than if said gas had been sold at the wellhead.
LESSOR'S royalty on all production from depths below the stratigraphic
equivalent of the top of the Cretaceous System as seen at 12,810 feet
---------
lcop 0012151 I
-6-
GWB2/dm 130(1)
54
in the electric log of the Vaquillas #7 Well located 260' FNL and
1,700' FWL of Survey 987, A2061, Webb County, Texas, under the lands
now held by Lessee under this Lease shall be one-fifth (1/5) instead
of one-sixth (1/6).
LESSEE may submit a copy of a proposed gas sales contract to Lessor
which is acceptable to Lessee and request that Lessor approve same for
royalty computation purposes. Lessor shall have thirty (30) days after
receipt of a gas contract to approve same. If lessor approves same or does
not timely decline to do so, then lessor's royalty on gas sold under such
gas sales contract shall be based on the gross proceeds received under said
contract.
GAS contracts with a term in excess of three (3) years shall contain a
provision for price redetermination no later than the end of the 3rd year
and subsequent price redeterminations thereafter at intervals no greater
than two (2) years apart.
20. Lessee agrees to fill all slush pits and level the same when they
have ceased to be used and to restore the land to as near its original
state as is practicable and to pay for damages to the surface of the land
and the improvements, water wells, growing crops and livestock thereon, and
to any other personal property of Lessor, Vaquillas Ranch Company, Ltd.,
occasioned by, arising out of, or resulting from operations by Lessee, his
agents, employees or independent contractors on the land hereby leased to
Lessee. Lessee also agrees, when requested in writing by Lessor, to
divulge to Lessor true and correct information as requested by Lessor as to
all drilling, producing and marketing operations conducted under this lease
and to furnish to lessor copies of all electric well logs taken hereunder;
provfded, however, Lessee shall not be obligated to release such
information until it has been released to the industry.
21. lessee hereby agrees to ensure that the two exit gates on F.M.
2895 (Forest Gate and Reynolds Gate) are guarded in an efficient and
prudent manner during drill ing, reworking or plugging operations and at
other times as mutually agreed to by Lessee and Lessor. As to the exit
-7-
GWB2/dm 130(1)
55
gate on the north side of U.S. Highway 59, Lessee agrees to use its best
efforts to work out an arrangement with other exploration companies using
such gate to ensure that it is guarded in an efficient and prudent manner
during drilling, reworking or plugging operations and other times as
mutually agreed to by Conoco and Lessor. Further, Lessee agrees to use its
best efforts to work out an arrangement with TransAmerican Natural Gas
Corporation or its successors or assigns to ensure that the exit gate
located 9 miles north of Aguilares, Texas, on F.M. 2895 is guarded in an
efficient and prudent manner during drilling, reworking or plugging
operations and at other times as mutually agreed to by Lessee and lessor.
In regard to gates used by Lessee and other exploration companies, Lessee
agrees to pay its share of the cost of guarding such gates when such gate
guards are required under this agreement. Lessee shall not be obligated to
furnish a gate guard on any gate which has been abandoned or is not being
used by Lessee.
22. Lessee agrees that before abandoning any well drilled on said
lease for oil or gas purposes, it will notify the owner or the surface
estate in person or by telephone of its intention to do so, and it will
allow said owner of the surface estate a reasonable time, not exceeding
twenty-four (24) hours thereafter, within which to elect to take over the
hole for the purpose of attempting to make and complete a water well.
lessee agrees to consult with such surface owner as to the location of a
potential water zone, without any liability or warranty for such
consultation. Upon the owner of the surface estate election, within the
specified time, to attempt to complete the well as a water well and
complying with all rules and regulations of the Railroad Commission of
Texas and applicable statutes, Lessee will, at its expense, set all plugs
to just below the deSignated water sand as may be required by the Railroad
Corrmi ss ; on and thereafter deli ver the we 11 to sa i d owner of the surface
estate, leaving in such well all surface casing and such intermediate
casing as may have been run and set to at least the depth of the designated
water sand and thereafter the owner of the surface state shall own the well
and shall be responsible for all subsequent matters in connection with the
well and for compliance with the applicable statutes and regulations of all
regulatory agencies having jurisdiction. Lessee shall have no liability to
-8-
GWB2/dm 130( 1) --~-~---
IcOP 0012153 I
- -..- - -.- - -
, ,
56
--
Lessor in connection with any of the operations which may be conducted by
the owner of the surface estate who shall thereafter bear all
responsibility and liability with respect thereto. It is expressly
understood that Lessee shall not be required to furnish any additional
casing or other equipment for any well plugged back at the request of the
owner of the surface estate under this paragraph. Should the owner of the
surface estate elect not to attempt to make a producing water well out of
any such hole, Lessee shall plug the well in accordance with all applicable
rules, regulations and statutes.
23. It is expressly agreed and understood that for the purposes of
this lease the following definitions shall apply:
lICorranencesll - A well shall be deemed commenced on the
date which the drilling bit enters the
earth for the drilling of a well.
IIAbandoned li - A well shall be deemed abandoned on the
day when it is finally plugged as a dry
hole.
"Completed" - A well shall be deemed completed thirty
(30) days after the day the Lessee sets
production casing.
24. Lessor and lessee agree to 1imit the commencement of actual
drilling during deer hunting season to 1) those wells drilled in areas
which would not disturb deer hunting, and 2) offset wells. If Lessee must
commence a well during deer hunting season to perpetuate said lease, then
Lessor will either a) not object to the drilling of such well during deer
hunting season or b) agree to extend the commencement date for such well to
a mutually agreeable date after deer hunting season ends. For the purposes
of this paragraph "deer hunting season II shall be that period defined by
State law.
25. Nothwlthstanding anything contained herein to the contrary, the
Lessor at any time and from time to time, upon not less than ninety (90)
days notice to the holder of this lease, may elect to require the payment
of any royalties accruing to such royalty owner under this lease to be made
in kind; provided that any expenses incident to the exercise of such
election shall be borne by Lessor and such election shall be for periods of
not less than twelve (12) months. Lessor shall only be allowed to take in
-9-
GW82/dm 130(1)
57
kind when lessee is producing for his own account. In the event of such an
election by Lessor, Lessee shall cooperate fully with Lessor in allowing
Lessor to take their royalty in kind, including permitting Lessor to use
Lessee's wellhead equipment and, to the extent that Lessee has assignable
rights, the use of lessee's purchaser's transportation facilities in good
faith and not to exceed prevailing charges for similar services in the
industry at the time if Lessee or its affiliates are transporting the gas,
but if Lessee has a third party contract for the transport of said gas,
Lessor will be bound by said contract. Should Lessee desire to enter into
a gas purchase contract having a term of more than one (1) year, then (a)
Lessee shall include in such contract a provision that allows Lessor to
elect to take its gas in kind and be released from such contract one
hundred twenty (120) days after notice, or (b) Lessor may approve of such
contract in writing, in which event, lessor may elect to tak.e its gas in
kind either at the end of such gas contact or one (1) year after notice to
Lessee, whichever happens sooner. Any equipment installed by Lessor
necessary to take in kind must be approved by lessee and maintained
according to lessee's specifications.
If Lessee is unable to obtain a more favorable gas contract because of
lessor's reservation of this election to take in kind, then lessee may
elect to give notice of its intention to sign a gas contract acceptable to
Lessee and request that lessor join in signing same, and if lessor elects
to Sign same, then Lessor's royalty share of revenue shall be bound by such
contract and Lessor may not elect to take its royalty in kind during the
term of such gas purchase contract.
26. This Amendment is applicable to only that leasehold interest
presently owned and held by Conoco Inc. Nothing contained herein shall in
any way inure to the benefit of or be applicable to third parties who hold
or claim any interest in said 26,622.79 acre lease or who claim an
undivided interest therin either jointly or separately with Conoeo.
Nothing herein shan in any way prejudice any claim, demand or cause of
action which Vaquillas may have or assert against third parties holding any
leasehold interests in Vaquillas lands. Nothing herein shall be construed
as a release or modification of any right, claim or cause of action which
-10- i'cop.~ls51
GWB2/dm 130(1) ---~-------
58
Vaquillas may have aga.inst third parties who claim any interest in said
26,622.79 acre lease or any other Vaqui11as lease.
27. Lessor does further RATIFY, CONFIRM and ADOPT all of the terms,
provisions and conditions of said June 15, 1974 Lease, as amended and as it
applies to those rights held by Conoco Inc. thereunder, and that such
lease, as amended and as it applies to Conoee Inc. is in full force and
effect as of this date. Further, nothing contained herein shall in any way
inure to the benefit of or be' applicable to any interest held by third
parties in and to the June 15, 1974 Oil and Gas lease.
DATED this <51'~ day of January, 1988.
VAQUILLAS RANCH COMPANY, LTD. VAQUILLAS UNPROVEN MINERAL TRUST
8y:
By:
VAQUILLAS PROVEN MINERAL TRUST CONOCO INC.
. Wal er, Jr., rustee !jd By: ~.f``~-Jl/~
By: 6: ,~og*~ &~ 'tl~
E. er
I
uiros, ru tee
)
-11-
GWB2/dm 130(1)
59
EXH I 8 I T "A"
.!!llir A8STRACT CERTIFICATE GRANTEE ACRES
16~9 I'll 0 llS8 eeso • RGNG 640;0
1651 1112 1159 eeso & RGNG 640.0
1652 2876 1159 \/. H. Taylor 640.0
1661 1122 1164 CCSO & RGNG 640.0
1663 1123 1165 ecso & RGNG 640.0
1633 1323 4/808 GC & SF 640.0
163~ 2252 4/808 GC & SF 659.96
1665 1124 1166 CCSO & RGNG 640.0
5.1/21666 2253 1166 eeso & RGNG 328.75
N.l/2 1666 3142 1166 ceso & RGNG 328.79
468 2255 236 AS & H 659. '"
467 799 236 AS • H 640.0
1635 1797 17 TC Ry. 640.0
865 1438 12/2541 H • GN 640.0
1683 1115 1175 CCSO & RGNG 640.0
1691 1267 5446 Ge • SF 640.0
1696 2418 5448 GC • SF 640.0
1695 1268 5448 Ge • SF 640.0
279 (pt. only) 1353 3702 GC & SF 458.2
1004 2421 21105 J. Poi tevent 634.58
1692 2419 5``6 GC • SF . 613.04
1693 1269 5447 GC. SF 640.0
2112 2420 & 1925 631 B.~F. James 627.12
276 i552 3700 Ge & SF 640.23
228 2550 134~, .. CCSO ,& 'RGNG 636.93
'227 1133 13W~ ceso & RGNG 640.0
988 2593 2/103 J •. Pol tevent 637.10
987' 2061 .211,93' J .. Poltevent 640.0
213' 1141 13~9. eeso & RGNG 640.0
275' 1336 3700 ' , 'GC ',,& "SF' 640.0
·27H' 1337 3701 cqQ& RGNG 640;0
:~'.1/~ '31. BI9Ck 2 1043 453 ..eeso:,,& ,~GNG 320.0
, 25. Block 2 1042 ~52 'eeso & RGNG 640.0
'232" 2148 1346 CCSO & ReNe 462.70
'233" 1117 1347 ceso &ReNe 4~5.9
N.H2 51. Block 2 1045 460 . ecso & ReNe 320.0
,259 (pt. only) 1137 1074 eeso &RGNG 600.0
1955 1328 4526 Ge & SF 640.0
2057 985 302 eeso & ReNG 652.25
2060 (pt. only) 3329-30 303 CT & H 440.0
LI/2 2059 984 303 eT& H 320.0
E.l/2 1953" 1329 4527 Ge& SF 320.0
1627 (Pt. only) 1324 4683 Ge & SF 160.0
1629 (pt. only) 1275 4682 GC & SF 292.65
\/.1/2 1662 2230 1164 eeso & RGNe
E.l/21648 329.31
\/.1/21648
24" 1157 eeso & RGNe 325.75
3301 1157 ceso & ReNe 325.75
26. Block 21'1 452 Rawle D •. Barnsley 640.0
2335 3025 School W. Brown 27.3
E.l/2 1956* 2560 4526 Ge & SF 327.34
Lessor's·warranty hereunder as to all of Surveys 987,273,275,27],26, the E.l/Z of 1953,
E.I/2 of 1956 and ~Ol.9 acres out of Survey 233 (all except 54 acreS out of SW corner of said
Sur. 23;) Is expressly limited to 1/2 of the executIve rights In the 011. and gas rights In
and under said lands, and as to all of Survey 232 :I~ :e~pressly limited to 4/5 of the execut ive
rIghts In the oll.and gas rights. . .,
The following parts of surveys are expressly exc1uded'~eref~om, -vIz.·:.
(I) The SE 1/4 of S~ 1/4, 511 1/4 of HE 1/4 (80 acs.L'andN ',1/2 of S~ I/~ and S\/ 1/4 of s~ 1/4
(120 acs.) of CT&H Survey 2060. ..' .".', ..... ' ..
(2) The w. 3/4 or GC~SF Survey 1627 described tn O&G Lse. to Daniel A. Pedrotti dated
September 24, 1973, as a~ended.
Any part of a survey listed herein not included \.,.Ithin any specific fraction.,1 reference
preceding the su'rver refercnc;e.
(4) The HE 160 acre' of GC&SF Survey 279.
(5) ·Block 11 as per the E.D.Claggett Subdivision of rccord 2 Plat Records 29, Wcbh County,
contiJinlng ~O acre~ tl~in9 the N\I I/lf of SE Ill; of CCSO & RGNG Survl'~' 259.
I
(6) All of the "I. 320 ;l.:r~'i> of Survey 1629 d(.'scribl!d and included In O&G lsc. tu l),lIllel A.
Pedrotti dated $"j'\.';:lh\.'r 2~, 1973, a,s amcndt"d,
T~OPOOI2i57:.
--~---~-.--- 60
EXlIlIlT •
C.lculatlon of toy.hy to b. SNld on ,II d.. ~I't'.nd to L..... or ,utill.tll for UII ,.M
nn for 1' . . . 1.') In ,,"cardlne. vlth p.,.,rlp)! 19.
"lnclp.h ,.y L.llor roy.Uy b.nd on thl ,r ..ttr of th' v.l;ht.d .v.,.;. price
ptld by th. th,u lar, .. t volUdtrtc pUrchllra for the ".l.nd,r qulner
In the .. at q\lIrttl' of v.bb Covnty 01' the 1III10"ttll 'Yin'll' of th. pr!c; ..
us.d by tilt L... or for roy., lY P')'MAt pIoIrpD . . . .
Oat. Sourc.s [n...vy 'luvdn; loot publication or IS reported to til. nu. of tun hlr
IIv.rene. tax pvrpaa.,.
sup 1. [lIlc;ul". th. v.I'IIht.d IIV'1'II0' prln tor the IIMth for ,lIc;h of tllll 'hI''' ttr..,."
volu-. P\lrc;hllll. for til quirt., 11"_ the tax r.carda.
Pureh .... fro .. 's!I!P'ny A
L.ne , 100,000 2.00 ZOO,a63
Unit 14 ao,ooo 1.51 120,eOO
leO,ezt I." 29t,733
TOtAL Unftltd T.... 360,ez,
Tren._I .. ton
613,396/160,e21 • SI.70/MMltu.
IIp .. t pl'oc.du,. for reNlnln~ two lIantlll for thll purch ... r .nd for remaining tlla
purch .......
Step 2. Calcul't. the vahllt.d IVerl\l' prle. of the thr •• Ilrv.n va\ulII.trlc pur!;"'" lor
the qulrllt u.lno JIIOntilly VII" .. troll IUp 1.
"onth·J'oy,ry '9!§ Month· ,ebruuy 19815 Honth , H.reh IfIU!
Emb.WL VOlUM Prlca Extension VO\\nI' Pr!c. Exten.lon Val~. Prlc. Ext.nslan
Me' l/HCf • MCf S/HC' • Me' S/KC' •
United Tax.. 360,821 1.10 613,396 397,130 1.515 627,465 3Z0,l06 1.58 506,083
TUMIII .. lon
UTUO!
South Gulf
Tot.l.
'oo,m
ill..222 LH
1,136,044
1.5$ 620,346
~
=
350,723
1,833,74Z 1,047,009
1.60
WI.
561,157
lll.m
500,1261.55
~.'~,5~'"--o'``~'~'"'
1,613,255 1,121,432
775,195
1,756,658
SUI! of Volu.." lUll ot ExUn,'o!\, Vefghud Ayerai' P~!c,
Toul. 3,304,485 5,263,855 1.59
sup 3. tlleulu. w.IGht.d ,v,nv' prtu und by L..... to calcul'tI roy.lty p'YIII,nta on
' " d,llvered to L..... or .HtI"t .. and not for 1' . . . 1••
Month.January 'filII Month.February 191111 Mgnth·Mush 1988
Voh... Pl'lc. Extln.fan vatu-. Prfc. Ext.n.lon \/01101IIII Prlc. Exun,lon
MCf '/IICf • Kef SIMCf
• 'Of $-/Her
•
155,000 1.60 248,000 140,000 1.62 Z26,aOO 155,000 l.se 244,900
III! 9' YoIV .." SUP' 9' ClIun.'on. "phtrd Aysrur Pelu
719,100 1.60
IUp 4. COIIPIr. w.l,ht.d 'Y'l"Ig. price c,IGullt.d In Sup 2 to lh. 1I.!vhud ..... r.'. , .....
prlc. c,lcul.ud In n.p 3.
SI.60IHCf I, lraUer th.n St.59/KCf '0 no .ddltlon.t !"Oy.lty P.YIII,/1t •• r, requlrad
10r th h qull'ur.
VOIUIIII .nc! prlc" v"d In thlt t . . .pl. Itl Utld for IIlunl'ulan .nd ... y nat b.
nfl'''I .... ' of .ctu.1 condltlona.
61
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
<.{iL
This instrument was acknowledged before me on the q day of
January, 1988, by J. O. WALKER, JR., General Partner of Vaquillas Ranch
Co., Ltd., A Texas Limited Partnership, on behalf of said partnership.
~ .. &LA," *~V{'~
Notary Public in an or
The State of Texas. <)C)
My COl11llission Expires 7-3- 0 ,
Lt:l\lRA BA LL€vJ
Printed/stamped name of Notary.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
oy--L
This instrument was acknowledged before me on the I day of
January, 198B, by E. WALKER QUIROS, General Partner of Vaquillas Ranch Co.,
Ltd., A Texas Limited Partnership, on behalf of said partnership.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
This instrument was acknowledged before me on the 9~ day of
January, 1988, by GENE S. WALKER, General Partner of Vaqulilas Ranch Co.,
Ltd., A Texas Limited Partnership, on behalf of said partnership.
~ ub~in and for
The State of Texas. J- 09'
My Comission Expires 7- 3- "
~fI<)RA 804 usvJ
Printed/stamped name of Notary.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
This instrument was acknowledged before me on the 9~ day of
January, 1988, by EVAN B. QUIROS, General Partner of Vaquillas Ranch Co ..
Ltd., A Texas Limited Partnership, on behalf of said partnership.
d.cblJ ~,J(1,,'}j
Notary Public in and for
The State of Texas.
My COI11Ilisslon Expires '1-3-&,,9
/v,q v I~/I t5A LUi vJ
Printed/stamped name of Notary.
-12-
GWB2/dm 130( I)
62
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
~
This instrument was acknowledged before me on the CJ day of
January, 1988, by J. O. WALKER, JR .. Trustee for The Vaquillas Unproven
Mineral Trust.
c~ . itA- .~fi. flu.if
Notary ~ublic in a~for
The State of Texas. 00
My Commission Expires: 7- 3- 6 I
LA) t>RA b>A UEN
Printed/stamped name of Notary.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
~
This instrument was acknowledged before me on the 7'
day of
January, 1988, by E. WALKER QUIROS, Trustee for the Vaquillas Unproven
Mineral Trust.
~"~4``
Notary Pu lie 1n and for
The State of Texas.
My Commission Expires: 7-:3- 8'9
0A tJfG,4 HI! LLEvJ
Printed/stamped name of Notary.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
n~
Thi 5 instrument was acknowledged before me on the -, day of
January, 1988, by GENE S. WALKER, Trustee of the Vaquillas Unproven Mineral
Trust.
~"94~," oOr"t
~Pub ie in and for
The State of Texas
My Commission Expires: '1- 3- 111
/"1IUi2A 1:54 LLSvJ
Printed/stamped name of Notary.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
This instrument was acknowledged before me on the day of
January, 1988, by EVAN B. QUIROS, Trustee of Vaquillas Unproven Minera 1
Trust. ~ "
- ~ !! ), a"
~y Public in and for
4J! 0,,,9-'
The State of Texas
My Commission Expires: '7-3-117
Lc,[)f(,a 15", LLe:vJ
Printed/stamped name of Notary.
-13-
GWB2/dm 130(1)
63
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
This instrument was acknowledged before me on the '1 ~ day of
January, 1988, by J. O. WALKER, JR., Trustee of Vaquillas Proven Mineral
Trust.
NOtarY ic in and for
The State of Texas "
My Commission Expires: 7-3- i?{
IvAM.A /2,,'b!t.on
•
OIL, GAS AND MINERAL LEASE
THIS AGltEEKENT mat. lbb,-1.~ .. _ _ _ _ _ _ .4&T ot. Novemb~L ____ R__ R. __ 'R. __ .. __ ._...lI..!!?_. ,*_11
Vaguillas Rancl!SomruillY.t.-Ltd.; Vaqui11~Jm.p.roven_MinJrral Tn,tst i ...Y!9..l!.!.+1.~!"9.Y.~!L
``ral-1.~ust..LI!f:..t,!!!~nd thr.g.H8!L.!~f!...&rulenLPJ!r..t.~ ....-h..JLr.....IDt1.lter. Jr ~._. ___ ._. _
_ ~. Wal~r.-JlU-..!~,````!!$~L~M_~"!!!J_I.. ....Q.\!ill_I!· , . ___._.'._.____ ..'
;::.~:~ 0111 ~ IrIOra) ...boN add ..... lu_ ., p..!.~o:-i~;J:D86:-~p Texa! 7804i=~===_====_~
and __G..?.!!``.£:..z.y_~_~ox 219L..Jlo'!~!Q..lh_``!lP_..l.1.£?_~____ ,. __ ._. ___ .• t.-. WlTNESS!:TH1
-I. ~ III ccmaW...,LlOII ot......!en Dollar"§._!lE.Q._.9,~J``~!,-o_4....rul!Ly'~.!..\@blt;L~..QJ!§.!~.E~!!2.!L._R'-_...»oIl&r,
II...! 0.00 ) In bDd paM!,. ot Lbe lO,llUII bu.ln Pf'OyIW. Illd of u.. Apft_t. of LMaw blf'lln toat.lM4, bereb, paa,ta.
kuM L114 lott.o uclual....,. viii,;·L.'_ fur tb. rnupoM 01 IlIn,UaIUlla. t:XpJ.orllll'. Pr'OtPlCltill•• kDU ... u>d mIlIllI&' lor ...d. Pf'Odud.n.. 011. " I.N!
all otb ... mIr.lra", COII41Kt.1D.S p;plor.~n. noIo.le and I'toph,.1c&1 .",....,.. b,. ~a»b, COra UIl. 1'n.'Pi&;r &114, 1n&.. n.tl • - ...~:``.
au, ...tv ant! ~Ir flllld ......01 air lIIto ...bnrt.... nratl, II}'I .... pipe Una. bullcUl" ..-da "nita,. ~ ItILlD.... te _ _ U11M III _ ' - IlnIoo
hIr'M tbtr.ull IIII!. 0.. , O.... r end. Urwl ludi _1IId or claim.:! b, Lutor adlac&llt alii! _ il INO 't~ to prod.\I~ "VI, tat. cer. or, kNot.
t.ralI.IlJOl1. &114 _" laid llrodtlcb, ud. boaf;lll&' It. IIIIplonn. ~ toU_IN!' duenbtcl Iud hL __ H~ W _ _ _ _ _ _ _• _ _• ___ Co"II~. T...... "..I"
6~740 acres of land~ more or less~ situated in Webb County, Texas, more fully
described in Exhibit "AI] attached hereto and made a part of this Lease for all
relevant purposes, including limitations upon warranty as specifically set out
therein,
67
.'
irATI; or .
~
OOUIITY .,._ __
``L-
--}
_ _ ._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ._ __
=-_~ 't:r ':...bt`` ~-iii;;;ii~...nbMrlbed to the lorqolq hl~t. UI4 KlIIIO'WIedp;!. to =- tbd _he.... aecut«l
GI.. " ulld" l1li' bud al'l4 lilt&! or ofnoe., u. .. u... ___ -U7 ot _ _ ._ _ _ _ _ _ ~ __________ • A. D. 11. ____ .••
--_.__._--_ ....
NotaQ Publlll h~ fAd for .----``. -----
T&1UJ'OlNr A.CKHOWLJmOMEHT
OOVNnO)': ._--}
N0f.u7 !'ubi" I. _4 tOl'____ ....,,,, LLe"J
Printed/stamped name of Notary.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
This instrument was acknowledged before me on the g~ day of
January, 1988, by E. WALKER QUIROS, Trustee for the Vaquillas Unproven
Mineral Trust.
- '.
``2ht``
The State of Texas. 9
My Conmission Expires: '7-:3- g
LlluRA BAU,£vJ
Printed/stamped name of Notary.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
This instrument was acknowledged before me on the 9 --r/:...J
day of
January, 1988, by GENE S. WALKER, Trustee of the Vaquillas Unproven Mineral
Trust.
Notary Pu ~in and for
The State of Texas
My Commission Expires: 7-3- 'i?'7
LA ORA 3,0 LLE:vJ
Printed/stamped name of Notary.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
'-f-L;
This instrument was acknowledged before me on the 9 day of
January, 1988, by EVAN B. QUIROS, Trustee of Vaquillas Unproven Mineral
Trust.
-.:/~ ~c~n~Y
The State of Texas a
My Commission Expires: 7-3-f? I
JvMR/i J:3A LLevJ
Printed/stamped name of Notary.
-13-
GWB2/dm 130(1)
84
• • -, ,.
--- 85
Co· ._
, ,
COUNTY OF WEBB
•
THE STATE OF TEXAS §
§
§
.
• o~
This instrument was acknowledged before me on the ,-,-::-.:-'--0'==-, day of
January, 1988, by J. O. WALKER, JR., Trustee of Vaquillas Proven Mineral
Trust.
{~?/
.,- <: :; ~ j
..-"<; ~ `` OCk.ft---
atarYUiC'in an for
The State of Texas
My Coomission Expires: '7'-:3 - J?9
~
\ .. /~ LA ORA ~ UBvJ
~"
,... - ...... Printed/stamped name of Notary.
.
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
This instrument was acknowledged before me on the day of 9'f1-,
January, 1988, by E. WALKER QUIROS, ~: vaqu~ Proven Mineral Trust.
_' t,
"," ,
Notary putiM in
The State of Texas
an~ 00
My Commi ss i on Expi res: 7- 3 - tJ f
LfiIJ/(,q 13A L1..HvJ
Printed/stamped name of Notary,
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
This instrument was acknowledged before me on the 9-tV
day of
January, 1988, by GENE S.WALKER, Trustee of Vaquillas Proven Mineral Trust.
}'
",
~. .~
``~d``l(y
The State of Texas
'" . My Commission Expires! 7-3-/?9
i..JAOI2A BA U_~ vJ
' ..
-:. " Printed/stamped name of Notary_
"
THE STATE OF TEXAS §
§
COUNTY OF WEBB §
~'
This instrument was acknowledged before me on the 9 day of
January, 1988, by EVAN B. QUIROS, Trustee of Vaquillas Proven Mineral
Trust.
~uh4 ~" O~.a-='
Notary Public in and for
The State of Texas OQ
My Conmission Expires: 7-3-0 I
0Mi(A 80'1 LLBv.j
Printed/stamped name of Notary.
-14-
GWB2/dm 130( 1)
86
• • .,..
,.
87
..
THE STATE OF TEXAS
• §
§
•
COUNTY OF WEBB §
Thi s instrument '1 cit . day of
Attorney·in-Fact
corporation.
The State of Texas
My Commission Expires: 9-/8' -yf'
L)e//«. fl1<>. Y'A-"er27
Printed/Stamped name of Notary.
·15-
GWB2/dm 130(1)
88
-
RAILROAD COMMISSION OF TEXAS
OFFICE OF GENERAL COUNSEL
OIL AND GAS DOCKET
NO. XX-XXXXXXX
FINAL ORDER
CONSOLIDATING VARIOUS FIELDS INTO A NEW FIELD CALLED
THE VAQUILLAS RANCH (LOBO CONS.) FIELD AND
ADOPTING FIELD RULES FOR THE
VAQUILLAS RANCH (LOBO CONS.) FIELD
WEBB COUNTY, TEXAS
The Commission finds that after statutory notice in the above-numbered docket
heard on October 8, 1997, the presiding examiner has made and filed a report and
recommendation containing findings of fact and conclusions of law, for which service was
not required; that the proposed application is in compliance with all statutory
requirements; and that this proceeding was duly submitted to the Railroad Commission
of Texas at conference held in its offices in Austin, Texas.
The Commission, after review and due consideration of the examiner's report and
recommendation, the findings of fact and conclusions of law contained therein, hereby
adopts as its own the findings of fact and conclusions of law contained therein, and
incorporates said findings of fact and conclusions of law as if fully set out and separately
stated herein.
Therefore, it is ordered by the Railroad Commission of Texas that the following
fields located in Webb County, Texas, are hereby combined into a new field called the
Vaquillas Ranch (Lobo Cons.) Field (No. q3~t 5 400 ):
BALTAZAR (LOBO 6 10470) FIELD 05357400
BARNSLEY (LOBO 10900) FIELD 05791 800
BARNSLEY (LOBO) FIELD 05791 400
BONEBRAKE (LOBO 6) FIELD 10419 500
BONEBRAKE (UPPER LOBO) FIELD 10419 800
CALICHE CREEK (LOBO) FIELD 14735225
CARR (LOBO 10100) FIELD 15874 350
CARR (LOBO 8300) FIELD 15874 235
CARR (LOBO 8600) FIELD 15874 250
CARR (LOBO 8700) FIELD 15874275
CARR (LOBO) FIELD 15874200
CARR (WILCOX 8200) FIELD 15874 600
CARR (WILCOX 8300) FIELD 15874 700
CARR (WILCOX) FIELD 15874 500
CATTO (LOBO 9900) FIELD 16405400
CATTO (LOBO 10200) FIELD 16405 500
EXHIBIT
A-4
245
OIL AND GAS DOCKET NO. XX-XXXXXXX PAGE 2
DESPARADO (LOBO 6) FIELD 24394500
DIAMONDBACK (LOBO 3) FIELD 24574400
GATO CREEK (9800) FIELD 34238400
GATO CREEK (LOBO 1) FIELD 34238 300
GATO CREEK (LOBO 1-SEGA) FIELD 34238 325
GATO CREEK (LOBO 3) FIELD 34238 350
GATO CREEK (LOBO 6 SEGMENT A) FIELD 34238 375
GATO CREEK, SE (9800) FIELD 34242 980
GATO CREEK, SE (LOBO 1) FIELD 34242 500
GATO CREEK, SE (UP. LOBO STRAY) FIELD 34242 750
HIRSCH (LOBO 9746) FIELD 41659075
JURASCHEK (LOBO) FIELD 47740 500
JURASCHEK (WILCOX 11600) FIELD 47740600
LUNDELL (LOBO 9200) FIELD 55755 180
LUNDELL (LOBO) FIELD 55755 175
MCLEAN (LOBO) FIELD 59725500
MUJERES CREEK (LOBO 1) FIELD 63668 300
MUJERES CREEK (LOBO 3) FIELD 63668400
MUJERES CREEK (LOBO 6) FIELD 63668500
MUJERES CREEK (LOBO) FIELD 63668250
MUJERES CREEK, SOUTH (LOBO) FIELD 63670500
NICHOLSON (LOBO 3) FIELD 65469020
NORDAN (LOBO) FIELD 65934500
POZO (LOBO) FIELD 72838500
RANCHO VIEJO, S. (LOBO 6) FIELD 74570 100
RANCHO VIEJO (LOBO 3) FIELD 74568680
RANCHO VIEJO (LOBO 6) FIELD 74568700
VAQUILLAS RANCH (LOBO 8100) FIELD 93215450
VAQUILLAS RANCH (UP. LOBO STRAY) FIELD 93215600
VAQUILLAS RANCH (WALKER 8300) FIELD 93215680
VAQUILLAS RANCH (WALKER 8600) FIELD 93215690
VAQUILLAS RANCH (WALKER, N.) FIELD 93215670
VAQUILLAS RANCH (WILCOX 11,100) FIELD 93215 700
VAQUILLAS RANCH (WILCOX 11,600) FIELD 93258750
VAQUILLAS RANCH (WILCOX 11,900) FIELD 93215 725
VAQUILLAS RANCH (YARSA) FIELD 93258 900
VENADA (9800) FIELD 93436 800
VENADA (LOBO) FIELD 93436300
VERGARA (LOBO 9300) FIELD 93537750
VERGARA (LOBO) FIELD 93537 500
It is further ordered that the following rules are adopted for the Vaquillas Ranch (Lobo
Cons.) Field:
246
r
!
I
OIL AND GAS DOCKET NO. XX-XXXXXXX PAGE 3
RULE 1: The entire Lobo Formation from the Lobo Unconformity to the top of the Wills
Point (Midway Shale) and including the above listed fields in Webb County, Texas, shall be
designated as a single reservoir for proration purposes and be designated as the Vaquillas
Ranch (Lobo Cons.) Field.
RULE 2: No gas well shall hereafter be drilled nearer than FOUR HUNDRED SIXTY
SEVEN (467) feet to any property line, lease line or subdivision line and no well shall be drilled
nearer than ONE THOUSAND TWO HUNDRED (1,200) feet to any applied for, permitted or
completed well in the same reservoir on the same lease, pooled unit or unitized tract. The
aforementioned distances in the above rule are minimum distances to allow an operator flexibility
in locating a well, and the above spacing rule and the other rules to follow are for the purpose
of permitting only one well to each drilling and proration unit. Provided however, that the
Commission will grant exceptions to permit drilling within shorter distances and drilling more wells
than herein prescribed whenever the Commission shall have determined that such exceptions
are necessary either to prevent waste or to prevent the confiscation of property. When exception
to these rules is desired, application therefore shall be filed and will be acted upon in accordance
with the provisions of Commission Statewide Rule 37 and 38, which applicable provisions of said
rule are incorporated herein by reference. Provided however, that persons who are presumed
to be affected by a request for an exception to the between-well spacing requirement shall be
limited to the operators and ownersllessees of tracts, lease or units within one mile or less of the
proposed well.
In applying this rule the general order of the Commission with relation to the subdivision
of property shall be observed.
RULE 3: The daily allowable production of gas from individual wells completed in the
subject field shall be determined by allocating the allowable production, after deductions have
been made for wells which are incapable of producing their gas allowables, among the individual
wells in the following manner:
TEN percent (10%) of the total field allowable shall be allocated equally among the
individual wells producing from this field.
NINETY percent (90%) of the total field allowable shall be allocated among the individual
wells in the proportion that the deliverability of such well, as evidenced by the most recent
G-10 test filed with the Railroad Commission bears to the summation of the deliverability
of all proratable wells producing from this field.
It is further ordered by the Railroad Commission of Texas that the allocation formula for
the Vaquillas Ranch (Lobo Cons.) Field be suspended. The allocation formula may be reinstated
administratively if the market demand for gas in the Vaquillas Ranch (Lobo Cons.) Field drops
below 100% of deliverability. If the market demand for gas in the Vaquillas Ranch (Lobo Cons.)
Field drops below 100% of deliverability while the allocation formula is suspended, the operator
shall immediately notify the Commission and the allocation formula shall be immediately
11
247
J
OIL AND GAS DOCKET NO. XX-XXXXXXX PAGE 4
reinstated. Failure to give such notice to the Commission may result in a fine (as provided for
in Tex. Nat. Res. Code §86.222) for eac day the operators fail to give notice to the Commission.
Effective this d/f ~ay of , 19q9 .
COMMISSIO~
a:zON
248
403 S.W.2d 325
(Cite as: 403 S.W.2d 325)
Hamilton, Pope, and Griffin, JJ., dissented.
Supreme Court of Texas. West Headnotes
Mildred Mitchell JONES et vir, Petitioners,
v. [1] Mines and Minerals 260 79.1(5)
S. H. KILLINGSWORTH et al., Respondents.
260 Mines and Minerals
No. A—10243. 260II Title, Conveyances, and Contracts
Dec. 8, 1965. 260II(C) Leases, Licenses, and Contracts
Rehearing Denied and Dissenting Opinion Filed April 260II(C)3 Construction and Operation of
20, 1966. Oil and Gas Leases
260k79 Rent or Royalties
Action by oil, gas, and mineral lessors against 260k79.1 In General
lessee's assignee and of owners of neighboring leases 260k79.1(5) k. Community
to obtain judgment declaring lease terminated at ex- Leases, Unitization, or Pooling Arrangements. Most
piration of primary term, to remove cloud on title, and Cited Cases
to obtain title to and possession of leased premises. (Formerly 260k79(1))
The District Court, Henderson County, Jack Y.
Hardee, J., entered judgment for defendants, and the Ascertainment of parties' true intention under oil,
lessors appealed. The Tyler Court of Civil Appeals, gas, and mineral lease as to lessee's authority to pool
Twelfth Supreme Judicial District, 379 S.W.2d 362, leased land into oil unit containing 170.86 acres would
affirmed the judgment, and the lessors brought error. require consideration of all pooling provisions con-
The Supreme Court, Smith, J., held that lease pooling tained in lease and rules and regulations governing
clause limiting units pooled for oil to area not sub- field in which leased land was located.
stantially exceeding 40 acres but permitting units to
conform with size of those prescribed by govern- [2] Mines and Minerals 260 79.1(5)
mental regulations if government prescribes or per-
mits larger units did not authorize a 170.86 acre unit
260 Mines and Minerals
where rule governing field provided that no proration
260II Title, Conveyances, and Contracts
unit should consist of more than 80 acres but permitted
260II(C) Leases, Licenses, and Contracts
operators to elect to assign an additional 80 acres, and
260II(C)3 Construction and Operation of
that lease habendum clause permitting extension
Oil and Gas Leases
based on pooling could not be used to extend lease
260k79 Rent or Royalties
beyond primary term where lands had been pooled
260k79.1 In General
without authority.
260k79.1(5) k. Community
Leases, Unitization, or Pooling Arrangements. Most
Judgments reversed, and judgment terminating Cited Cases
lease and awarding title and possession rendered. (Formerly 260k79(1))
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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)
Oil, gas, and mineral lease pooling clause limiting by lessor with those of other lessors.
units pooled for oil to area not substantially exceeding
40 acres but permitting units to conform in size with [5] Mines and Minerals 260 73.5
those prescribed by government regulations if gov-
ernment prescribes or permits larger units did not
260 Mines and Minerals
authorize a 170.86 acre unit, where rule governing
260II Title, Conveyances, and Contracts
field provided that no proration unit should consist of
260II(C) Leases, Licenses, and Contracts
more than 80 acres but permitted operators to elect to
260II(C)3 Construction and Operation of
assign an additional 80 acres and receive allowable
Oil and Gas Leases
credit of not more than 160 acres.
260k73.5 k. Term. Most Cited Cases
(Formerly 260k731/2, 260k73)
[3] Mines and Minerals 260 92.79
Oil, gas, and mineral lease habendum clause de-
260 Mines and Minerals scribing term of lease as 10 years and so long there-
260III Operation of Mines, Quarries, and Wells after as oil was produced from land with which leased
260III(A) Statutory and Official Regulations land was pooled could not be used to extend term of
260k92.78 Unitization lease beyond 10-year primary term where lands had
260k92.79 k. In General; Procedure. been pooled without authority.
Most Cited Cases
(Formerly 260k92.78)
[6] Mines and Minerals 260 92.79
Oil and gas well field rules adopted by Railroad
260 Mines and Minerals
Commission require a proration unit of at least 80
260III Operation of Mines, Quarries, and Wells
acres but permit larger units of not more than 160
260III(A) Statutory and Official Regulations
acres.
260k92.78 Unitization
260k92.79 k. In General; Procedure.
[4] Mines and Minerals 260 79.1(5) Most Cited Cases
260 Mines and Minerals Railroad Commission's orders cannot compel
260II Title, Conveyances, and Contracts pooling agreements not agreed upon by parties to oil,
260II(C) Leases, Licenses, and Contracts gas, and mineral lease; the commission has no power
260II(C)3 Construction and Operation of to determine property rights.
Oil and Gas Leases
260k79 Rent or Royalties
*326 John A. Pace, Edward Kliewer, Jr., Dallas, for
260k79.1 In General
petitioners.
260k79.1(5) k. Community
Leases, Unitization, or Pooling Arrangements. Most
Ralph Shank, Prentice Wilson, Dallas, Murph Wilson,
Cited Cases
F. Wilbert Lasater, Ramey, Brelsford, Hull & Flock,
(Formerly 260k79(1))
Frank L. McClendon, with above firm, Tyler, for
respondents.
Absent express authority, oil, gas, and mineral
lessee has no power to pool interests in estate retained
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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)
SMITH, Justice. this unit as though it contains only 160 acres.
ON MOTION FOR REHEARING
Our opinion delivered on June 23, 1965, is with- It was stipulated that the unit owners commenced
drawn and the following opinion is substituted there- drilling operations on the West Poynor Unit and
for. completed a producing oil well on or about August 16,
1961, which ‘unit well’ has continued to produce oil in
The question presented for our determination is paying quantities. It was agreed that ‘no well in search
whether or not the lands owned by the petitioner, of oil, gas or other minerals has been drilled by S. H.
Mildred Mitchell Jones, and described in an oil, gas Killingsworth and the other defendants on the lands
and mineral lease executed by Mildred Mitchell Jones actually described by metes and bounds in the Long
and her husband, Harry C. Jones, as lessors, to S. S. lease, and that no oil, gas or other minerals in paying
Long, as lessee (later assigned to S. H. Killingsworth), quantities has been produced from any well actually
on August 16, 1951, were effectively pooled into what located on the lands actually described in the Long
is known as the Hunt Oil Company et al.—West lease.’
Poynor Unit. The trial court, without a jury, held that
Killingsworth effectively pooled the acreage covered Although lessors contend that they are not bound
by the lease in accordance with authority granted in by the terms of the Unit Declaration and the Amended
the lease, and for that reason the lease did not termi- Unit Declaration, it is agreed that Killingsworth and
nate on August 16, 1961, the date of the expiration of the other unit owners in the unit acted in good faith in
the primary term. A take-nothing judgment rendered forming the unit, in securing a permit to drill and in
against the petitioners has been affirmed by the Court drilling the well on the unit.
of Civil Appeals. 379 S.W.2d 362.
The habendum clause of the Mitchell-Long lease
The judgments of both the trial court and the provides that:
Court of Civil Appeals are reversed and judgment is
rendered for the petitioners.
'Subject to the other provisions herein contained,
this lease shall be for a term of ten (10) years from this
Mildred Mitchell Jones and her husband filed this date * * * And as long thereafter as oil * * * is pro-
suit against S. H. Killingsworth and owners of leases duced from * * * land with which said land is pooled
in the immediate vicinity of the Mitchell-Long lease. hereunder.'
These owners will be referred to as ‘Hunt Petroleum
Corporation.’ On July 12, 1961, at a time when the
The pertinent pooling provisions of the lease are
Mitchell-Long lease was in effect and was owned by
to be found in the first two sentences of paragraph 4 of
and the title thereto was vested in S. H. Killingsworth,
the Mitchell-Long lease. These sentences read as
subject to certain overriding royalty interests, Kill-
follows:
ingsworth, joined by the above-mentioned owners of
other leases, entered into a pooling agreement estab-
‘Lessee, at its option, is hereby given the right and
lishing a unit hereinafter referred to as the ‘West
power to pool or *327 combine the acreage covered by
Poynor Unit.’ The two tracts of land described in the
this lease, or any portion thereof as to oil and gas, or
Mitchell-Long lease were included within this unit
either of them, with other land, lease or leases in the
designation. These tracts contained, in the aggregate,
immediate vicinity thereof to the extent, hereinafter
20.55 acres. It was stipulated that the created unit
stipulated, when in Lessee's judgment it is necessary
contained 170.86 acres. However, the parties deal with
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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)
or advisable to do so in order properly to develop and with those Prescribed by governmental regulations.’
operate said leased premises in compliance with the (Emphasis added.) Absent this proviso, perhaps it
spacing rules of the Railroad Commission of Texas, or could well be said that the lessee was given authority
other lawful authority, or when to do so would, in the to pool the lessor's land for oil only in units not sub-
judgment of Lessee, promote the conservation of oil stantially exceeding 40 acres in area for either the
and gas from said premises. Units pooled for oil purpose of complying with spacing rules or to promote
hereunder shall not substantially exceed 40 acres each the conservation of oil, the two situations mentioned
in area, and units pooled for gas hereunder shall not in the first sentence wherein the power to pool is left
substantially exceed in area 640 acres each plus a exclusively to lessee's judgment. In order to ascertain
tolerance of 10% Thereof, provided that should gov- the true intention of the parties to this lease, the Court
ernmental authority having jurisdiction prescribe or should take into consideration all of the pooling pro-
permit the creation of units larger than those specified, visions contained therin, as well as the rules and reg-
units thereafter created may conform substantially in ulations governing the Fairway (James Lime) Field in
size with those prescribed by governmental regula- which lessors' land is located. (The rules adopted by
tions.’ the Railroad Commission governing that field have
the express purpose of ‘permitting only one well to
[1][2][3][4][5] The issue in this case is not each eighty (80) acre proration unit.’ The field rules
whether the pooling clause granted authority to pool only encourage larger units by Permitting an operator
the Jones' land into an oil unit consisting of more than ‘to assign tolerance of not more than eighty (80) acres
40 acres. The issue, properly defined, is whether the of additional unassigned lease acreage to a well on an
pooling clause granted authority pool the Jones' land eighty (80) acre unit and shall in such event receive
into an oil unit containing 170.86 acres. The lessors allowable credit for not more than one hundred sixty
take the position that authority to pool their land into (160) acres.’) It is argued that these Railroad Com-
an oil unit consisting of 170.86 acres was not granted mission rules provide for proration units of not less
by the lease, and that the attempt to pool did not ef- than 80 acres more than 160 acres, and that by reading
fectively extend the term of the lease beyond the ter- the rules into the lease contract, paragraph 4 of the
minal date provided therein. We agree with the lessee lease would read: ‘the size of the units thereafter cre-
that the pooling provision confers authority on the ated may not be substantially less than 80 acres nor
lessee to pool the lessors' land, but, we do not agree substantially more than 160 acres.’ We disagree with
that the Extent to which the power to pool may be this construction of the lease *328 contract. The les-
exercised is entrusted solely to the lessee's judgment. sors did not consent to enlarge an oil proration unit to
The lessors' land may be pooled only to the extent any size Permitted by governmental regulations. They
stipulated in the lease. The second sentence of the gave their consent to enlarge a unit of substantially 40
pooling provision provides that ‘units pooled for oil * acres, but only to the extent of the size of units Pre-
* * shall not substantially exceed 40 acres each in area, scribed by the regulatory authority. The fact that the
and units pooled for gas * * * shall not substantially Railroad Commission may Permit a much larger unit
exceed in area 640 acres each plus a tolerance of 10% cannot be read into the lease contract when, as here,
Thereof. * * *’ However, this provision must be con- the authority to create larger oil units is expressly
strued in the light of the further provisions which is to limited to units of the size Prescribed by the Railroad
the effect that in the event a governmental authority Commission. The Commission Prescribed a unit of 80
having jurisdiction should ‘prescribe or Permit the acres. (The field rules clearly say that there Must be a
creation of units larger than those specified units proration unit of at least 80 acres, and there May be
thereafter created may conform substantially in size larger units of not more than 60 acres.) It is true that
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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)
the pooling provision contains the word ‘permit’ as (1943); Nale v. Carroll, 155 Tex. 555, 289 S.W.2d 743
well as the word ‘prescribe.’ It is not unreasonable to (1956).
assume that the parties to the lease contract intended,
by the use of both words, to give each a distinctly (The judgments of the trial court and the Court of
different meaning. The parties obviously knew when Civil Appeals are both reversed and judgment is ren-
the lease contract was executed that a Permitted oil dered declaring the Mitchell Long lease terminated as
proration unit could conceivably be much larger in of August 16, 1961, and the title and possession of the
area than one Prescribed by governmental authority. lands described in said lease is awarded to Mildred
To say that a lessee can pool lessors' land with units of Mitchell Jones. Respondents' motion for rehearing is
any size Permitted by the Railroad Commission would overruled. A second motion for rehearing may be filed
defeat the intention of the parties to restrict the size of within fifteen days.)
the units to the size Prescribed by governmental au-
thority. Absent express authority, a lessee has no
GRIFFIN, HAMILTON and POPE, JJ., dissenting.
power to pool interests in the estate retained by the
lessor with those of other lessors. See Brown v. Smith,
HAMILTON, Justice (dissenting).
141 Tex. 425, 174 S.W.2d 43 (1943); Gulf Oil Cor-
I withdraw the dissenting opinion heretofore filed
poration v. Marathon Oil Co., 137 Tex. 59, 152
in this cause on June 23, 1965, and file the following
S.W.2d 711 (1941); Knight v. Chicago Corporation,
opinion, respectfully dissenting:
144 Tex. 98, 188 S.W.2d 564 (1945). Since the lands
were pooled without authority, the habendum clause
in the Mitchell-Long lease cannot be used to extend I disagree with the Court's construction of the
the term of the lease beyond August 16, 1961, the pooling agreement in the oil and gas lease under con-
terminal date of the primary term of the lease. sideration and with the application of the pooling
agreement to the rules and regulations adopted by the
Railroad Commission. Construing the pooling*329
[6] Killingsworth and the Hunt Petroleum Cor-
agreement in its entirety simply means that the lessee
poration contend that the pooling clause in the
was given authority to pool the lessor's land with other
Mitchell-Long lease created a relationship of principal
land in units, the size of which are controlled by the
and agent, or at least created a relationship similar to
rules and regulations of the Railroad Commission.
the of principal and agent, and that performance by the
lessee is to be measured by the standard of good faith.
It is true that the lessee acted in good faith. It is true The applicable rules and regulations for the de-
that the lessee was given authority to pool. It is equally velopment of the Fairway (James Lime) Field, in
true that the permit granted by the Railroad Commis- which the pooling unit in question is located, are set
sion is unquestionably valid. Even so, the acts of the out in Railroad Commission Order No. 6—45, 322.
Railroad Commission cannot be said to operate ef- Rules 1 and 2 of that order are as follows:
fectively to extend the restrictive terms of the lease.
The orders of the Railroad Commission cannot com- ‘RULE 1: No well for oil or gas shall hereafter be
pel pooling agreements that the parties themselves do drilled nearer than eighteen hundred fifty (1850) feet
not agree upon. The Railroad Commission has no to any well completed in or drilling to the same res-
power to determine property rights. See Ryan Con- ervoir on the same lease, unitized tract or farm, and no
solidated Petroleum Corp. v. Pickens, 155 Tex. 221, well shall be drilled nearer than six hundred sixty
285 S.W.2d 201 (1955); Magnolia Petroleum Co. v. (660) feet to any property line, lease line or subdivi-
Railroad Commission, 141 Tex. 96, 170 S.W.2d 189 sion line; provided, however, that the Commission
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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)
will, in order to prevent waste or to prevent the con- eighty (80) acre unit and shall in such event receive
fiscation of property grant exceptions to permit drill- allowable credit for not more than one hundred sixty
ing within shorter distances than herein prescribed (160) acres.
whenever the Commission shall have determined that
such exceptions are necessary either to prevent waste ‘Operators shall file with the Commission certi-
or to prevent the confiscation of property. When ex- fied plats of their properties in said field, which plats
ception to this rule is desired, application therefor shall set out distinctly all of those things pertinent to
shall be filed and will be acted upon in accordance the determination of the acreage credit claimed for
with the provisions of Commission Statewide Rules each well; provided that if the acreage assigned to any
37 and 38, which applicable provisions of said rules proration unit has been pooled, the operator shall
are incorporated herein by reference. furnish the Commission with such proof as it may
require as evidence that interests in and under such
‘The aforementioned distances in the above rule proration unit have been so pooled.’
are minimum distances to allow an operator flexibility
in locating a well, and the above spacing rule and the The petitioner does not contend, nor does the
other rules to follow are for the purpose of permitting opinion say, that the proration unit in *330 question
only one well to each eighty (80) are proration unit. does not comply with the regulations of the Railroad
Commission. The opinion simply assumes, without
‘In applying this rule, the general order of the giving a reason why, that the regulations of the Rail-
Commission with relation to the subdivision of prop- road Commission under which the unit in question
erty shall be observed. was created were not Prescribed by governmental
regulations.
‘RULE 2: The acreage assigned to the individual
oil well for the purpose of allocating allowable oil The court, in discussing the provisions of the
production thereto shall be known as a proration unit. regulations, does not fully cover all the size units
No proration unit shall consist of more than eighty provided in said regulations. Since the authority given
(80) acres except as hereinafter provided, and the two by lessor to pool is governed largely by these regula-
farthermost points in any proration unit shall not be in tions, it is thought that it well be helpful to more fully
excess of forty two hundred (4200) feet removed from analyze them.
each other; provided, however, that in the case of long
and narrow leases or in cases where because of the At the time the unit in question was formed,
shape of the lease such is necessary to permit the Railroad Commission Order No. 6—45, 322 was in
utilization of tolerance acreage the Commission may effect and governed the Fairway (James Lime) Field.
after proper showing grant exceptions to the limita- One of the Commission's preliminary findings set out
tions as to the shape of proration units as herein con- in the order, preceding the adoption of field rules, was
tained. All proration units, however, shall consist of an express finding to the effect that certain observa-
continuous and contiguous acreage which can rea- tions and calculations made with reference to the
sonably be considered to be productive of oil. discovery well in the field had indicated that the well
was producing oil in an area outside the radius of a
‘Provided, however, that operators may elect to 160-acre circle around the well. From this and other
assign tolerance of not more than eighty (80) acres of findings the Commission proceeded to adopt proration
additional unassigned lease acreage to a well on an rules which established a maximum proration unit of
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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)
160 acres for which full acreage allowable credit The pooling unit in question comes squarely
would be given. Thus, it was implicit that the Com- within the limits as to size with the provisions of the
mission had determined that the basic drainage pattern governmental regulations just as much so as does the
for the field was 160 acres or, in other words, that a 80-acre unit referred to above.
160-acre unit would be reasonably drained by a single
well. This brings us to a discussion of the interpretation
to be given the proviso of the pooling unit, which we
The Commission order did something more. It here quote:
expressly recognized that smaller units would also be
given full acreage allowable credit, if they met certain ‘* * * provided that should governmental author-
requirements. One of the provisions of the rules es- ity having jurisdiction prescribe or permit the creation
tablished, in effect, that if an operator had as much as of units larger than those specified, units thereafter
80 acres in a single lease, 80 acres would then be created may conform substantially in size with those
considered as the minimum proration unit, the inclu- prescribed by governmental regulations.’
sion of additional acreage, up to the total maximum of
160 acres, being optional with the operator. But an-
The first clause of the proviso governs the condi-
other provision, relating to distance spacing, also
tion under which the lessee may create units larger
established that, still without the necessity of any
than those specified, *331 (40 acres), that is, when
hearing or exception, any square tract of 40 acres or
government authority has prescribed rules and regu-
more would also serve as an acceptable proration unit,
lations for the creation of larger units or when gov-
if that were all the acreage the operator possessed in
ernmental authority has permitted the creation of
the particular property, and if there had been no illegal
larger units. Under the facts of this case the govern-
subdivision. The 40-acre minimum standard was
mental authority has prescribed rules and regulations
implicit in the rule that no well be drilled nearer than
providing for the creation of larger units, but it has not
660 feet from any property line. Thus, the Commis-
permitted the creation of larger units. No permit was
sion Order in effect recognized that, without special
requested nor was one needed. As a general rule the
hearing and exception, the maximum standard prora-
Railroad Commission permits the creation of units
tion unit, i.e., the area which could reasonably be
only as exceptions to established rules and regulations.
drained by a single well, was 160 acres, while the
The last clause of the proviso governs the size of units
minimum standard unit, i.e., the smallest to be al-
created under either prescribed regulations or gov-
lowed, was 40 acres. Pickens v. Railroad Commis-
ernmental authority permission. As said above, it is
sion, 387 S.W.2d 35, 38, 39 (Tex.Sup.Ct.1965).
not questioned but that this unit was created in com-
pliance with the established regulations and not by
The court's opinion says ‘The Commission pre- permission of the Railroad Commission as an excep-
scribed a unit of 80 acres', inferring that all other size tion to the regulation.
units provided for in said regulations were permitted
by the Railroad Commission or permitted by the reg-
It has been argued before this court that since the
ulations, I am not sure which. To be sure, an 80-acre
first clause in said proviso uses the term ‘permit’ and
unit is prescribed by the regulations. But I do not agree
the second clause does not use the term, that ‘pre-
that it is the only unit prescribed. As shown above, the
scribed’ must necessarily have a special meaning of
regulations provide for units from 40 acres to 160
‘required’ in order to leave room for permissive units
acres in size.
to be formed, and since the last clause did not establish
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403 S.W.2d 325
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a size for permissive units, no authority was given to liberal interpretation should be given to the pooling
form any permissive units. This reasoning seems to be provision to accomplish the purpose for which it was
the basis of the court's holding. Under this line of intended, that is, to promote conservation beneficial
reasoning we wonder why the parties used the term both to the lessor and the lessee. It can be reasonably
‘permit’ at all in the first clause of the proviso. It is concluded that from said pooling provision the parties
fundamental that in contracts all the terms used should intended for the authority to pool to extend to any unit
be given meaning if possible. Should a governmental size substantially conforming to any unit standard
authority lay down rules and regulations for the crea- officially established by the Railroad Commission in
tion of larger units, it is reasonable to say the gov- the exercise of its spacing proration function.
ernmental authority has Prescribed. If the govern-
mental authority allows the creation of a larger unit as This court, in construing an oil and gas lease in
an exception to the prescribed rules and regulations it the recent case of Grady L. Fox et al. v. Julia Thore-
can be said that governmental authority has Permitted son, 9 Tex.Sup.Ct.J. 26 (1965), used the following
the creation of larger units. In fact, the term ‘permit’ is language:
the universal term applied to authority granted as an
exception to regular rules and regulations governing
‘* * * Another sound rule of interpretation is that
the development of oil and gas fields. The fact that the
language used by *332 the parties to an oil and gas
word ‘permit’ is not used in the second clause of the
lease will not be held to impose a special limitation on
proviso does not destroy the import of the word
the grant unless it is clear and precise and so une-
‘permit’ in the first clause.
quivocal in nature that it can reasonably be given no
other meaning.’
This construction of the proviso allows us to give
the usual and ordinary meaning to the word ‘prescribe’
The court's opinion in the instant case has given a
as defined by Webster:
narrow and restricted meaning to the pooling provi-
sion in question when there is no language in said
‘prescribe (L. praescribere, praescriptum, fr.prae pooling provision which compels such construction to
before—scribere to write, see scribere.) * * * be placed thereon. So long as the lessor's pooling unit
is confined to the size of the pooling units authorized
‘2. To lay down authoritatively as a guide direc- by the rules and regulations of the Railroad Commis-
tion or rule of action; to impose as a peremptory order; sion, it can reasonably be said that the unit complies in
to dictate; direct; ordain; as, to prescribe regular hours size with the prescribed regulations. This would be a
of study. 3. To keep within limits or bounds; to re- reasonable construction of the pooling provision ra-
strain; to confine * * *. ther than a strained one.
‘Syn.—Limit, control, order, guide.’ In Texaco, Inc. v. Letterman, 343 S.W.2d 726,
732 (Tex.Civ.App.1961), the court in construing a
I think that the authority granted by the lessor for pooling provision in an oil and gas lease said:
pooling necessarily had to be stated in broad and
general terms because it could not be foreseen what ‘That pooling or unitizing of oil and gas leases is a
the circumstances in the future might be, what the standard practice in the industry can not be ques-
regulations of the Railroad Commission might be nor tioned. It is equally recognized that unitization is often
in what terms they might be stated. For that reason a a more feasible method of operation from an engi-
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 9
403 S.W.2d 325
(Cite as: 403 S.W.2d 325)
neering and scientific point of view. Unitization can should be upheld, although the grant of power is in
be said to be advantageous to both lessors and lessees. general terms, because it is subject to implied terms
We think these facts lead to the conclusion that in the that will prevent arbitrary and unfair dealing, will
absence of clear language to the contrary, pooling require compliance with the implied covenants in the
clauses should not be construed in a narrow or limited lease for the benefit of the lessor and will impose a
sense.’ rigid standard of good faith on the part of the lessee.’
And in Tiller v. Fields, 301 S.W.2d 185, 187 In construing this pooling provision of the oil and
(Tex.Civ.App.1957), the court said: gas lease we should recognize that this does not only
affect the litigants involved here, but affects the oil
‘Anticipatory provisions in leases for the com- industry as a whole for the simple reason that the form
mittment by the lessee of such leases to unitization, of of the pooling unit used is in wide *333 use in Texas
necessity must be in general terms. Neither the lessor and has been for many years. [FN1]
nor the lessee has any way of knowing at the time the
lease is taken the facts with respect to which it will be FN1. The form of pooling provision is in
necessary for the lessee to apply his power. It is not lease forms in Walker, Cases on Oil and Gas,
practicable for the lessee to await the ascertainment of Vol. 2, Second form following page 895,
such facts. He knows from experience that because of publication 1948, lease form dated April,
the possibility of many changes in ownership of the 1946; Stayton Texas Forms, 1960, Sec. 4026,
lessor's interest as time goes on, it may be difficult to Vol. 7, p. 254; Huie, Walker and Woodward,
effect an agreement if the right to unitize is not in- Oil & Gas, American Casebook Series, 1960,
cluded in the lease itself. Phillips Petroleum Co. v. first form in the Appendix, p. 807, offered by
Peterson, 10 Cir., 218 F.2d 926. The Texas courts, as the authors as a form ‘selected for the pur-
well as other courts, have recognized these basic facts, pose of acquainting the student with the
and have consistently sustained the basic validity of general nature of the instruments discussed in
lease pooling provisions and units formed under their the cases,’ and printed by permission of
authority.’ Pound Printing & Stationery Co., Houston;
Williams, Oil & Gas Law, 1962, Vol. 4, p.
In Phillips v. Petroleum Co. v. Peterson, 218 F.2d 635, Sec. 699.7.
926, 933, (10th Cir. 1954), the court reasoned as fol-
lows: The pooling clause which we have before us for
construction has been in use in Texas for many years.
‘Thus, it will be seen that unitization is a con- Tolerance type proration units have been prescribed
servation measure which benefits both lessor and for various oil and gas fields in Texas for many years.
lessee and tends to prevent waste of a natural resource. The result has been the creation of many pooled units
*** in numerous fields which are now shadowed. The
confusion, uncertainty, and possible title failure is not
limited to the lessee who may have formed the unit. It
‘The practice of unitization by a power granted
extends to royalty owners in the unit, overriding roy-
the lessee in advance, if faithfully carried out, will be
alty owners, and to some extent to the purchasers of
fair and profitable both to the lessor and lessee, and is
production and the financial institutions which furnish
vital to the oil and gas industry in the interests of the
capital for the development and enjoyment of the
conservation of both natural and material resources. It
mineral resources. Furthermore, there is affected by
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 10
403 S.W.2d 325
(Cite as: 403 S.W.2d 325)
the court's opinion the new Texas Compulsory Pool- The thrust of our opinion is that the Commission
ing Act by the Legislature, Art. 6008c, ‘prescribes' certain things, and it also ‘permits' certain
Rev.Civ.Stat.Ann. (1965). See discussion by Ernest E. things. The majority then tries to determine which the
Smith, Tex.Law Rev. Vol. 43 pp. 1003—1021. Commission did in this instance and holds that the
Commission ‘prescribed’ eighty acres but did not
I think a reasonable's construction of the pooling ‘prescribe’ 160 acres. The fact is that the Commission
clause does not require that we strike it down, and I passed its rules without regard to whether it was
would affirm the judgments of the trial court and ‘prescribing’ or ‘permitting,’ as those terms are used
Court of Civil Appeals. by the private contracting parties. The term ‘permit-
ted’ actually does two things: It permits but it also
prohibits all that is beyond that which is permitted.
GRIFFIN, J., joins in this dissent.POPE, Justice (dis-
Every permit carries an inherent prescription, pro-
senting).
scription, and prohibition of things beyond the permit.
The fault that I find with our holding in this case
What the Commission did in passing its Rule 2 was to
is that we are trying to fit the meaning of terms used by
authorize certain units. Those units could be formed
private parties to a lease into a supposed technical
*334 without any further recourse to the Commission.
terminology used by the Railroad Commission in
To the extent that Rule 2 was complied with, a unit
making its rules and orders. This is the sequence of
was authorized. To the extent that it was beyond what
events. First the parties made the oil and gas lease and
Rule 2 authorized, it was prohibited. To the extent that
in it they provided:
it was prohibited, it was ‘prescribed,’ if we want to
squeeze the Commission order into the contractual
'Units pooled for oil hereunder shall not substan-
mold. In my opinion the word ‘prescribed’ is more
tially exceed 40 acres each in area, and units pooled
applicable to the 160-acre unit than the 80-acre unit
for gas hereunder shall not substantially exceed in area
because the only prohibition or direction is against
640 acres plus a tolerance of 10% Thereof, provided
creating a unit of more than 160 acres.
that should governmental authority having jurisdiction
Prescribe or permit the creation of units larger than
I respectfully dissent.
those specified, units thereafter created may conform
substantially in size with those Prescribed by gov-
ernmental regulations.' TEX 1966.
Jones v. Killingsworth
403 S.W.2d 325
Several years later the Commission order was
passed which stated:
END OF DOCUMENT
'* * * No proration unit shall consist of more than
eighty (80) acres except as hereinafter provided, * * *
‘Provided, however, that operators may elect to assign
tolerance of not more than eighty (80) acres of addi-
tional unassigned lease acreage to a well on an eighty
(80) acre unit and shall in such event receive allowable
credit for not more than one hundred sixty (160)
acres.’
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Page 1
694 S.W.2d 441
(Cite as: 694 S.W.2d 441)
Language used by parties to a contract should be
Court of Appeals of Texas, given its plain grammatical meaning unless it defi-
Eastland. nitely appears that intention of the parties would
thereby be defeated.
J.E. TOMLIN et ux., Appellants,
v. [2] Mines and Minerals 260 73
PETROLEUM CORPORATION OF TEXAS, Ap-
pellee. 260 Mines and Minerals
260II Title, Conveyances, and Contracts
No. 11–85–039–CV. 260II(C) Leases, Licenses, and Contracts
June 13, 1985. 260II(C)3 Construction and Operation of
Oil and Gas Leases
Lessors of oil and gas lease brought declaratory 260k73 k. In General; General Rules of
judgment action concerning their rights and status Construction. Most Cited Cases
under the lease. The 90th District Court, Stephens (Formerly 260k73(1))
County, R.E. Thornton, J., granted lessee oil compa-
ny's motion for summary judgment, and lessors ap- Language used by parties to oil and gas lease will
pealed. The Court of Appeals, McCloud, C.J., held not be held to impose special limitation on the grant
that paragraph of lease which began by stating that unless it is clear and precise and so unequivocal in
“each producing oil well drilled on said land * * * nature that it can reasonably be given no other mean-
shall hold forty (40) acres * * *” contained no refer- ing.
ence to producing gas well and did not apply to
acreage held by gas well, and thus, did not operate as [3] Mines and Minerals 260 73
amendment to habendum clause so as to prevent gas
well from maintaining the lease in force beyond end of 260 Mines and Minerals
primary term of the lease. 260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts
Affirmed. 260II(C)3 Construction and Operation of
Oil and Gas Leases
West Headnotes 260k73 k. In General; General Rules of
Construction. Most Cited Cases
(Formerly 260k73(1))
[1] Contracts 95 152
95 Contracts In oil and gas lease in which specific things are
95II Construction and Operation followed by some general term, such general term
must refer to things of the same kind.
95II(A) General Rules of Construction
95k151 Language of Instrument
95k152 k. In General. Most Cited Cases [4] Mines and Minerals 260 78.1(7)
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 2
694 S.W.2d 441
(Cite as: 694 S.W.2d 441)
perpetuated as to only forty (40) acres around any
260 Mines and Minerals producing well, whether oil or gas.
260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts Both parties filed motions for summary judgment.
260II(C)3 Construction and Operation of The trial court granted summary judgment to PETCO,
Oil and Gas Leases stating that the subject lease remains in full force and
260k78 Testing or Working effect. The Tomlins appeal. We affirm.
260k78.1 Construction, Breach, and
Penalties The December 3, 1974, oil, gas, and mineral lease
260k78.1(7) k. Place or Portion consists of a printed form, together with a typed rider
Developed; Pooled or Unitized Tracts. Most Cited containing five (5) additional paragraphs relating to
Cases PETCO's operations under the lease. The granting
clause grants PETCO the right to “(produce) oil, gas,
Paragraph of oil and gas lease stating that “each and all other minerals” found in the covered 326.5
producing oil well drilled on said land * * * shall hold acres of leased land. The habendum clause states that
forty (40) acres * * *” contained no reference to a *442 “(S)ubject to the other provisions herein con-
producing gas well and did not apply to acreage held tained, this lease shall remain in force for a term of
by gas well, and thus, did not operate as amendment to three (3) years ... (called ‘primary term’), and so long
habendum clause so as to prevent gas well from thereafter as oil, gas, or other mineral is produced
maintaining the lease in force beyond end of primary from said land.” Paragraph 16, one of the five para-
term of the lease. graphs contained in the typed rider, states the fol-
lowing:
*441 John R. Cook, Thompson & Cook, Brecken-
ridge, for appellants. At the end of the primary term hereof each pro-
ducing oil well drilled on said land by Lessee shall
Frank L. Jennings, Jennings, Dies, Turner & Knight, hold 40 acres, to be designated by Lessee, and the
Graham, for appellee. balance of the acreage shall be released to Lessor;
and after the primary term hereof, any acreage so
held by a producing well shall be considered as
McCLOUD, Chief Justice.
covered by a separate lease from any other acreage
J.E. Tomlin and his wife, Betty Tomlin, lessors,
held by any other producing well, so that production
sued Petroleum Corporation of Texas (PETCO), les-
from any such well shall not thereafter continue this
see, seeking a declaratory judgment under the Uni-
lease in effect as to acreage which was held by an-
form Declaratory Judgment Act,
other producing well at the expiration of the primary
TEX.REV.CIV.STAT.ANN. art. 2524–1 (Vernon
term hereof. (Emphasis added)
1965) concerning their rights and status under an oil,
gas, and mineral lease entered into by the parties. The
Tomlins alleged that the lease terminated for failure to PETCO drilled a gas well on the premises, which
produce “oil.” Alternatively, they contended that the was producing gas at the expiration of the primary
lease is ambiguous and the case should be reversed term of the lease.
and remanded so that parol evidence may be intro-
duced to show that the parties intended that upon The Tomlins argue that paragraph 16 operates as
expiration of the primary term, the lease would be an amendment to the habendum clause, the effect of
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 3
694 S.W.2d 441
(Cite as: 694 S.W.2d 441)
which is to prevent a gas well from maintaining the
lease in force beyond the end of the primary term. The Tomlins' conditionally submitted second
They contend that only a producing “oil well” will point of error, seeking a remand of this case, is over-
hold any acreage of the lease beyond the primary term, ruled. We hold that the lease is not ambiguous. Only a
with “the balance of the acreage,” including that sur- question of law is involved; no genuine issue of fact
rounding a gas well, to be “released to Lessor.” We exists. Therefore, the trial court's rendition of sum-
disagree. mary judgment in favor of PETCO was proper.
[1][2] In determining proper construction of a The judgment of the trial court is affirmed.
contract, the court usually examines the entire docu-
ment. Language used by the parties should be given its
Tex.App. Eastland 1985.
plain grammatical meaning unless it definitely appears
Tomlin v. Petroleum Corp. of Texas
that the intention of the parties would thereby be de-
694 S.W.2d 441
feated. Language used by the parties to an oil and gas
lease will not be held to impose a special limitation on
END OF DOCUMENT
the grant unless it is clear and precise and so une-
quivocal in nature that it can reasonably be given no
other meaning. Fox v. Thoreson, 398 S.W.2d 88
(Tex.1966).
[3][4] Paragraph 16 begins by stating that “each
producing oil well drilled on said land ... shall hold
forty (40) acres....” (Emphasis added) The provision
contains no reference to a producing gas well. Where
specific things are followed by some general term,
such general term must refer to things of the same
kind. Fleming Foundation v. Texaco, 337 S.W.2d 846
(Tex.Civ.App.—Amarillo 1960, writ ref'd n.r.e.).
Phrases such as “any acreage so held by a producing
well” and “any such well” refer only to any oil wells
which are producing at the expiration of the primary
term of the subject lease. Paragraph 16 does not apply
to acreage held by a gas well. The language urged by
the Tomlins as imposing a special limitation on the
grant is not clear, precise, and “so unequivocal in
nature that it can reasonably be given no other mean-
ing.” Fox v. Thoreson, supra at 92.
Therefore, the habendum clause alone governs
the right of the parties when a gas well is producing at
the end of the primary term. Accordingly, the gas well
maintains the lease in full force and effect as to all
326.5 acres.
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 1
94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
(Formerly 233k37)
Supreme Court of Texas. Construing an unambiguous lease is a question of
ANADARKO PETROLEUM CORPORATION, law for the court.
Petitioner,
v. [2] Appeal and Error 30 893(1)
Phillip THOMPSON, et al., Respondents.
30 Appeal and Error
No. 01–0261. 30XVI Review
Argued March 6, 2002. 30XVI(F) Trial De Novo
Decided July 3, 2002. 30k892 Trial De Novo
Opinion Denying Rehearing Jan. 30, 2003. 30k893 Cases Triable in Appellate
Court
Lessor sought declaration that gas lease had ter- 30k893(1) k. In general. Most Cited
minated, and sought damages. The District Court, Cases
Moore County, Ron Enns, J., granted partial summary
judgment for lessor, and after a bench trial, awarded Appellate court reviews lease-construction ques-
damages to lessor for lessee's post-termination con- tions de novo.
version of gas. Lessee appealed. The Court of Ap-
peals, Quinn, J., 60 S.W.3d 134, affirmed. After [3] Landlord and Tenant 233 593
granting lessee's petition for review, the Supreme
Court, Baker, J., held that: (1) gas mining lease did not
233 Landlord and Tenant
terminate when actual production ceased longer than
233II Leases and Agreements in General
60 days but well was still actually capable of pro-
233II(B) Construction and Operation
ducing gas, and (2) well is “capable of production” if it
233k593 k. Intention of parties. Most Cited
is capable of producing in paying quantities without
Cases
additional equipment or repairs.
(Formerly 233k37)
Reversed and remanded.
In construing an unambiguous lease, court's pri-
mary duty is to ascertain the parties' intent as ex-
West Headnotes pressed within the lease's four corners.
[1] Landlord and Tenant 233 611 [4] Landlord and Tenant 233 596
233 Landlord and Tenant 233 Landlord and Tenant
233II Leases and Agreements in General 233II Leases and Agreements in General
233II(B) Construction and Operation 233II(B) Construction and Operation
233k611 k. Questions of law or fact. Most 233k596 k. Ordinary or technical language.
Cited Cases
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 2
94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
Most Cited Cases Mining Leases
(Formerly 233k37) 260k62.1 k. Premises demised and
rights acquired. Most Cited Cases
Court gives a lease's language its plain, gram-
matical meaning unless doing so would clearly defeat Mines and Minerals 260 73.1(3)
the parties' intentions.
260 Mines and Minerals
[5] Landlord and Tenant 233 598 260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts
233 Landlord and Tenant 260II(C)3 Construction and Operation of
233II Leases and Agreements in General Oil and Gas Leases
233II(B) Construction and Operation 260k73.1 Premises Demised and Rights
233k598 k. Construction as a whole. Most Acquired
Cited Cases 260k73.1(3) k. Interest in real estate.
(Formerly 233k37) Most Cited Cases
Court examines the entire lease and attempts to A mineral lease grants a fee simple determinable
harmonize all its parts, even if different parts appear to the lessee.
contradictory or inconsistent, because court presumes
that the parties to a lease intend every clause to have [8] Mines and Minerals 260 63
some effect.
260 Mines and Minerals
[6] Landlord and Tenant 233 590 260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts
233 Landlord and Tenant 260II(C)2 Construction and Operation of
233II Leases and Agreements in General Mining Leases
233II(B) Construction and Operation 260k63 k. Term. Most Cited Cases
233k590 k. In general. Most Cited Cases
(Formerly 233k37) Mines and Minerals 260 73.5
Court will not hold a lease's language to impose a 260 Mines and Minerals
special limitation on the grant unless the language is 260II Title, Conveyances, and Contracts
so clear, precise, and unequivocal that court can rea- 260II(C) Leases, Licenses, and Contracts
sonably give it no other meaning. 260II(C)3 Construction and Operation of
Oil and Gas Leases
[7] Mines and Minerals 260 62.1 260k73.5 k. Term. Most Cited Cases
260 Mines and Minerals Lessee's mineral estate may continue indefinitely,
260II Title, Conveyances, and Contracts as long as the lessee uses the land for its intended
260II(C) Leases, Licenses, and Contracts purpose.
260II(C)2 Construction and Operation of
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 3
94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
[9] Mines and Minerals 260 63
[11] Mines and Minerals 260 78.1(8)
260 Mines and Minerals
260II Title, Conveyances, and Contracts 260 Mines and Minerals
260II(C) Leases, Licenses, and Contracts 260II Title, Conveyances, and Contracts
260II(C)2 Construction and Operation of 260II(C) Leases, Licenses, and Contracts
Mining Leases 260II(C)3 Construction and Operation of
260k63 k. Term. Most Cited Cases Oil and Gas Leases
260k78 Testing or Working
Mines and Minerals 260 73.5 260k78.1 Construction, Breach, and
Penalties
260 Mines and Minerals 260k78.1(8) k. Extent of produc-
260II Title, Conveyances, and Contracts tion, paying quantities, and marketing. Most Cited
260II(C) Leases, Licenses, and Contracts Cases
260II(C)3 Construction and Operation of
Oil and Gas Leases A typical Texas mineral lease that lasts “as long
260k73.5 k. Term. Most Cited Cases as oil or gas is produced” automatically terminates if
actual production permanently ceases during the
Mineral estate will automatically terminate if the secondary term.
event upon which it is limited occurs.
[12] Mines and Minerals 260 63
[10] Mines and Minerals 260 63
260 Mines and Minerals
260 Mines and Minerals 260II Title, Conveyances, and Contracts
260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts
260II(C) Leases, Licenses, and Contracts 260II(C)2 Construction and Operation of
260II(C)2 Construction and Operation of Mining Leases
Mining Leases 260k63 k. Term. Most Cited Cases
260k63 k. Term. Most Cited Cases
Mines and Minerals 260 73.5
Mines and Minerals 260 73.5
260 Mines and Minerals
260 Mines and Minerals 260II Title, Conveyances, and Contracts
260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts
260II(C) Leases, Licenses, and Contracts 260II(C)3 Construction and Operation of
260II(C)3 Construction and Operation of Oil and Gas Leases
Oil and Gas Leases 260k73.5 k. Term. Most Cited Cases
260k73.5 k. Term. Most Cited Cases
Although the habendum clause generally controls
Lease's habendum clause defines the mineral es- the mineral estate's duration, other clauses may extend
tate's duration. the habendum clause's term.
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 4
94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
260 Mines and Minerals
[13] Landlord and Tenant 233 890 260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts
260II(C)3 Construction and Operation of
233 Landlord and Tenant
Oil and Gas Leases
233IV Particular Kinds of Tenancies and Attrib-
260k78 Testing or Working
utes Thereof
260k78.1 Construction, Breach, and
233IV(F) Termination
Penalties
233IV(F)1 In General
260k78.1(8) k. Extent of produc-
233k890 k. In general. Most Cited Cases
tion, paying quantities, and marketing. Most Cited
(Formerly 233k93)
Cases
When a lease terminates is always a question of
Completion of a gas well capable of producing in
resolving the intention of the parties from the entire
paying quantities but shut-in due to lack of pipe line
instrument.
facilities or for other reasons is not considered “pro-
duction” and therefore does not sustain a mineral
[14] Mines and Minerals 260 78.1(8) interest that lasts as long as oil or gas “is produced.”
260 Mines and Minerals
[16] Mines and Minerals 260 78.1(8)
260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts
260 Mines and Minerals
260II(C)3 Construction and Operation of
260II Title, Conveyances, and Contracts
Oil and Gas Leases
260II(C) Leases, Licenses, and Contracts
260k78 Testing or Working
260II(C)3 Construction and Operation of
260k78.1 Construction, Breach, and
Oil and Gas Leases
Penalties
260k78 Testing or Working
260k78.1(8) k. Extent of produc-
260k78.1 Construction, Breach, and
tion, paying quantities, and marketing. Most Cited
Penalties
Cases
260k78.1(8) k. Extent of produc-
tion, paying quantities, and marketing. Most Cited
Gas mining lease, which contained habendum Cases
clause stating that lease would remain in force as long
as “gas is or can be produced,” did not terminate when
A well is “capable of production” if it is capable
actual production ceased longer than 60 days but well
of producing in paying quantities without additional
was still actually capable of producing gas, despite
equipment or repairs.
cessation-of-production clause providing for 60-day
period to resume operations after cessation of pro-
duction; cessation-of-production clause only applied [17] Mines and Minerals 260 78.1(8)
if well holding lease became incapable of production.
260 Mines and Minerals
[15] Mines and Minerals 260 78.1(8) 260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts
260II(C)3 Construction and Operation of
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 5
94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
Oil and Gas Leases Oil and Gas Leases
260k78 Testing or Working 260k78 Testing or Working
260k78.1 Construction, Breach, and 260k78.1 Construction, Breach, and
Penalties Penalties
260k78.1(8) k. Extent of produc- 260k78.1(8) k. Extent of produc-
tion, paying quantities, and marketing. Most Cited tion, paying quantities, and marketing. Most Cited
Cases Cases
Gas well was still “capable of production in In the case of a marginal gas well, the standard by
paying quantities” under mineral lease terms, even which paying quantities, under a mineral lease, is
though there were periods during which there was no determined is whether or not under all relevant cir-
production, where the well was connected to pipeline cumstances a reasonably prudent operator would, for
facilities, and there was no question that well was the purpose of making a profit and not merely for
capable of producing in paying quantities. speculation, continue to operate a well in the manner
in which the well in question was operated.
[18] Mines and Minerals 260 78.1(8)
[20] Mines and Minerals 260 78.1(8)
260 Mines and Minerals
260II Title, Conveyances, and Contracts 260 Mines and Minerals
260II(C) Leases, Licenses, and Contracts 260II Title, Conveyances, and Contracts
260II(C)3 Construction and Operation of 260II(C) Leases, Licenses, and Contracts
Oil and Gas Leases 260II(C)3 Construction and Operation of
260k78 Testing or Working Oil and Gas Leases
260k78.1 Construction, Breach, and 260k78 Testing or Working
Penalties 260k78.1 Construction, Breach, and
260k78.1(8) k. Extent of produc- Penalties
tion, paying quantities, and marketing. Most Cited 260k78.1(8) k. Extent of produc-
Cases tion, paying quantities, and marketing. Most Cited
Cases
For a gas well to produce in paying quantities, or
to be capable of producing in paying quantities, there In a mineral lease involving a gas well, the term
must be facilities located near enough to the well that “paying quantities” involves not only the amount of
it would be economically feasible to establish a con- production, but also the ability to market the gas at a
nection so that production could be marketed at a profit.
profit.
[21] Mines and Minerals 260 78.2
[19] Mines and Minerals 260 78.1(8)
260 Mines and Minerals
260 Mines and Minerals 260II Title, Conveyances, and Contracts
260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts
260II(C) Leases, Licenses, and Contracts 260II(C)3 Construction and Operation of
260II(C)3 Construction and Operation of Oil and Gas Leases
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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
260k78 Testing or Working itable returns from the well is the test; if the quantity
260k78.2 k. Forfeiture for breach in be sufficient to warrant the use of the gas in the mar-
general. Most Cited Cases ket, and the income therefrom is in excess of the actual
marketing cost, and operating costs, the production
Mines and Minerals 260 78.7(6) satisfies the term “paying quantities.”
260 Mines and Minerals [23] Mines and Minerals 260 78.1(8)
260II Title, Conveyances, and Contracts
260II(C) Leases, Licenses, and Contracts 260 Mines and Minerals
260II(C)3 Construction and Operation of 260II Title, Conveyances, and Contracts
Oil and Gas Leases 260II(C) Leases, Licenses, and Contracts
260k78 Testing or Working 260II(C)3 Construction and Operation of
260k78.7 Actions Oil and Gas Leases
260k78.7(6) k. Judgment and 260k78 Testing or Working
relief; damages. Most Cited Cases 260k78.1 Construction, Breach, and
Penalties
Remedy for breach of implied covenant to market 260k78.1(8) k. Extent of produc-
production under oil and gas lease agreement is not tion, paying quantities, and marketing. Most Cited
forfeiture or termination of lease; breach of implied Cases
covenant in oil and gas lease does not automatically
terminate the estate, but instead subjects breaching Gas mining lease, containing clause stating that
party to liability for monetary damages, or, in ex- lease would remain in force as long as “gas is or can be
traordinary circumstances, remedy of conditional produced,” did not mean lease would remain in effect
decree of cancellation. only as long as gas “is produced”; “can be produced”
did not mean actual production.
[22] Mines and Minerals 260 78.1(8)
*552 Eric Anthony Hillerman,Harlow Sprouse,
260 Mines and Minerals Charles Wade Miller, Sprouse *553 Smith & Rowley,
260II Title, Conveyances, and Contracts Amarillo, J. Kyle McClain, Anadarko Petroleum
260II(C) Leases, Licenses, and Contracts Corp., David M. Gunn, Hogan Dubose & Townsend,
260II(C)3 Construction and Operation of L.L.P., Houston, for Petitioner.
Oil and Gas Leases
260k78 Testing or Working Joe L. Lovell, Lovell Lovell & Newsom, Amarillo,
260k78.1 Construction, Breach, and Donald M. Hunt, Mullin Hoard Brown Langston Carr
Penalties Hunt & Joy LLP, Lubbock, J.R. Lovell, Lovell &
260k78.1(8) k. Extent of produc- Lyle, Dumas, for Respondents.
tion, paying quantities, and marketing. Most Cited
Cases Justice BAKER delivered the opinion of the Court.
In this case, we decide whether a gas mining lease
In determining whether gas well under mineral terminated when actual production ceased longer than
lease is producing in paying quantities, test is whether sixty days. The lease expressly states that it lasts for
there is a reasonable basis for the expectation of prof- one year and “as long thereafter as gas is or can be
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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
produced.” The lease also provides that, if production 1936. However, it is undisputed that production totally
ceases for any reason, the lease “shall not terminate ceased for sixty-one days in 1981 and ninety-one days
provided lessee resumes operations for drilling a well in 1985 while the gas purchaser conducted pipeline
within sixty (60) days from such cessation.” The les- repairs. In 1997, Thompson sued for a declaration that
sees began producing gas in 1936. However, in 1981 the lease terminated when production ceased in 1981
and again in 1985, actual production ceased longer and for conversion damages.
than sixty days. The court of appeals held that these
cessations terminated the lease. 60 S.W.3d 134, 141. On Thompson's motion, the trial court granted
We disagree. We conclude that a well that is capable partial summary judgment that the lease terminated
of production sustains this particular lease even if due to one or more cessations of production. After a
actual production ceases longer than sixty days. Ac- bench trial, the court rejected Anadarko's affirmative
cordingly, we reverse the court of appeals' judgment defenses of limitations, laches, quasi-estoppel, unjust
and remand to the trial court for further proceedings enrichment, adverse possession, revivor, judicial es-
consistent with this opinion. toppel, and promissory estoppel. Accordingly, the trial
court awarded damages and attorney's fees to
I. BACKGROUND Thompson.
In 1936, Thompson's and Anadarko's predeces-
sors entered into a lease “for the purpose of mining Anadarko appealed. After considering the lease's
and operating for and producing gas.” The lease al- implicit and explicit objectives, language in the lease's
lows either production or the lessees' beginning drill- continuous operations clause, and other jurisdictions'
ing operations to maintain the lease beyond its case law, the court of appeals construed the lease's
one-year primary term. habendum clause to require actual production in
paying quantities. 60 S.W.3d at 140–41. Accordingly,
Two provisions in the lease are pertinent here. it affirmed the trial court's partial summary judgment
The lease's “habendum clause” states: that the lease terminated when *554 actual production
ceased longer than sixty days. 60 S.W.3d at 141. The
This lease shall remain in force for a term of one (1) court of appeals also determined that the evidence
year and as long thereafter as gas is or can be pro- supported the trial court's denying Anadarko's af-
duced. firmative defenses. 60 S.W.3d at 145.
The lease also has a “cessation-of-production We granted Anadarko's petition to consider
clause,” which provides: whether the court of appeals properly construed the
If, after the expiration of the primary term of this lease to conclude that it terminated.
lease, production on the leased premises shall cease
from any cause, this lease shall not terminate pro- II. APPLICABLE LAW
vided lessee resumes operations for drilling a well A. LEASE CONSTRUCTION
within sixty (60) days from such cessation, and this [1][2][3][4][5][6] Construing an unambiguous
lease shall remain in force during the prosecution of lease is a question of law for the Court. Luckel v.
such operations and if production results therefrom, White, 819 S.W.2d 459, 461 (Tex.1991). Accordingly,
then as long as production continues. we review lease-construction questions de novo. See
El Paso Natural Gas Co. v. Minco Oil & Gas, Inc., 8
Anadarko's predecessors began producing gas in S.W.3d 309, 312 (Tex.1999). In construing an unam-
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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
biguous lease, our primary duty is to ascertain the that lasts “as long as oil or gas is produced” automat-
parties' intent as expressed within the lease's four ically terminates if actual production permanently
corners. Luckel, 819 S.W.2d at 461; see also ceases during the secondary term. See Amoco Prod.
Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368, Co. v. Braslau, 561 S.W.2d 805, 808 (Tex.1978).
372–73 (Tex.2001). We give the lease's language its
plain, grammatical meaning unless doing so would [12][13] Although the habendum clause generally
clearly defeat the parties' intentions. Fox v. Thoreson, controls the mineral estate's duration, other clauses
398 S.W.2d 88, 92 (Tex.1966). We examine the entire may extend the habendum clause's term. Southland
lease and attempt to harmonize all its parts, even if Royalty, 496 S.W.2d at 552. When a lease terminates
different parts appear contradictory or inconsistent. “is always a question of resolving the intention of the
Luckel, 819 S.W.2d at 462. That is because we pre- parties from the entire instrument.” Southland Royal-
sume that the parties to a lease intend every clause to ty, 496 S.W.2d at 552.
have some effect. Heritage Res., Inc. v. NationsBank,
939 S.W.2d 118, 121 (Tex.1996). However, we will
III. ANALYSIS
not hold the lease's language to impose a special lim-
A. LEASE CONSTRUCTION
itation on the grant unless the language is so clear,
[14] Here, we decide whether the lease terminated
precise, and unequivocal that we can reasonably give
when actual production ceased *555 longer than sixty
it no other meaning. Fox, 398 S.W.2d at 92.
days. Both parties' arguments about what triggers the
lease's termination rely upon the lease's habendum and
B. OIL AND GAS LEASE PROVISIONS cessation-of-production clauses.
[7][8][9] A Texas mineral lease grants a fee sim-
ple determinable to the lessee. See Texas Co. v. Davis,
Anadarko contends that the habendum clause's
113 Tex. 321, 254 S.W. 304, 309 (1923). Conse-
plain language allows production or the capability of
quently, the lessee's mineral estate may continue in-
production to sustain the lease. Thus, Anadarko ar-
definitely, as long as the lessee uses the land for its
gues, the court of appeals incorrectly concluded that
intended purpose. Davis, 254 S.W. at 306. However, a
the habendum clause requires actual production.
mineral estate will automatically terminate if the event
Anadarko urges us to give the clause's “can be pro-
upon which it is limited occurs. Gulf Oil Corp. v. Reid,
duced” language its full effect. See Fox, 398 S.W.2d at
161 Tex. 51, 337 S.W.2d 267, 269 (1960).
92. According to Anadarko, the cessa-
tion-of-production clause does not contradict the
[10][11] A lease's habendum clause defines the habendum clause's plain meaning, because the cessa-
mineral estate's duration. Gulf Oil Corp. v. Southland tion-of-production clause is a savings provision that
Royalty Co., 496 S.W.2d 547, 552 (Tex.1973). For only applies if the habendum clause's special limita-
instance, a typical habendum clause states that the tion occurs and threatens to terminate the lease. In
lease lasts for a relatively short fixed term of years other words, the cessation-of-production clause only
(primary term) and then “as long thereafter as oil, gas applies if the well holding the lease becomes incapable
or other mineral is produced” (secondary term). See, of production. Because the well holding the lease has
e.g., Reid, 337 S.W.2d at 269 n. 1; see also 1 SMITH always been capable of production, Anadarko asks us
& WEAVER, TEXAS LAW OF OIL & GAS § 4.3 to reverse the partial summary judgment that the lease
(1996). In Texas, such a habendum clause requires terminated due to one or more cessations of produc-
actual production in paying quantities. Reid, 337 tion.
S.W.2d at 269–70; Garcia v. King, 139 Tex. 578, 164
S.W.2d 509, 512 (1942). Thus, a typical Texas lease
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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
In response, Thompson asserts that both the 372–73; Luckel, 819 S.W.2d at 461. The habendum
lease's terms and existing Texas law support the court clause's plain language shows that the parties intended
of appeals' conclusion that actual production is re- that a well actually produce gas, or be capable of
quired to sustain the lease after the primary term. See producing gas, to sustain the lease. See Fox, 398
60 S.W.3d at 140. According to Thompson, the ces- S.W.2d at 92. This construction does not conflict with
sation-of-production clause applies whenever actual our rule that Texas leases generally require actual
production ceases rather than when actual production production. See Reid, 337 S.W.2d at 269–70; Garcia,
and capability of production cease. Moreover, 164 S.W.2d at 512. That is because the cases in which
Thompson argues, allowing the capability of produc- *556 we recognized the general rule involved leases
tion to sustain the lease indefinitely would render the with typical habendum clauses that sustained the lease
cessation-of-production clause meaningless. as long as oil or gas “is produced.” See Reid, 337
S.W.2d at 269 n. 1; Garcia, 164 S.W.2d at 512. Thus,
Here, the habendum clause expressly states that these cases do not control how to construe a habendum
the lease lasts as long as gas “is or can be produced.” clause that lasts as long as gas “is or can be produced.”
For several reasons, the court of appeals rejected
Anadarko's argument that capability of production Additionally, the court of appeals reasoned that
sustained the lease and, instead, concluded that the allowing the ability to produce gas to prolong the lease
habendum clause requires actual production. 60 would “effectively erase” the cessation-of-production
S.W.3d at 140. First, citing Garcia v. King, the court clause from the lease. 60 S.W.3d at 139. But the court
of appeals reasoned that the habendum clause must of appeals' analysis incorrectly assumes that the ces-
require actual production to further the lease's objec- sation-of-production clause is triggered any time ac-
tive—to reap economic gain. 60 S.W.3d at 140. Sec- tual production stops. Read as a whole, the cessa-
ond, the court of appeals construed the habendum tion-of-production clause combines a sixty-day time
clause in light of the lease's continuous operations limit with a resumption of operations provision. Thus,
clause, which sustains the lease so long as drilling the clause indicates the parties' intent that the cessa-
operations continue “and if production results there- tion-of-production clause apply only when the cir-
from, then as long as production continues.” See 60 cumstances require the lessee “to resume operations
S.W.3d at 140. The court of appeals determined that for drilling a well.” In other words, the cessa-
the continuous operations clause shows that the parties tion-of-production clause only applies if a well hold-
intended that “the continuation of actual production ing the lease ceases to be capable of producing gas.
was and is necessary to prolong the life of the lessee's Indeed, in analyzing a similar cessation-of-production
interest.” 60 S.W.3d at 140. And third, the court of clause, one commentator has observed:
appeals relied on decisions from other jurisdictions
that have interpreted similar habendum clauses. 60 The fact that the event which is designed to prevent
S.W.3d at 140 (citing Greer v. Salmon, 82 N.M. 245, termination is the commencement of drilling or
479 P.2d 294 (1970); Fisher v. Grace Petroleum reworking operations gives some indication of the
Corp., 830 P.2d 1380 (Okla.Ct.App.1991)). purpose of the clause and the intention of the par-
ties. It indicates that the parties are concerned with a
We disagree with the court of appeals' lease con- situation where cessation of production is of the
struction. Here, neither party contends that the lease is type that is remedied by drilling or reworking op-
ambiguous. Consequently, in construing the lease, we erations. Thus, the parties must have intended that
first consider the parties' intentions as expressed in the the clause would become operative if a dry well is
lease's four corners. See Yzaguirre, 53 S.W.3d at drilled or if a producing well ceases to be capable of
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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
producing in paying quantities. A literal application 299. Thus, the New Mexico Court relied on provisions
of the clause to every temporary cessation of pro- within the lease's four corners to ascertain the
duction could lead to absurd and unintended results. habendum clause's meaning.
2 KUNTZ, A TREATISE ON THE LAW OF OIL Furthermore, the court of appeals erroneously re-
& GAS 416–17. lied upon an Oklahoma court of appeals opinion to
support its view that the Anadarko habendum clause
Construing the cessation-of-production clause to requires actual production. See Fisher, 830 P.2d at
apply when a well holding the lease ceases to be ca- 1387–88. In relying on Fisher, the court of appeals
pable of production—and not simply when actual overlooked the fact that the Oklahoma Supreme Court
production ceases—accords with the cessa- rejected the Fisher court's approach. See Pack v. Santa
tion-of-production clause's plain language. Moreover, Fe Minerals, 869 P.2d 323, 327 (Okla.1994).
this construction avoids imposing an unnecessary
limitation on the grant. See Fox, 398 S.W.2d at 92. In Pack, the Oklahoma Supreme Court consid-
The court of appeals' construction of the cessa- ered whether a lease held by a gas well capable of
tion-of-production clause would require Anadarko to production but shut-in for more than sixty days ex-
resume drilling operations within sixty days of any pired under the cessation-of-production clause. Pack,
cessation in actual production even if the existing well 869 P.2d at 325. In construing both clauses, the Ok-
remained capable of production. Such a construction lahoma Supreme Court concluded that the cessa-
disregards the habendum clause's “can be produced” tion-of-production clause operates as a savings clause
language, whereas our construction gives every clause and only applies when production—as defined in the
some effect. See Heritage Res., 939 S.W.2d at 121. habendum clause—ceases. Pack, 869 P.2d at 328.
Accordingly, the court of appeals incorrectly relied “Any other conclusion would render the habendum
upon the cessation-of-production clause to hold that clause useless after the primary term expires, a con-
the habendum clause requires actual production to clusion clearly not intended by the parties to the
sustain the lease. lease.” Pack, 869 P.2d at 328. Thus, the Oklahoma
Supreme Court's analysis supports our viewpoint
The court of appeals also misplaced its reliance rather than Thompson's.
on cases from other states. See 60 S.W.3d at 140. First,
in looking to other states to determine how to interpret Finally, we reject Thompson's contention that
the lease here, the court of appeals disregarded our allowing the capability of production to sustain the
well-established rules about how to interpret oil and lease would allow the lessees to sustain the lease in-
gas leases. See Heritage Res., 939 S.W.2d at 121; definitely—without actual production. Rather, the
Luckel, 819 S.W.2d at 461–62; Fox, 398 S.W.2d at 92. implied duty to manage and administer the lease as a
Second, the cases the court of appeals cites actually reasonably prudent operator, which encompasses the
support our views about this lease. In Greer, the New implied duty to market the gas reasonably, would limit
Mexico Supreme Court construed a habendum clause the lessees' ability to sustain the lease based on a well's
like the one in this case in conjunction with two sav- capability of production. See Yzaguirre, 53 S.W.3d at
ings clauses: a cessation-of-production clause and a 373.
shut-in royalty clause. Greer, 479 P.2d at 296. The
New Mexico Court held that a gas well capable of For these reasons, we hold that a well actually
production would only hold the lease if the lessee paid producing or capable of producing gas sustains this
*557 an annual shut-in royalty. Greer, 479 P.2d at
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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
particular lease under the habendum clause. We also maintained a lease even though actual production had
hold that the cessation-of-production clause only ap- ceased. Hydrocarbon, 861 S.W.2d at 433–34. In this
plies if the lease would otherwise terminate under the context, the Hydrocarbon court stated:
habendum clause. Consequently, the court of appeals
erred in holding that, under this lease, “can be pro- We believe that the phrase “capable of production in
duced” means “actual production.” paying quantities” means a well that will produce in
paying quantities if the well is turned “on,” and it
B. CAPABILITY OF PRODUCTION begins flowing, without additional equipment or
Because we conclude that actual production was repair. Conversely, a well would not be capable of
not necessary to sustain the lease, we next consider producing in paying quantities if the well switch
whether the 1981 and 1985 cessations terminated the were turned “on,” and the well did not flow, because
lease. This depends upon whether the well holding the of mechanical problems or because the well needs
leased premises was capable of production during the rods, tubing, or pumping equipment.
two periods when actual production ceased longer
than sixty days. According to Anadarko's brief, “[t]he Hydrocarbon, 861 S.W.2d at 433–34.
evidence is undisputed here that the well was capable
of production during the two periods when no pro-
[16] We approve the Hydrocarbon definition,
duction was shown,” because the evidence shows that
because it is consistent with existing cases that discuss
the well was shut-in for pipeline repairs. In response,
the difference between actual production and capabil-
Thompson contends that the well was not capable of
ity of production. See Peveto, 645 S.W.2d at 771 (a
production, because the well would not have produced
well is capable of production if it is shut-in because
if it had been “turned on.” See Hydrocarbon Mgt., Inc.
there is no available pipeline); Stanolind Oil & Gas
v. Tracker Exploration, Inc., 861 S.W.2d 427, 433–34
Co. v. Barnhill, 107 S.W.2d 746, 749
(Tex.App.-Amarillo 1993, no writ).
(Tex.Civ.App.-Amarillo 1937, writ ref'd) (a well is
capable of production if it is shut-in because there is
[15] We have determined that “the completion of no available market); see also Davis, 254 S.W. at 309
a gas well capable of producing in paying quantities (a well is incapable of production if the lessee removes
but shut-in due to lack of pipe line facilities or for the equipment and abandons all efforts to produce);
other reasons is not considered production” and Pack, 869 P.2d at 327 (a well is incapable of produc-
therefore does not sustain a mineral interest that lasts tion if the underlying mineral reserves are depleted).
as long as oil or gas “is produced.” Peveto v. Starkey, Accordingly, we hold that a well is capable of pro-
645 S.W.2d 770, 771 (Tex.1982) (quoting Midwest duction if it is capable of producing in paying quanti-
Oil Corp. v. Lude, 376 S.W.2d 18, 20 ties without additional equipment or repairs.
(Tex.Civ.App.-Corpus Christi 1964, writ ref'd n.r.e.));
see also *558Giles v. McKanna, 200 S.W.2d 709, 712
IV. CONCLUSION
(Tex.Civ.App.-Austin 1947, writ ref. n.r.e.) (noting
Here, the lease's habendum clause expressly
the “marked difference between the capacity to pro-
states that the lease lasts as long as gas “is or can be
duce in paying quantities and actual production in
produced.” Based on the habendum clause's plain
paying quantities”). However, we have not defined
meaning, we hold that a well actually producing gas or
what “capable of production” means.
capable of producing gas sustains this particular lease.
To be “capable of producing gas,” we conclude that a
One court of appeals considered this issue in de- well must be capable of producing gas in paying
ciding whether a lessee's paying shut-in royalties
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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
quantities without additional equipment or repairs. be facilities located near enough to the well that it
Accordingly, we reverse the court of appeals' judg- would be economically feasible to establish a con-
ment and remand to the trial court for further pro- nection so that production could be marketed at a
ceedings consistent with this opinion. See profit. As we explained in Clifton v. Koontz, 160 Tex.
TEX.R.APP. P. 60.2(d). Because we resolve this case 82, 325 S.W.2d 684, 691 (Tex.1959), all the relevant
based on the lease-construction issue, we do not reach circumstances must be considered in determining
Anadarko's affirmative defenses. whether there are “paying quantities”:
In the case of a marginal well, such as we have
Justice O'NEILL did not participate in this opinion. here, the standard by which paying quantities is
ON MOTION FOR REHEARING determined is whether or not under all the relevant
PER CURIAM. circumstances a reasonably prudent operator would,
We deny the motion for rehearing but write to for the purpose of making a profit and not merely
clarify our decision.FN1 for speculation, continue to operate a well in the
manner in which the well in question was operated.
FN1. JUSTICE BAKER, author of the
Court's original opinion, resigned effective ....
August 31, 2002, and therefore did not par-
ticipate on rehearing. The term “paying quantities” involves not only
the amount of production, but also the ability to
[17][18][19][20][21][22] In defining “capable of market the product (gas) at a profit. Whether there is
production” in our original opinion, we approved this a reasonable basis for the expectation of profitable
definition from Hydrocarbon Management, Inc. v. returns from the well is the test. If the quantity be
Tracker Exploration, Inc., 861 S.W.2d 427, 433–34 sufficient to warrant the use of the gas in the market,
(Tex.App.-Amarillo 1993, no pet.): and the income therefrom is in excess of the actual
marketing cost, and operating costs, the production
satisfies the term “in paying quantities”. In the
We believe that the phrase “capable of production in
Hanks case, [24 S.W.2d 5, 6 (Tex. Comm'n
paying quantities” means a well that will produce in
App.1930, judgm't adopted)], the trial court found
paying quantities if the well is turned “on,” and it
that the well completed by Hanks did not produce in
begins flowing, without additional equipment*559
paying quantities within the contemplation of the
or repair. Conversely, a well would not be capable
terms of the lease, and this Court upheld such
of producing in paying quantities if the well switch
finding, holding that there was no evidence showing
were turned “on,” and the well did not flow, because
that there were any facilities for marketing the gas
of mechanical problems or because the well needs
or any near-by localities or industries which might
rods, tubing, or pumping equipment.
have furnished a profitable market therefor. The
Court went further and pointed out the complete
94 S.W.3d 550, 557. In so doing, we did not
failure of the evidence to show what the gas could
overrule or otherwise call into question our prior de-
have been sold for at any probable market, and that
cisions regarding the proper interpretation of “pro-
there was no evidence “tending to show that the well
duction in paying quantities.” Specifically, we did not
was situated in such proximity to any prospective
overrule or modify the longstanding requirement that
market which would justify the construction of a
for a well to produce in paying quantities, or to be
pipe line for marketing same.”
capable of producing in paying quantities, there must
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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
Id. at 691 (quoting Hanks v. Magnolia Petroleum (holding that a lease did not terminate when an im-
Co., 24 S.W.2d 5, 6 (Tex. Comm'n App.1930, judgm't plied covenant was breached but that there would be
adopted)) (citations omitted); see also Stanolind Oil & liability for damages sustained); Tex. Co. v. Davis,
Gas Co. v. Barnhill, 107 S.W.2d 746, 749 113 Tex. 321, 254 S.W. 304, 308 (Tex.1923) (reiter-
(Tex.Civ.App.-Amarillo 1937, writ ref'd). In the case ating that the implied covenant to explore and produce
before us today, the well was connected to pipeline is not a condition subsequent that would give rise to
facilities, and there was no question that it was capable the lease's termination if breached). The rationale for
of producing in paying quantities even though there these holdings is to promote greater certainty about the
were periods during which there was no production. continued existence of a lease:
In our original opinion in this case, we also said, [I]f reasonable diligence in performing every one of
the lessee's exploring, developing, producing, and
we reject Thompson's contention that allowing the marketing operations was the test, neither lessor nor
capability of production to sustain the lease would lessee could at any time have clearly or certainly
allow the lessees to sustain the lease indefinite- known whether the estate granted was alive or
ly—without actual production. Rather, the implied ended. Such a test must inevitably diminish—if not
duty to manage and administer the lease as a rea- destroy—the value of the rights of all parties de-
sonably prudent operator, which encompasses the rived from a mineral lease.
implied duty to market the gas reasonably, would
limit the lessees'*560 ability to sustain the lease W.T. Waggoner Estate, 19 S.W.2d at 30–31.
based on a well's capability of production.
We meant in our original decision that, as a prac-
94 S.W.3d at 557–58. But we did not intend to tical matter, a lessee will not sustain a lease based on a
imply that the remedy for breach of an implied cove- well's capability of production without actual produc-
nant to market production would be forfeiture or ter- tion of the well because the payment of damages for
mination of a lease because we have consistently held the failure to reasonably market the gas would be a
that breach of an implied covenant in an oil and gas strong incentive to connect the well to facilities that
lease “does not automatically terminate the estate, but would permit actual production. And, in an extraor-
instead subjects the breaching party to liability for dinary case, when damages would not furnish an ad-
monetary damages, or in extraordinary circumstances, equate remedy, a court could conditionally order ter-
the remedy of a conditional decree of cancellation.” mination if a connection and actual production were
Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 not commenced within a reasonable time. See id. at
(Tex.1989); see also Rogers v. Ricane Enters., Inc., 32.
884 S.W.2d 763, 767–68 (Tex.1994); Stanolind, 107
S.W.2d at 748 (holding that “the failure of the lessee [23] Finally, the motion for rehearing contends
further to develop the property is, under the holdings that several decisions of this Court and other courts
of the courts, a breach of an implied covenant, the compel a different result in this case. We disagree. The
usual remedy for which is an action in damages”); cases on which Thompson and the other Respondents
W.T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, rely are distinguishable because they involved dif-
19 S.W.2d 27, 32 (Tex.1929) (refusing “to treat as a ferent lease provisions, different facts, or both. The
limitation or as a condition subsequent the implied leases at issue in many of the cases said that the lease
covenant for reasonable development of premises would remain in effect as long as oil or gas “is pro-
leased for the mining of oil and gas”); Mon–Tex Corp. duced.” See Haby v. Stanolind Oil & Gas Co., 228
v. Poteet, 118 Tex. 546, 19 S.W.2d 32, 34 (Tex.1929) F.2d 298, 301 (5th Cir.1955); Samano v. Sun Oil Co.,
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 14
94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)
621 S.W.2d 580, 581 (Tex.1981); Francis v. Pritchett,
278 S.W.2d 288, 289 (Tex.Civ.App.-El Paso 1955, Justice O'NEILL, Justice SMITH and Justice
writ ref'd); Sunray DX Oil Co. v. Texaco, Inc., 417 WAINWRIGHT did not participate in the decision on
S.W.2d 424, 426–27 (Tex.Civ.App.-El Paso 1967, rehearing.
writ ref'd n.r.e.); Woodson Oil Co. v. Pruett, 281
S.W.2d 159, 162 (Tex.Civ.App.-San Antonio 1955,
Tex.,2002.
writ ref'd n.r.e.); Hall v. McWilliams, 404 S.W.2d 606,
Anadarko Petroleum Corp. v. Thompson
607 (Tex.Civ.App.-Austin 1966, writ ref'd n.r.e.);
94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup.
Wainwright v. Wainwright, 359 S.W.2d 628, 629
Ct. J. 1039
(Tex.Civ.App.-Fort Worth 1962, writ ref'd n.r.e.). But
in this case, the lease said “is *561 or can be pro-
END OF DOCUMENT
duced.” As we explained in our original opinion, “can
be produced” does not mean actual production.
Only two decisions relied on by Thompson and
the other Respondents involved leases that contained a
“can be produced” provision. Davis, 254 S.W. at 305;
Hanks, 24 S.W.2d at 7, affirming Hanks v. Magnolia
Petroleum Co., 14 S.W.2d 348, 349
(Tex.Civ.App.-Eastland 1929). But the facts were
very different from the facts in the case before us
today. In Davis, the lessee abandoned all operations on
the lease after the wells it had drilled ceased to pro-
duce, and there was no production for about fourteen
years. 254 S.W. at 305. There was also evidence that
the lessee had expressly released the lease. Id. This
Court held the lease had terminated. Id. at 309. In
Hanks, the lessee drilled a successful well and then
capped it. 24 S.W.2d at 5. The court held that there
was no evidence that the well could produce in paying
quantities because “[t]he record is wholly devoid of
evidence showing that there were any facilities for
marketing the gas or any nearby localities or industries
which might have furnished a profitable market
therefor,” and “[n]o attempt was made to show what
the gas could have been sold for at any probable
market, nor was there any evidence tending to show
that the well was situated in such proximity to any
prospective market which would justify the construc-
tion of a pipe line for marketing same.” Id. at 6. As
noted above, that is not the situation in this case.
Accordingly, we deny the motion for rehearing.
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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)
30XVI(F) Trial De Novo
30k892 Trial De Novo
30k893 Cases Triable in Appellate
Court of Appeals of Texas,
Court
El Paso.
30k893(1) k. In general. Most Cited
CHESAPEAKE EXPLORATION, L.L.C., Chesa-
Cases
peake Operating, Inc., Anadarko Petroleum Corpora-
tion, and Swepi, L.P., Appellants,
v. The standard of review for construction of an
ENERGEN RESOURCES CORPORATION, Kaiser unambiguous oil and gas lease is de novo.
Francis Oil Company, Pride Energy Company, Crown
Oil Partners, IV, L.P., Crump Energy Partners, L.L.C., [2] Mines and Minerals 260 73
Dalton H. Cobb, Jr., Michael B. Cobb, Bill Hightower,
and Hightower Exploration, L.L.C., Appellees. 260 Mines and Minerals
260II Title, Conveyances, and Contracts
No. 08–13–00266–CV. 260II(C) Leases, Licenses, and Contracts
Oct. 1, 2014. 260II(C)3 Construction and Operation of
Oil and Gas Leases
Background: Plaintiff oil companies brought action 260k73 k. In general; general rules of
against defendant oil companies after each side re- construction. Most Cited Cases
quested that the other cease operations in 560–acre
portion of section that had been pooled with an The primary duty of the court in interpreting an
80–acre portion of another section. The District Court, oil and gas lease is to ascertain the parties' intent as
Ward County, Bob Parks, J., entered summary judg- expressed within the four corners of the lease.
ment in favor of plaintiffs. Defendants appealed.
[3] Mines and Minerals 260 73
Holding: The Court of Appeals, Yvonne T. Rodri-
guez, J., held that retained acreage clauses confirmed 260 Mines and Minerals
that production anywhere on certain section, or land 260II Title, Conveyances, and Contracts
pooled with it, was sufficient to maintain the leases as 260II(C) Leases, Licenses, and Contracts
to the entirety of the section. 260II(C)3 Construction and Operation of
Oil and Gas Leases
Affirmed. 260k73 k. In general; general rules of
construction. Most Cited Cases
West Headnotes
In seeking to ascertain the parties' intent, the court
[1] Appeal and Error 30 893(1) must attempt to harmonize all parts of the oil and gas
lease, even if different parts of the lease appear con-
30 Appeal and Error tradictory or inconsistent.
30XVI Review
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Page 2
445 S.W.3d 878
(Cite as: 445 S.W.3d 878)
[4] Mines and Minerals 260 73 part of the pooled acreage would be treated as if such
drilling operations were upon or such production was
260 Mines and Minerals from the land described in the lease whether the well
260II Title, Conveyances, and Contracts or wells be located on the land covered by this lease or
260II(C) Leases, Licenses, and Contracts not, ensured that production anywhere on a pooled
260II(C)3 Construction and Operation of unit maintained the lease in effect as to all lands cov-
Oil and Gas Leases ered by the lease, both within and outside the unit,
260k73 k. In general; general rules of unless the lease expressly provided otherwise, and the
construction. Most Cited Cases plain, grammatical language of the retained acreage
clause did not expressly provide for rolling termina-
tion of proration units as they ceased to exist.
Construing the oil and gas lease to give effect to
all of its provisions honors the parties' intent that every
clause has some effect and in some measure evidences [6] Mines and Minerals 260 78.1(7)
their agreement; accordingly, the court should not
strike down any part of the lease, unless there is an 260 Mines and Minerals
irreconcilable conflict wherein one part of the lease 260II Title, Conveyances, and Contracts
destroys in effect another part thereof. 260II(C) Leases, Licenses, and Contracts
260II(C)3 Construction and Operation of
[5] Mines and Minerals 260 78.1(7) Oil and Gas Leases
260k78 Testing or Working
260k78.1 Construction, Breach, and
260 Mines and Minerals
Penalties
260II Title, Conveyances, and Contracts
260k78.1(7) k. Place or portion
260II(C) Leases, Licenses, and Contracts
developed; pooled or unitized tracts. Most Cited Cases
260II(C)3 Construction and Operation of
Oil and Gas Leases
260k78 Testing or Working A habendum clause referring to “said land” ex-
260k78.1 Construction, Breach, and tends the lease as to all the leased property while
Penalties production of oil or gas occurs anywhere on the
260k78.1(7) k. Place or portion property during the second term; thus, in the absence
developed; pooled or unitized tracts. Most Cited Cases of anything in the lease to indicate a contrary intent,
production on one tract will operate to perpetuate the
lease as to all tracts described therein and covered
Retained acreage clauses in oil and gas lease did
thereby.
not provide for rolling termination of non-producing
proration units, and instead, the leases confirmed that
production anywhere on certain section, or land [7] Mines and Minerals 260 73
pooled with it, was sufficient to maintain the leases as
to the entirety of the section, where the habendum 260 Mines and Minerals
clauses in both leases provided for continuation be- 260II Title, Conveyances, and Contracts
yond the primary term as long as oil, gas, or other 260II(C) Leases, Licenses, and Contracts
mineral was produced from said land or land with 260II(C)3 Construction and Operation of
which said land was pooled, and pooling clause, which Oil and Gas Leases
stated that drilling operations and production on any 260k73 k. In general; general rules of
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Page 3
445 S.W.3d 878
(Cite as: 445 S.W.3d 878)
construction. Most Cited Cases This case involves the construction of two oil and
gas leases executed in 1976 (hereinafter, “the 1976
When an oil and gas lease terminates is always a leases”) and their effect on a 640–acre section of land
question of resolving the intention of the parties from covered by the leases—Section 25. Section 25 was
the entire instrument; however, Court of Appeals will pooled with an adjacent section of land not covered by
not hold the lease's language to impose a special lim- the 1976 leases—Section 18–to form two pooled gas
itation on the grant unless the language is so clear, units. One of the pooled units continues to produce to
precise, and unequivocal that Court can reasonably this day, but the other ceased producing completely in
give it no other meaning. 1988 when its well was plugged and abandoned. That
particular well was completed in March 1979, and its
operator designated all of Section 25 as the well's
[8] Mines and Minerals 260 78.1(7)
proration unit in paperwork filed with the Texas
Railroad Commission (hereinafter, “RRC”). Ap-
260 Mines and Minerals proximately two months thereafter, continuous de-
260II Title, Conveyances, and Contracts velopment ended on the leased premises. The leases
260II(C) Leases, Licenses, and Contracts provide that when continuous development ends, the
260II(C)3 Construction and Operation of lease terminates as to all acreage except for:
Oil and Gas Leases
260k78 Testing or Working
[E]ach proration unit established under ... [the] rules
260k78.1 Construction, Breach, and
and regulations [of the RRC ...] upon which there
Penalties
exists (either on the above described land or on
260k78.1(7) k. Place or portion
lands pooled or unitized therewith) a well capable of
developed; pooled or unitized tracts. Most Cited Cases
producing oil and/or gas in commercial quantities
....
The primary legal consequence of pooling is that
production and operations anywhere on the pooled
The issue is whether, under the above-quoted
unit are treated as if they have taken place on each
“retained acreage” clause, the 1976 leases remain in
tract within the unit; additionally, production from the
effect as to all of Section 25, as urged by Plain-
pooled gas unit provides the lessors with an economic
tiffs–Appellees FN1 *880 (hereinafter “Energen”), or
benefit in the form of royalty income.
only as to an 80–acre portion of Section 25, as urged
by Defendants–Appellants FN2 (hereinafter, “Chesa-
*879 Shannon H. Ratliff, Lisa A. Paulson, Ratliff Law peake”). On cross-motions for summary judgment, the
Firm, PLLC, Austin, William E. Berry, Jr., Cotton, trial court ruled in favor of Energen and against
Bledsoe, Tighe & Dawson, P.C., for Appellees. Chesapeake. We affirm.
Jane M.N. Webre, Scott, Douglass & McConnico, FN1. Appellees are Energen Resources
LLP, Austin, for Appellants. Corporation, Kaiser Francis Oil Company,
Pride Energy Company, Crown Oil Partners,
Before McCLURE, C.J., RIVERA (Not Participat- IV, L.P., Crump Energy Partners, L.L.C.,
ing), and RODRIGUEZ, JJ. Dalton H. Cobb, Jr., Michael B. Cobb, Bill
Hightower, and Hightower Exploration,
OPINION L.L.C. We refer to Appellees collectively as
YVONNE T. RODRIGUEZ, Justice. Energen, for we see nothing that requires us
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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)
to distinguish among them. from Section 18. As mentioned earlier, the designated
proration unit for the Cadenhead No. 2 Well included
FN2. Appellants are Chesapeake Explora- all of Section 25. Each lease also contains a provision
tion, L.L.C., Chesapeake Operating, Inc., requiring termination if the leased premises are not
Anadarko Petroleum Corp., and SWEPI, L.P. continuously developed as set forth in the leases'
We refer to Appellants collectively as “continuous development” clauses. Those clauses
Chesapeake because, again, we see nothing provide in relevant part:
that requires us to distinguish among them.
[12]D. Lessee shall continuously develop the above
FACTUAL AND PROCEDURAL BACK- described land by commencing operations for the
GROUND drilling of a well on or before the expiration of the
The 1976 leases cover acreage located in Ward primary term of this lease and thereafter shall allow
County, Texas, including the aforementioned Section not more than sixty (60) days to elapse between the
25 of Block 1, W & NW Ry. Co. Survey. Each lease completion or abandonment of one well and the
contains a “pooling” clause, which states in pertinent commencement of the next until the above de-
part: scribed land is drilled to the density necessary to
obtain the maximum allowable per well under the
rules and regulations of the Railroad Commission of
5. Lessee is hereby granted the right to pool or
Texas (or other governmental authority having ju-
unitize this lease, the land covered by it or any part
risdiction), or this lease shall terminate as to all of
thereof with any other land, lease, leases, mineral
the above described land ....
estates or parts thereof for the production of oil, gas,
or any other minerals. ... Drilling operations and
production on any part of the pooled acreage shall As indicated earlier, after the Cadenhead No. 2
be treated as if such drilling operations were upon or Well was completed in March 1979, no additional
such production was from the land described in this wells were drilled on the leased premises. The Ca-
lease whether the well or wells be located on the denhead No. 2 well was subsequently plugged back
land covered by this lease or not. The entire acreage and recompleted in a shallower field in 1984. Four
pooled into a unit shall be treated for all purposes ... years later, it was abandoned.
as if it were included in this lease.
Through subsequent transactions not relevant to
Pursuant to this provision, an 80–acre portion of this appeal, Energen and Chesapeake acquired their
Section 25 was pooled with a 560–acre portion of respective interests in Section 25. In 2011, Energen
Section 18 to form a 640–acre pooled gas unit named drilled a well on the 560–acre portion of Section 25
the Cadenhead No. 1 Pooled Gas Unit. This pooled that had been pooled with the 80–acre *881 portion of
unit's well, the Cadenhead No. 1 Well, was drilled and Section 18 and obtained a permit to drill another well.
completed on the 560–acre portion of Section 18 in Chesapeake too obtained a permit to drill a well on the
1978, and it has continually produced gas in com- 560–acre portion of Section 25. Each party requested
mercial quantities since then. The next year, the Ca- that the other cease operations. Neither did, and the
denhead No. 2 Well was completed on Section 25. present action ensued.
This well was included in a 640–acre pooled gas unit
named the Cadenhead No. 2 Pooled Gas Unit, which In the trial court, both parties agreed with the
consisted of 560 acres from Section 25 and 80 acres principle that production anywhere on the pooled
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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)
premises is sufficient to maintain the entire lease un- “to maintain the lease[s] in effect throughout the
less the lease provides otherwise. They disagreed, secondary term—not just at the moment that contin-
however, on whether the retained acreage clause in uous development ends.” In so arguing, Chesapeake
each lease provided otherwise. Chesapeake argued the takes the position that the proration unit designated for
retained acreage clause provided otherwise because it the Cadenhead No. 2 Well was retained only while the
applied “equally to ‘all’ of the lands under lease, even well was producing, and when it ceased to produce in
if pooling has occurred and even as to pooled lands.” 1988, the proration unit reverted to the lessors and was
According to Chesapeake, the clause expressly pro- no longer subject to the 1976 leases. We disagree.
vides for continuous and automatic termination, i.e.,
“rolling” termination, of proration units as they cease Standard of Review
to produce. Thus, when the proration unit for the Ca- [1] The trial court's summary judgment concerns
denhead No. 2 Well ceased to exist in 1988, the 1976 the construction of an unambiguous oil and gas
leases terminated as to the 560–acre portion of Section lease.FN3 The standard of review is therefore de novo.
25 on which that well had been drilled, irrespective of See Tex. Mun. Power Agency v. Pub. Util. Comm'n of
continued production from the Cadenhead No. 1 Tex., 253 S.W.3d 184, 192 (Tex.2007) (reviewing
Pooled Gas Unit. grant of summary judgment de novo ); Anadarko
Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554
Energen urged a different construction. Accord- (Tex.2002) (reviewing lease-construction questions
ing to Energen, the retained acreage clause did not de novo ).
provide for “rolling” termination because the clause
operated once and only once—when continuous de- FN3. The parties agree the lease is not am-
velopment ceased. Under Energen's interpretation, all biguous, and we do not hold otherwise. The
acreage included in a designated proration unit was parties also agree the resolution of this appeal
retained if a well capable of producing in commercial hinges on the law, not on disputed facts.
quantities existed on the leased premises or on acreage
pooled with the leased premises when continuous
Applicable Law
development ended. Thus, “[b]ecause the Cadenhead
[2][3][4] The primary duty of the court in inter-
No. 2 Well was then capable of producing in com-
preting an oil and gas lease is to *882 ascertain the
mercial quantities, the lease was preserved as to its
parties' intent as expressed within the four corners of
designated proration unit, all of Section 25, a portion
the lease. Luckel v. White, 819 S.W.2d 459, 461
of which had previously been pooled with Section
(Tex.1991). In seeking to ascertain the parties' intent,
18.”
the court must attempt to harmonize all parts of the
lease, even if different parts of the lease appear con-
In essence, both parties agreed the retained tradictory or inconsistent. Id. at 461–62. Construing
acreage applied, but disagreed on its scope and tem- the lease to give effect to all of its provisions honors
poral application. the parties' intent that every clause has some effect and
in some measure evidences their agreement. Luckel,
THE RETAINED ACREAGE CLAUSE DOE 819 S.W.2d at 462. Accordingly, the court should not
NOT PROVIDE FOR “ROLLING” TERMINA- strike down any part of the lease, unless there is an
TION irreconcilable conflict wherein one part of the lease
In one issue, Chesapeake argues the trial court destroys in effect another part thereof. Id.
erred in concluding the 1976 leases did not require
“rolling” termination of non-producing proration units
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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)
Discussion pooled gas units serve to maintain the 1976 leases as
[5] When read in harmony with other portions of to the entirety of Section 25. However, they agree the
the leases, the retained acreage clauses do not provide answer to their dispute lies in the proper interpretation
for “rolling” termination of non-producing proration of the retained acreage clauses, which control the
units as argued by Chesapeake. Instead, the language termination of the leases after cessation of continuous
of the 1976 leases confirms that production anywhere development. “Retained acreage clauses were origi-
on Section 25, or land pooled with it, is sufficient to nally drafted to prevent the lessee from losing those
maintain the leases as to the entirety of Section 25. portions of a lease that had productive wells located
thereon if the rest of the lease terminated ... [but] ...
[6] The habendum clauses in both leases provide [t]he term has expanded its meaning to include clauses
for continuation beyond the primary term “as long ... that require the release of all acreage that, at the end of
as oil, gas, or other mineral is produced from said land the primary term, is not within a drilling, spacing, or
or land with which said land is pooled.” Under Texas proration unit.” Bruce M. Kramer, Oil and Gas Leases
law, a habendum clause referring to “said land” ex- and Pooling: A Look Back and A Peek Ahead, 45
tends the lease as to all the leased property while TEX. TECH L.REV. 877, 881 n. 28 (2013).
production of oil or gas occurs anywhere on the
property during the second term. Ridge Oil Co., Inc. v. [7] Here, the leases' retained acreage clauses, in
Guinn Invs., Inc., 148 S.W.3d 143, 149 (Tex.2004). conjunction with the continuous development clauses,
Thus, “in the absence of anything in the lease to in- provide that the lessee's failure to continuously de-
dicate a contrary intent, production on one tract will velop the *883 leased premises terminates the leases
operate to perpetuate the lease as to all tracts described as to all unproductive acreage except for:
therein and covered thereby.” Mathews v. Sun Oil Co.,
425 S.W.2d 330, 333 (Tex.1968). [E]ach proration unit established under ... [the] rules
and regulations [of the RRC ...] upon which there
Concordant with this general principle, the lease's exists (either on the above described land or on
pooling clauses provide that: “Drilling operations and lands pooled or unitized therewith) a well capable of
production on any part of the pooled acreage shall be producing oil and/or gas in commercial quantities
treated as if such drilling operations were upon or such ....
production was from the land described in this lease
whether the well or wells be located on the land cov- When a lease terminates “is always a question of
ered by this lease or not.” Accorded its plain, gram- resolving the intention of the parties from the entire
matical meaning, this clause ensures that production instrument.” Thompson, 94 S.W.3d at 554. “However,
anywhere on a pooled unit maintains the lease in effect we will not hold the lease's language to impose a
as to all lands covered by the lease, both within and special limitation on the grant unless the language is
outside the unit, unless the lease expressly provides so clear, precise, and unequivocal that we can rea-
otherwise. Key Operating & Equip., Inc. v. Hegar, sonably give it no other meaning.” Thompson, 94
435 S.W.3d 794, 798 (Tex.2014); Scott v. Pure Oil S.W.3d at 554.
Co., 194 F.2d 393, 395 (5th Cir.1952); Texaco, Inc. v.
Lettermann, 343 S.W.2d 726, 733
The plain, grammatical language of the retained
(Tex.Civ.App.-Amarillo 1961, writ ref'd n.r.e.).
acreage clause does not expressly provide for rolling
termination of proration units as they cease to exist.
As indicated earlier, Chesapeake and Energen Instead, the plain, grammatical language shows that
disagree on whether operations conducted within the
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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)
the parties intended the leases to continue as to each
designated proration unit if the unit had a well capable But this construction is belied by the plain, ex-
of producing gas in commercial quantities when con- press language of the retained acreage clauses. The
tinuous development ceased. That the parties chose to language in these clauses makes clear that: (1) prora-
maintain the lease as to each proration unit when tion units, as recognized by the state agency having
continuous drilling stopped based on the ability of that regulatory jurisdiction over oil and gas development,
unit's well to produce gas, rather than actual produc- are the portions of the leased premises maintained
tion, indicates they did not intend the retained acreage after continuous development ceases; and (2) each
clause to be triggered any time actual production proration unit is maintained, not by the existence on
stops. To conclude otherwise would promote uncer- the unit of a producing well, but by the existence on
tainty about the continued existence of a lease. the unit of a well capable of producing in paying
Moreover, adopting the construction urged by Ches- quantities. The use of the specific regulatory term in
apeake imposes an unnecessary limitation on the kind the retained acreage clause merely serves to identify
and character of the estate the parties chose to convey, with reasonable certainty the *884 property that re-
i.e., an expansive one maintained by production from mains under lease when continuous development
any part of pooled lands unless limited by language so ceases. In other words, the term “RRC-designated
clear, precise, and unequivocal that no other conclu- proration unit” functions as a mere descriptor in the
sion could be reached. That type of language is absent clause, not as a normative one in the sense that it
from the retained acreage clauses. prescribes what ought to be the outcome based on the
application of RRC regulations. If the parties to the
Chesapeake contends that the retained acreage 1976 leases had wished to provide for continual re-
clauses must be read to modify the habendum clauses linquishment of non-producing proration units, so that
to require “rolling” termination of non-producing a proration unit would no longer be subject to the lease
proration units, as designated by the Texas Railroad once production had ceased on that particular unit,
Commission, such that production from a pooled unit they could have done so by including such language.
will not maintain the leases as to proration units that But they did not, and it is not within our purview to
ceased to exist. It makes two arguments in support of rewrite the leases and alter the parties' contract. See
this construction, one of which finds no support in the Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154,
leases, and the other of which finds no support in 162 (Tex.2003) (“But we may neither rewrite the
Texas case law. parties' contract nor add to its language.”).
Chesapeake first argues that “[t]he parties' use of [8] Chesapeake also argues that the parties to the
a specific regulatory term—[RRC-designated] prora- 1976 leases could not have intended for production on
tion unit—to define the extent to which the 1976 a single unit to maintain the entire lease indefinitely
leases would be maintained after continuous devel- after continuous development ceased. Although this
opment” signals their intent “that the leases would argument has some equitable appeal, it is refuted by
only be maintained as to lands within proration units language of the lease, as demonstrated above. More-
for so long as such proration units existed.” Chesa- over, maintaining the leases during the secondary term
peake thus asserts that because “[p]roration units are to acreage outside of producing proration units but
designed on a well-by-well basis and only exist for so within a pooled unit would not be novel. “The primary
long as the well for which the proration unit is desig- legal consequence of pooling is that ‘production and
nated produces [,]” the proration unit for the Caden- operations anywhere on the pooled unit are treated as
head Well No. 2 ceased to exist when it was plugged. if they have taken place on each tract within the unit.’
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 8
445 S.W.3d 878
(Cite as: 445 S.W.3d 878)
” Hegar, 435 S.W.3d at 798. Additionally, production acreage clause, operated independently upon each
from the pooled gas unit provides the lessors with an tract and that production on one 160–acre tract would
economic benefit in the form of royalty income. not maintain the lease as to *885 another 160–acre
Granted, the lessors could have achieved an additional tract on which production had ceased. 522 S.W.2d at
economic benefit by expressly stating that production 707–08. The retained acreage clause there provided
on each proration unit is required to maintain the that upon the lessee's failure to comply with the con-
leases as to each of those units during the secondary tinuous drilling program, the lease terminated as to the
term. However, they failed to do so. Absent proof of entire premises except as to “the gas and gas rights ...
fraud or mutual mistake, neither of which was pled by in 160 acres ... around each well theretofore completed
the parties, we are not at liberty to rewrite the eco- as a gas well, down to and including the sand from
nomic bargain struck by the parties to the 1976 leases. which such well produced gas.” Id. at 705. When
See Eagle Life Ins. Co. v. G.I.C. Ins. Co., 697 S.W.2d continuous drilling ceased in 1954, four wells were
648, 651 (Tex.App.-San Antonio 1985, writ ref'd producing oil. Id. at 705. The two oil wells at issue
n.r.e.) (“Courts are not at liberty to rewrite the contract ceased producing in 1968. Id. Relying on the
between the parties without pleading and proof of habendum clause, the appellants argued that continued
fraud or mutual mistake.”). Accordingly, we decline production from an oil well was sufficient to maintain
Chesapeake's invitation to construe the retained the lease as to the oil wells even though those wells
acreage clauses—decades after the fact—as expressly were not located on the same 160–acre tract of land on
stating “that the leases would only be maintained as to which the producing well was located. Id. at 705–06.
lands within proration units for so long as such prora- The court disagreed, concluding that, “[i]n light of the
tion units existed” in the absence of clear, precise, and provisions of this lease discussed above, it is evident
unequivocal language to that effect. See Lettermann, that the well must be producing oil, or gas, at the date
343 S.W.2d at 732 (“[I]n the absence of clear language that lessee ceases permanent drilling operations re-
to the contrary, pooling clauses should not be con- quired in paragraph 6, as amended, and the mineral
strued in a narrow or limited sense.”). (oil or gas) produced as of that date determines the
acreage and mineral rights therein which said well will
Chesapeake next argues that “Texas case law di- hold under the lease.” Id. at 708 [Emphasis added].
rectly on point confirms that the 1976 leases termi-
nated as to the disputed acreage.” In support of this Nafco is distinguishable in that there is no indi-
argument, Chesapeake relies chiefly on Nafco Oil & cation the lease in that case contained a pooling
Gas, Inc. v. Tartan Res. Corp., 522 S.W.2d 703 clause. Nafco is also distinguishable because the re-
(Tex.Civ.App.-Corpus Christi 1975, writ ref'd n.r.e). tained acreage clause there expressly required actual
According to Chesapeake, Nafco stands for the prop- production on each 160–acre tract when continuous
osition that “even where a retained acreage provision development ceased. But significantly, the Nafco
is silent as to whether a lease terminates as to a re- court did not construe the retained acreage clause there
tained tract once the retained tract's well stops pro- to mean it operated continuously over the life of the
ducing later in the life of the lease, the fee simple lease. Rather, as the italicized language quoted above
determinable nature of an oil and gas leases requires demonstrates, the Nafco court construed that clause to
courts to imply such an intent ....” But Chesapeake's mean it operate once and only once—“at the date that
reliance on Nafco is misplaced. Although Nafco is lessee ceases permanent drilling operations ....” That
distinguishable, the court's opinion in that case actu- interpretation comports with ours.
ally supports our conclusion. In Nafco, the court held
that the habendum clause, as modified by the retained Like Nafco, the court's opinion in Humphrey v.
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 9
445 S.W.3d 878
(Cite as: 445 S.W.3d 878)
Seale, 716 S.W.2d 620 (Tex.App.-Corpus Christi Seale court construed that clause to mean it operates
1986, no writ), supports our conclusion. In Seale, the once and only once—when the initial release of
court held that, in the absence of language in the re- acreage occurred after continuous drilling ceased.
tained acreage clause calling for a continual relin-
quishment on non-producing lease acreage, the gen- Chesapeake argues Seale does not support our
eral rule provides that production anywhere on the conclusion because termination of the lease under the
leased premises maintains the lease. 716 S.W.2d at retained acreage clause there “was not automatic but
622. The retained acreage clause there provided that rather required an affirmative action by the lessee,”
upon the lessee's failure to comply with the continuous and thus, it was not surprising that “the [c]ourt de-
drilling program, the lease terminated as to the entire clined to imply a continuing release obligation that
premises except as to “forty (40) acres designated as a would effectuate ‘rolling’ lease termination.” But that
well block around such producing well, and said well was not the reason why the Seale court declined to
block designation shall be filed of record immediately construe the retained acreage clause in that case to
after said block has been designated by Lessee ....” Id. mean it operated continuously over the life of the
at 621. When appellant acquired his interest in the lease. Rather, the court declined to construe the clause
leased premises in April 1982, two of the wells in in that manner because the clause did not provide for
dispute were no longer producing, but the other dis- rolling termination in clear, precise, and unequivocal
puted well continued to produce until appellant ceased language. As the court was quick to note, “[i]f the
operations on it when he filed suit. Id. The appellees parties to the lease had wished to provide for a con-
took “the position that 40 acres was retained around tinual relinquishment of nonproducing acreage, so that
the well only while a well produced, and upon the a 40–acre tract would no longer be subject to the lease
cessation of production of a particular well, the 40 once production had ceased on that particular 40–acre
acres surrounding that well reverted to the landowner tract, it would have been simple to include such lan-
and was no longer subject to the ... [l]ease.” Seale, 716 guage.” Seale, 716 S.W.2d at 622.
S.W.2d at 621 The court disagreed, concluding:
For the foregoing reasons, Chesapeake has not
[The retained acreage clause] does not require the shown the trial court erred in concluding that the 1976
lessee to relinquish additional acreage from the leases failed to provide for rolling termination of
lease after the initial release is accomplished non-producing proration units.
‘within 180 days of the first oil well.’ As all three of
the 40–acre tracts are under the same lease and lease
CONCLUSION
terms, production on one will keep the lease in ef-
The trial court's order granting Energen's motion
fect for all.
for summary judgment is affirmed.
Seale, 716 S.W.2d at 622 [Emphasis added].
Tex.App.–El Paso,2014.
Chesapeake Exploration, L.L.C. v. Energen Resources
*886 The retained acreage clause in Seale, like Corp.
the one in Nafco, is not identical to the ones here. 445 S.W.3d 878
However, that difference is immaterial because the
Seale court, like the Nafco court, did not construe the
END OF DOCUMENT
retained acreage clause there to mean it operated con-
tinuously over the life of the lease. Rather, as the
italicized language quoted above demonstrates, the
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Page 1
Not Reported in S.W.3d, 2006 WL 1748584 (Tex.App.-San Antonio)
(Cite as: 2006 WL 1748584 (Tex.App.-San Antonio))
sors-in-interest of Maria Eva U. Ramirez and El
Only the Westlaw citation is currently available. Refugio, Ltd. (collectively “Ramirez”) for a primary
term of five years. After the expiration of the primary
term, the acreage the lessee is entitled to hold is gov-
SEE TX R RAP RULE 47.2 FOR DESIGNATION
erned by paragraph 18 of the lease, which provides in
AND SIGNING OF OPINIONS.
part as follows:
MEMORANDUM OPINION
At the end of five years after the expiration of the
primary term hereof, Lessee covenants and agrees to
Court of Appeals of Texas,
execute and deliver to Lessor a written release of
San Antonio.
any and all portions of this lease which have not
CONOCOPHILLIPS COMPANY and Kaiser-Francis
been drilled to a density of at least forty (40) acres
Oil Company, Appellants
for each producing oil well and three hundred and
v.
twenty (320) acres for each producing or shut-in gas
Maria Eva U. RAMIREZ and El Refugio, Ltd., Ap-
well from depths above 5,000 feet from the surface
pellees.
of the ground and 640 acres for each producing or
shut-in gas well from depths below 5,000 feet from
No. 04-05-00488-CV. the surface of the ground except that in case any rule
June 28, 2006. adopted by the Railroad Commission of Texas or
other regulating authority for any field on this lease
From the 49th Judicial District Court, Webb County, provides for a spacing or proration establishing
Texas, Trial Court No. 2005-CVQ-000823-D1; Ma- different units of acreage per well, then such estab-
nuel R. Flores, Judge Presiding. lished different units shall be held under this lease
Michael V. Powell, Chrysta L. Castaneda, Locke by such production, in lieu of the units above men-
Liddell & Sapp L.L.P., Dallas, Adolfo Campero, Jr., tioned....
Campero & Becerra, P.C., Laredo, for Appellant.
In short, paragraph 18 provides that, at the end of
Ricardo E. Morales, Person, Whitworth, Borchers & five years after the expiration of the primary term, the
Morales, L.L.P., Laredo, for Appellee. lessee is entitled to hold 640 acres for each gas well
drilled below 5,000 feet unless the Railroad Commis-
Sitting: SARAH B. DUNCAN, Justice KAREN sion has “adopted” a rule “for” the field in which the
ANGELINI, Justice SANDEE BRYAN MARION, gas well is drilled; if the Railroad Commission has
Justice. “adopted” a rule “for” a field, the lessee is entitled to
the acreage specified in that rule.
MEMORANDUM OPINION
Opinion by SARAH B. DUNCAN, Justice. The parties agree the lease's primary term expired
*1 On February 10, 1975, the predeces- on February 10, 1980; and, five years later, on Feb-
sor-in-interest of ConocoPhillips and Kaiser-Francis ruary 10, 1985, two wells were producing gas from a
Oil Company (collectively “Conoco”) leased 1053 depth greater than 5,000 feet: the Serafin No. 1 gas
acres in Zapata County from the predeces- well and the Serafin No. 4 gas well. The parties further
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 2
Not Reported in S.W.3d, 2006 WL 1748584 (Tex.App.-San Antonio)
(Cite as: 2006 WL 1748584 (Tex.App.-San Antonio))
agree that the Railroad Commission “adopted” a rule
“for” the field in which the Serafin No. 4 gas well was No well shall be drilled on less, but may be
drilled; and that field rule entitles Conoco to 176 acres drilled on more, acreage than that hereafter
surrounding the Serafin No. 4 gas well. But the parties prescribed as the proper amount for all oil
disagree on whether the Railroad Commission and gas fields wherein only spacing rules,
“adopted” a rule “for” the field in which the Serafin either special or statewide, are applicable
No. 1 gas well was drilled. Ramirez argues the Rail- ... 467-1200 [feet] ... 40 [acres].
road Commission “adopted” two rules-statewide
Rules 37 FN1 and 38 FN2-“for” this field and, under
16 TEX. ADMIN. CODE § 3.38(b)(1),
these rules, the lessee is entitled to only forty acres
adopted effective Jan. 1, 1976 (repealed
around the well. Conoco argues statewide rules are not
and replaced 1989) (current version at 16
“adopted” “for” a field and therefore do not trigger the
TEX. ADMIN. CODE § 3.38(b)(1)
“except clause” in paragraph 18; accordingly, Conoco
(Tex.R.R. Comm'n, Well Densities)
argues, it is entitled to 640 acres around the well. The
(hereinafter cited as Former Rule
trial court rendered judgment in Ramirez's favor, rul-
38(b)(1)).
ing that Conoco is entitled to only forty acres around
the Serafin No. 1 gas well in accordance with the
*2 “To regulate oil and gas production, the Rail-
statewide rules. Conoco appealed. Because we agree
road Commission of Texas has adopted general rules
with Conoco that statewide rules are not “adopted”
applicable throughout the State....” R. R. Comm'n of
“for” a field, we reverse the trial court's judgment and
Tex. v. WBD Oil & Gas Co., 104 S.W.3d 69, 70
render judgment in Conoco's favor.
(Tex.2003). However, “because these general rules
cannot adequately address the widely varying condi-
FN1. Rule 37, the Statewide Spacing Rule,
tions found in the thousands of oil and gas reservoirs
provides in relevant part:
in Texas, the Commission may issue orders with de-
tailed regulations for a specific field, which the
The distances mentioned in subsection (a) Commission calls field rules.” Id. Because the general
[-1200 feet between wells and 467 feet rules apply statewide, they must be promulgated in
between any well and a property line-] are accordance with the rulemaking provisions of the
minimum distances to provide standard Texas Administrative Procedure Act; field rules, on
development on a pattern of one well to the other hand, apply to a specific field and a specific
each 40 acres in areas where proration group of operators and must therefore be adopted
units have not been established. under the adjudication provisions of the TAPA. See id.
at 71. These differences make clear that a statewide
16 TEX. ADMIN. CODE § 3.37(b) (2006) rule is not a field rule. FN3 Accordingly, we hold that,
(Tex.R.R. Comm'n, Statewide Spacing because statewide Rule 37(b) and Former Rule
Rule). Because this part of statewide Rule 38(b)(1) were not “adopted” “for” the field in which
37 remains unchanged since 1985, we cite the Serafin gas well No. 1 was drilled, they are not
to the current rule. field rules and therefore do not trigger the “except”
clause in paragraph 18.
FN2. In 1985, Texas Railroad Commission
Rule 38, Well Densities, provided in relevant FN3. See, e.g., Browning Oil Co. v. Luecke,
part: 38 S.W.3d 625, 633 n. 5 (Tex.App.-Austin
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Page 3
Not Reported in S.W.3d, 2006 WL 1748584 (Tex.App.-San Antonio)
(Cite as: 2006 WL 1748584 (Tex.App.-San Antonio))
2000, pet. denied) (“Field rules are special following a formal adjudicative proceeding-a type of
rules that modify the Railroad Commission's proceeding that indisputably did not occur before
[statewide regulations affecting] well spac- statewide Rule 37(b) and Former Rule 38(b)(1) were
ing, density, prorationing, and casing re- applied to the field in which the Serafin No. 1 gas well
quirements for designated fields to deal with was drilled. In short, although these statewide rules
differences in reservoir conditions.”); Sea- apply to the field in which the Serafin No. 1 gas well
gull Energy E & P, Inc. v. R.R. Comm'n of was completed, these rules were not “adopted” “for”
Tex., 99 S.W.3d 232, 235-36 the field. Accordingly, the “except” clause in para-
(Tex.App.-Austin 2003, pet. granted) (dis- graph 18 does not apply as a matter of law; and parol
tinguishing statewide and field rules). evidence from Ramirez's expert is irrelevant.
Ramirez makes three arguments to the contrary. FN4. See Nat'l Union Fire Ins. Co. v. CBI
First, she argues paragraph 18 is ambiguous and points Indus., Inc., 907 S.W.2d 517, 521 (Tex.1995)
to the testimony of her expert that it was the Railroad (per curiam).
Commission's policy for a proration analyst to “adopt”
statewide rules “for a particular field when the field is *3 Ramirez next argues that paragraph 18 is in-
discovered and application is made to the [Commis- consistent with and trumped by the statewide rules.
sion] by the operator.” However, parol evidence is not However, the statewide rules merely establish mini-
admissible to vary the terms of an unambiguous con- mum spacing and density requirements. See 16 TEX.
tract FN4; and a contract is ambiguous only if it is ADMIN. CODE § 3.37(b) (“The distances mentioned
susceptible to more than one reasonable interpretation. in subsection (a) [-1200 feet between wells and 467
See Universal C.I.T. Credit Corp. v. Daniel, 150 Tex. feet between any well and a property line-] are min-
513, 243 S.W.2d 154, 157 (1951). In light of the imum distances to provide standard development on a
longstanding distinction in Texas jurisprudence be- pattern of one well to each 40 acres in areas where
tween statewide and field rules, we hold paragraph 18 proration units have not been established.”); Former
is unambiguous: it clearly provides that, if the Rail- Rule 3.38(b)(1) (“No well shall be drilled on less, but
road Commission does not “adopt” a rule “for” a field, may be drilled on more, acreage than that hereafter
the lessee is entitled to 640 acres around a gas well prescribed as the proper amount for all oil and gas
drilled below 5,000 feet; if the Railroad Commission fields wherein only spacing rules, either special or
does “adopt” a rule “for” a field, the lessee is entitled statewide, are applicable ... 467-1200 [feet] ... 40
to the acreage specified in that rule. Ramirez's ambi- [acres]”). Paragraph 18, on the other hand, establishes
guity argument, as well as her interpretation of para- the acreage the lessee is entitled to hold five years
graph 18 and her expert's testimony, also erroneously after the expiration of the primary term. Indeed, if we
equates the quite different concepts of “adoption” and were to construe statewide Rule 37(b) and Former
“application.” To “adopt” means “to accept formally Rule 38(b)(1) as determining the amount of acreage
and put into effect,” while to “apply” means “to put the lessee is entitled to hold five years after the expi-
into operation or effect.” WEBSTER'S NINTH NEW ration of the primary term, it would render the part of
COLLEGIATE DICTIONARY 58, 97 (1984). Under paragraph 18 that applies in the absence of a field rule
Texas law, an operator's application for a permit does meaningless. The statewide rules would always con-
not cause the Railroad Commission to “adopt” trol.
statewide rules; rather, the Commission promulgates
statewide rules through a formal rule-making proce-
Ramirez also argues the drafters intended para-
dure. The Commission “adopts” specific field rules
graph 18 to protect against the remote contingency
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Page 4
Not Reported in S.W.3d, 2006 WL 1748584 (Tex.App.-San Antonio)
(Cite as: 2006 WL 1748584 (Tex.App.-San Antonio))
“that spacing or proration rules by a governing body Tex.App.-San Antonio,2006.
may not exist at the time Paragraph 18 is triggered,” so ConocoPhillips Co. v. Ramirez
that a lessee could hold the entire acreage with just one Not Reported in S.W.3d, 2006 WL 1748584
well. However, this construction of paragraph 18 (Tex.App.-San Antonio)
ignores its plain language and structure: the first pro-
viso states the general rule (in the absence of a field END OF DOCUMENT
rule, the lessee will hold 640 acres around a gas well
drilled deeper than 5,000 feet), while the second pro-
viso states the exception (if a field rule is adopted, the
lessee will hold the acreage specified in the field rule).
Under Ramirez's construction, the structure of para-
graph 18 is turned on its head: the first clause would
never apply, while the second “except” clause would
state both the general rule (fields governed by the
statewide rules) and the exception (fields governed by
field rules). This construction would be not only
nonsensical but contrary to general rules of construc-
tion. Cf. Knight v. Chicago Corp., 144 Tex. 98, 188
S.W.2d 564, 566-67 (1945) (“Immediately following
the above clause and in the same sentence is a proviso
introduced by the words ‘provided, however,’ which
are followed by the restrictive provisions. That pro-
viso must be construed as a limitation or restraint upon
the authority defined in the clause immediately pro-
ceeding it.... The parties undertook only to restrict the
powers defined and not to enlarge thereon. To hold
otherwise would be to make a restriction upon a power
cover a broader field than the power itself.”).
In sum, although statewide Rule 37(b) and For-
mer Rule 38(b)(1) apply to the field in which the
Serafin No. 1 gas well was drilled, they were not
“adopted” “for” this field. Accordingly, pursuant to
the plain language of paragraph 18, Conoco is entitled
to hold 640 acres surrounding the Serafin No. 1 gas
well. The trial court therefore erred in ruling to the
contrary. Therefore, we reverse the trial court's
judgment to the extent it declares that, as of February
10, 1985, Conoco held forty acres located around the
Serafin No. 1 gas well and render judgment that, as of
February 10, 1985, Conoco held 640 acres located
around the Serafin No. 1 gas well.
© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.