Endeavor Energy Resources, L.P. and Endeavor Petroleum, L.L.C. v. Discovery Operating, Inc. and Patriot Royalty and Land, L.L.C.

IN THE SUPREME COURT OF TEXAS
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No. 15-0155
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ENDEAVOR ENERGY RESOURCES, L.P. AND ENDEAVOR PETROLEUM, L.L.C.,
PETITIONERS,
v.
DISCOVERY OPERATING, INC. AND PATRIOT ROYALTY AND LAND, L.L.C.,
RESPONDENTS
══════════════════════════════════════════
ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE ELEVENTH DISTRICT OF TEXAS
══════════════════════════════════════════
Argued January 9, 2018
JUSTICE BOYD delivered the opinion of the Court.
This case involves competing claims to mineral-lease interests in two tracts of land in
Martin County. Discovery Operating, Inc., which has drilled producing wells on both tracts, bases
its claim on leases acquired directly from the mineral-estate owners. Endeavor Energy Resources,
L.P., and Endeavor Petroleum, L.L.C., (collectively, Endeavor) bases its claim on prior leases with
the same owners covering land that includes the two tracts at issue. Endeavor never drilled on
those two tracts, and the parties agree that Endeavor’s leases’ terms have expired. But the leases
include “retained-acreage clauses,” which provide that the leases would continue after they expired
as to a certain number of acres associated with each of the wells Endeavor drilled on adjacent
tracts. The issue is whether the acreage Endeavor retained under the retained-acreage clauses
includes the two tracts at issue. The trial court and court of appeals held that it does not. We agree
and affirm.
I.
Background
Between 2004 and 2007, Endeavor acquired mineral leases involving two adjoining tracts.
The leases relevant to this dispute cover all (approximately 640 acres) of a tract we will call
“section 4,”1 and the northern half (approximately 320 acres) of a tract we will call “section 9.”2
Section 4 sits immediately north of section 9. Endeavor completed two wells in section 9, both
located in the section’s northeastern quarter (approximately 160 acres), which we will call well #1
and well #2. Although the lease covered the entire northern half of section 9, Endeavor did not
drill in or develop section 9’s northwestern quarter. Endeavor also completed two wells in section
4, both in that section’s southeastern quarter (approximately 160 acres), which we will call well
#3 and well #4. Although the lease covered all of section 4, Endeavor did not drill wells in section
4’s southwestern quarter.
After completing the wells, Endeavor filed certified proration plats with the Texas Railroad
Commission (the Commission). For well #1, the plat designated a proration unit of 81.21 acres
consisting of the northern half of section 9’s northeastern quarter. For well #2, the plat designated
1
A “section” of land is a one-square-mile area containing 640 acres. See 8 HOWARD R. WILLIAMS & CHARLES
J. MEYERS, OIL AND GAS LAW: MANUAL OF OIL AND GAS TERMS 951 (LexisNexis Matthew Bender 2017) [hereinafter
WILLIAMS & MEYERS].
2
The Elrods, who own the mineral interests and were Endeavor’s lessors as to section 4, include Stanley D.
Elrod, Karen M. Thomas, Jon David Elrod, Janice K. Gaither, and Joseph Elrod. Section 4 is described more
particularly as Section 4, Block 35, T–1–N, T & P Ry. Co. Survey, Martin County, Texas. Rebecca J. Williams,
Norvella Ann Schafer, and Jackie Lue Wells are Trustees of The Mildred Haggard Irrevocable Grantor Trust, which
owns the mineral interests and was Endeavor’s lessor as to section 9. Section 9 is described more particularly as
Section 9, Block 35, T–1–N, T & P Ry. Co. Survey, Martin County, Texas.
2
81.21 acres consisting of the southern half of section 9’s northeastern quarter. The designated
proration units did not include any of section 9’s northwestern quarter:
For well #3, Endeavor’s plat designated 81.0 acres consisting of the northern half of section
4’s southeastern quarter. For well #4, the plat designated 81.0 acres consisting of the southern half
of section 4’s southeastern quarter. The designated proration units did not include any of section
4’s southwestern quarter:
3
The leases at issue include two clauses that permit Endeavor to retain certain interests after
the leases’ primary terms expire. The first, which we refer to as the continuous-development
clause, provides that the leases “shall remain in full force and effect as to all proration units” after
the primary terms expire if Endeavor, as the lessee or “operator,” is “then engaged in drilling or
reworking operations” and so long as Endeavor maintains “a continuous drilling program.” If
Endeavor is not engaged in such operations when the primary terms expire, the leases will
automatically terminate “as to each proration unit” on which there is no well “producing oil or gas
in commercial quantities.” The second clause, which we refer to as the retained-acreage clause,
provides that once the leases expire and the operator does not maintain the required continuous-
4
drilling program, the leases “shall automatically terminate as to all lands and depths covered
herein, save and except” certain lands within certain governmental proration units “assigned to” a
producing well. (Emphasis added.)
After Endeavor’s leases’ primary terms expired, Patriot Royalty and Land, LLC, reviewed
the leases and the certified proration plats Endeavor had filed with the Commission. Based on
those documents, Patriot concluded that Endeavor’s leases had terminated as to section 4’s
southwestern quarter and section 9’s northwestern quarter—the lands Endeavor did not include in
the proration units designated in its filed plats and on which it had not engaged in any drilling or
development operations. Patriot approached the owners of section 4 and section 9, obtained leases
covering both of those quarters, and then assigned the leases to Discovery. Discovery successfully
drilled two wells in each quarter.
When Endeavor discovered that Discovery had drilled wells on section 4’s southwestern
quarter and section 9’s northwestern quarter, it objected to Discovery’s assertion of any leasehold
interest in those quarters. Relying on the leases’ retained-acreage clauses, it asserted that the
applicable governmental proration unit for each of its two wells in section 9’s northeastern quarter
covered 160 acres, and thus each proration unit included half of section 9’s northwestern quarter
as well as half of section 9’s northeastern quarter. Endeavor also asserted that the applicable
governmental proration unit for each of its two wells in section 4’s southeastern quarter also
covered 160 acres, and thus each proration unit included half of section 4’s southwestern quarter
as well as half of its southeastern quarter. In short, based on the retained-acreage clauses, Endeavor
asserted that its leases remained in effect as to the entire southern half of section 4 and the entire
northern half of section 9, so Discovery’s leases were invalid.
5
As explained, however, Endeavor had previously filed plats with the Commission
assigning proration units of only 81.21 or 81.0 acres to each of the four wells, and those proration
units did not include the lands described in Discovery’s leases (section 4’s southwestern quarter
and section 9’s northwestern quarter). Endeavor asserted that it had mistakenly failed to assign
160 acres to each well, consistent with the applicable “governmental proration unit.” Relying on
this assertion, Endeavor filed new proration plats with the Commission, assigning 160 acres to
each well, which included the acreage described in Discovery’s leases.
Also relying on the retained-acreage clauses, Discovery asserted that the lands within the
governmental proration units assigned to Endeavor’s producing wells included only the 81.21 and
81.0 acres that Endeavor had assigned as proration units in its plat filings before the leases’ primary
terms expired. Relying on this construction of the retained-acreage clauses, Discovery filed this
trespass-to-try-title action against Endeavor. The Elrods and the Haggard Trust intervened as
plaintiffs in support of Discovery’s position. Because of this litigation, the Commission declined
to take any action with regard to Endeavor’s request to amend its plat filings.
After stipulating to most of the relevant facts, both sides filed summary-judgment motions.
Agreeing with Discovery’s construction of the retained-acreage clauses, the trial court granted
Discovery’s motion and denied Endeavor’s. In its order, the trial court held that (1) Endeavor’s
leases had terminated as to the disputed acreage, (2) Discovery’s leases were valid, and (3)
Discovery held record title to, ownership of, and the exclusive right to possession of the leasehold
interests. The court of appeals affirmed, holding that Endeavor’s leasehold interests survived only
as to the acreage in the proration units it assigned to its wells in the plats it filed with the
6
Commission. 448 S.W.3d 169, 178 (Tex. App.—Eastland 2014). We granted Endeavor’s petition
for review.
II.
Mineral Leases
Endeavor’s rights to the disputed acreage derive solely from its mineral leases from the
Elrods and the Haggard Trust. Like all mineral leases, Endeavor’s leases memorialize the parties’
contractual agreements. But unlike many other types of contracts, mineral leases are subject to
extensive governmental regulation. As a result, mineral leases often include particular types of
terms and clauses through which the parties specify their respective rights in light of the regulatory
context. Before addressing Endeavor’s leases, we briefly describe the contractual nature of mineral
leases, the regulatory context in which they exist, and the key terms they often include.
Contractual nature
A mineral lease is a contract, and as such, its terms define the parties’ respective rights and
duties. See Samson Expl., LLC v. T.S. Reed Props., Inc., 521 S.W.3d 766, 774 (Tex. 2017); Amoco
Prod. Co. v. Alexander, 622 S.W.2d 563, 571 (Tex. 1981). As with contracts generally, the parties
are free to decide their contract’s terms, and the law’s “strong public policy favoring freedom of
contract” compels courts to “respect and enforce” the terms on which the parties have agreed.
Phila. Indem. Ins. Co. v. White, 490 S.W.3d 468, 471 (Tex. 2016); Nafta Traders, Inc. v. Quinn,
339 S.W.3d 84, 95 (Tex. 2011) (“As a fundamental matter, Texas law recognizes and protects a
broad freedom of contract.”).
The general principles that govern our construction of contracts also govern our
construction of mineral leases. Tittizer v. Union Gas Corp., 171 S.W.3d 857, 860 (Tex. 2005) (per
curiam) (“An oil and gas lease is a contract, and its terms are interpreted as such.”). We review
7
and construe mineral leases de novo, and our objective in doing so is “to ascertain the parties’
intent as expressed within the lease’s four corners.” Anadarko Petroleum Corp. v. Thompson, 94
S.W.3d 550, 554 (Tex. 2002) (citing Luckel v. White, 819 S.W.2d 459, 461 (Tex. 1991)). We
presume the parties intended every clause to have some effect, so we “examine the entire lease and
attempt to harmonize all its parts, even if different parts appear contradictory or inconsistent.” Id.
Because mineral leases transfer and affect title to real-property interests, however, they are subject
to special construction rules that apply particularly to agreements governing property rights. See
generally Bruce M. Kramer, The Sisyphean Task of Interpreting Mineral Deeds and Leases: An
Encyclopedia of Canons of Construction, 24 TEX. TECH L. REV. 1 (1993).
Regulatory context
Although mineral leases are contracts, they are subject to legal and regulatory restrictions.
As a result, “the rights of the contracting parties to an oil and gas lease will be subordinated to the
regulatory authority of the State even though the contractual rights or obligations may be affected
in so doing.” Gulf Oil Corp. v. Southland Royalty Co., 478 S.W.2d 583, 590 (Tex. Civ. App.—El
Paso 1972), aff’d, 496 S.W.2d 547 (Tex. 1973). In particular, mineral leases are “subject to the
state’s police power to conserve and develop” the State’s natural resources. Seagull Energy E &
P, Inc. v. R.R. Com’n, 226 S.W.3d 383, 389 (Tex. 2007) (citing TEX. CONST. art XVI, § 59(a)).
Exercising that power, the State, through the Legislature, has delegated rule-making
authority to the Commission “to further the state’s goals of preventing waste and conserving
natural resources.” Id. (citing TEX. NAT. RES. CODE § 85.201). Under that authority, the
Commission “has adopted general rules applicable throughout the State.” R.R. Com’n v. WBD Oil
& Gas Co., 104 S.W.3d 69, 70 (Tex. 2003). For example, the Commission has promulgated
8
statewide spacing rules imposing a minimum distance between wells, see 16 TEX. ADMIN. CODE
§ 3.37, as well as statewide rules relating to regulatory filings, well densities, and proration units,
see id. § 3.38.
One of the many ways the Commission attempts to prevent waste and conserve mineral
resources is by adopting specific “production allowables” based on “proration units” assigned to
each well. “Production allowables refer to the maximum amount of hydrocarbons a well may
recover as prescribed by the applicable field rules” and “are designed to limit production from a
well in order to control the rate of production from the field.” Browning Oil Co. v. Luecke, 38
S.W.3d 625, 634 (Tex. App.—Austin 2000, pet. denied); see Victory Energy Corp. v. Oz Gas
Corp., 461 S.W.3d 159, 164 n.3 (Tex. App.—El Paso 2014, pet. denied); 58 C.J.S. Mines and
Minerals § 447. A proration unit is the “acreage assigned to a well for the purpose of assigning
[production] allowables and allocating allowable production to the well.” 16 TEX. ADMIN. CODE §
3.38(a)(3). Generally, “an operator must first designate [a well’s] proration unit and the acreage
assigned to it, then certify that the acreage is productive before receiving the well’s production
allowable.” Luecke, 38 S.W.3d at 634.
The Commission’s statewide rules typically require operators to designate a well’s acreage
and proration unit by filing certified plats and other forms, such as a “Form P–15.”3 See, e.g., 16
TEX. ADMIN. CODE § 3.31(c)(1) (requiring gas-well operators to file a “certified plat showing the
acreage assigned to the well for proration purposes”); id. § 3.40(a) (permitting operators to pool
3
“A Form P–15 is the means by which an operator designates the configuration, size, and location of acreage
attributable to a given well for purposes of obtaining a production allowable from the Railroad Commission.” XOG
Operating, LLC v. Chesapeake Expl. Ltd. P’ship, 480 S.W.3d 22, 25 (Tex. App.—Amarillo 2015), aff’d, No. 15-0935,
— S.W.3d — (Tex. Apr. 13, 2018).
9
acreage to create “a drilling unit or proration unit by filing an original certified plat”); id. § 3.40(g);
(permitting operators to “file proration unit plats for individual wells in a field”). Acreage assigned
to a well “for allocation of allowables” may not be assigned to another well in the same field. Id.
§ 3.40(d) (“[S]uch duplicate assignment of acreage is not acceptable.”). The Commission reviews
the operator’s filings to ensure they comply with applicable rules and generates a “maximum
allowable for a well,” which is “the largest allowable that can be assigned under applicable rules,”
id. § 3.31(g)(9), and it will not accept a proration plat that “shows acreage in the unit in excess of
the maximum number of acres permitted by the field rules,” id. § 3.31(c)(1).
The Commission’s statewide rules, however, “cannot adequately address the widely
varying conditions found in the thousands of oil and gas reservoirs in Texas.” WBD Oil & Gas
Co., 104 S.W.3d at 70. To accommodate unique circumstances existing within particular
production areas, the Commission adopts specific “field rules,” which provide “detailed
regulations for a specific field.” Id. The Commission “has replaced the statewide rules with more
specific field rules where necessary to prevent waste or confiscation.” Seagull Energy E & P, 226
S.W.3d at 389 (footnotes and citations omitted).
Common mineral-lease terms
Although mineral owners and operators generally enjoy the freedom to contract as they
wish, they must exercise that freedom within the limits of the Commission’s statewide and field
rules. As a result of this unique regulatory context, mineral leases often contain particular terms
and clauses that other kinds of leases and contracts do not. The dispute in this case involves clauses
that address the duration and expiration of Endeavor’s mineral leases; specifically, the habendum
10
clause, the continuous-development clause, and the retained-acreage clause. We briefly discuss
each in turn.
1. Habendum clause
Generally, a lease’s habendum clause defines the duration of the mineral-lease estate.
Anadarko, 94 S.W.3d at 554. The habendum clause typically divides a lease’s duration into two
parts: a primary term and a secondary term. Id. The primary term usually lasts for a fixed period
of time stated in the lease, while the secondary term continues the lease after the primary term
expires, for “as long thereafter as oil, gas or other mineral is produced.” Id. Under this type of
habendum clause, a lease may continue indefinitely “as long as oil or gas is produced,” but will
automatically terminate if actual production permanently ceases during the secondary term. Id. As
long as one portion of the leased tract—even a small portion—is producing oil or gas, the lease
will continue as to the entire tract, even if the operator elects not to develop other areas within the
leased tract. See Mathews v. Sun Oil Co., 425 S.W.2d 330, 333 (Tex. 1968).
Because a mineral lease is a creature of contract, parties may modify the effect of a
habendum clause by including other provisions. See Anadarko, 94 S.W.3d at 554.4 Lessors, of
course, typically desire that the operator fully develop the lease and produce as much as possible
to maximize the lessors’ royalties. After all, “the dominant purpose of a lease is to discover and
produce oil and gas . . . .” Rogers v. Osborn, 261 S.W.2d 311, 315 (Wilson, J., concurring). Thus,
a “habendum-only” lease—under which the lessee’s production on only a small portion may
permit the lessee to retain its rights as to the entire leased tract—may conflict with the lessor’s
4
See also Cmty. Bank of Raymore v. Chesapeake Expl., L.L.C., 416 S.W.3d 750, 755 (Tex. App.—El Paso
2013, no pet.) (“The habendum clause, however, also recognizes that this general principle is subject to modification
by other contractual provisions in the lease, including the producing-acreage and continuous-development clauses.”).
11
desire to seek full development given the operator’s ability to hold the entire estate by drilling only
a single producing well. See Anadarko, 94 S.W.3d at 554. But an operator may prefer to postpone
drilling and production until, for example, the market for the minerals produces a greater financial
return. Continuous-development and retained-acreage clauses serve to balance the interests of the
lessor and lessee in this respect.
2. Continuous-development clauses
A continuous-development clause “permits a lease to be preserved under certain
circumstances even though there is no production after the expiration of the primary term during
continuous drilling operations, whether on the same or different wells.” WILLIAMS & MEYERS at
§ 617. Generally, under these types of clauses, “if production results from the continuous
prosecution of the very operations being engaged in by the lessees upon the expiration of the
primary term, the lease is good.” Rogers, 261 S.W.2d at 315. But the required development efforts
must “be continuous with no gap.” Id. (Wilson, J., concurring). If the efforts cease at any moment
after the primary term, the lease typically terminates immediately and automatically.
3. Retained-acreage clauses
Continuous-development clauses often work in tandem with other clauses, including
retained-acreage clauses. While a habendum clause generally extends the entire lease so long as
some production is occurring on the lease, and a continuous-development clause further extends
the entire lease so long as the operator remains engaged in the required development efforts, a
retained-acreage clause typically divides the leased acreage such that production or development
will preserve the lease only as to a specified portion of the leased acreage. See 3 WILLIAMS &
12
MEYERS at § 603.7. So if a lessor wants its entire leasehold acreage developed, it should include a
retained acreage clause in its leases. Id.
Retained-acreage clauses come in many different shapes, sizes, and forms.5 The effect of
a particular retained-acreage clause depends on the terms the parties freely chose and, like the
Commission’s implementation of special field rules, there is no “one size fits all” result of their
proper construction. Each retained-acreage clause must be construed on its own, under governing
principles of contract interpretation.
Although “originally drafted to prevent the lessee from losing those portions of a lease that
had productive wells located thereon if the rest of the lease terminated,” retained-acreage clauses
have expanded to “include clauses that require the release of all acreage that, at the end of the
primary term, is not within a drilling, spacing, or proration unit.” Bruce M. Kramer, Oil and Gas
Leases and Pooling: A Look Back and a Peek Ahead, 45 TEX. TECH L. REV. 877, 881 n.28 (2013).
As a result, retained-acreage clauses often “refer to [Commission] proration units as the lodestar
for determining which acreage has been obtained and which acreage must be surrendered.”
WILLIAMS & MEYERS at § 603.7. Defining the retained acreage by reference to a Commission
designation like a proration unit can provide certainty or clarity regarding the extent of the acreage
that remains under lease. But the inclusion of such regulatory principles in a retained-acreage
5
See, e.g., No. 15-0935, slip op. at 2 (clause reserved “portion of said lease included within the proration or
pooled unit of each well”) (emphasis added); ConocoPhillips Co. v. Vaquillas Unproven Minerals, Ltd., No. 04-15-
00066-CV, 2015 WL 4638272, at *1 (Tex. App.—San Antonio Aug. 5, 2015, pet. granted, judgm’t vacated w.r.m.)
(mem. op.) (clause reserved 640 acres unless a Commission rule “provide[d] for a spacing or proration establishing
different units of acreage per well”) (emphasis added); Chesapeake Expl., L.L.C. v. Energen Res. Corp., 445 S.W.3d
878, 883 (Tex. App.—El Paso 2014, no pet.) (clause provided lease would terminate except as to each proration unit
“established under the rules and regulations” of the Commission and “upon which there exists (either on the above
described land or on lands pooled or unitized therewith) a well capable of producing oil and/or gas in commercial
quantities”) (emphasis added). By contrast, the retained-acreage clauses at issue here reserved acreage “assigned to”
a particular well.
13
clause may also cause confusion or disappointment, as the contracting parties may not fully
understand the ramifications of including a regulatory term in the typical mineral lease. See
ConocoPhillips, 2015 WL 4638272, at *2 (“[W]hen a lease ties the retained acreage clause to
governmental authority, the parties may not ‘fully anticipate the consequences of doing so.’”)
(quoting Scott C. Petry, Drafting the Retained Acreage Clause: The Effect of Governmental
Authority on Retained Acreage, STATE BAR. OF TEX. PROF. DEV. PROGRAM, 27TH ANNUAL
ADVANCED OIL, GAS, AND ENERGY RESOURCES LAW COURSE 3 (2009) [hereinafter Petry]).6 This
is such a case. With these principles in mind, we turn to Endeavor’s leases.
III.
Endeavor’s Mineral Leases
Endeavor’s mineral leases were located in the Spraberry (Trend) Area, a massive oil field
in the Permian Basin. Although the field’s low porosity hindered initial efforts to recover the
minerals underneath,7 the advent of new technology has increased production significantly.8
Regulatory context
The Commission has promulgated field rules specific to the Spraberry Trend Area, and
those rules have changed over time. In 1952, for example, the Commission increased the allowable
size of proration units from 80 acres to 160 acres per producing well, though the standard unit
6
See also Jones v. Killingsworth, 403 S.W.2d 325, 328 (Tex. 1965) (“The fact that the [Commission] may
Permit a much larger unit cannot be read into the lease contract when, as here, the authority to create larger units is
expressly limited to units of the size Prescribed by the [Commission].”).
7
‘Largest uneconomic pay in the world’ proved worth effort, MIDLAND REPORTER-TELEGRAM (Sept. 26,
2009, 7:00 PM), http://www.mrt.com/business/energy/article/Largest-uneconomic-pay-in-world-proved-worth-
7491811.php (“The expectation of a low recovery efficiency led many explorationists to call the sands the largest
uneconomic oil-producing pay in the world.”).
8
Mella McEwen, USGS assessment puts Spraberry resources at 4.2 billion barrels, MIDLAND REPORTER-
TELEGRAM (May 22, 2017, 12:24 PM), https://www.mrt.com/business/oil/article/USGS-assessment-puts-Spraberry-
resources-at-4-2-11156810.php.
14
remained 80 acres. Tex. R.R. Com’n, Special Order Adopting Rules and Regulations for the
Spraberry Trend Area Field, Oil & Gas Docket Nos. 125 & 126, 7 & 8–25,841 (Dec. 22, 1952).
And since at least 1952, the Commission has required operators, “for proration purposes,” to “file
certified plats of their properties in the field, which plats show all those things pertinent to the
determination of the acreage claimed for each well hereunder.” Id.
The Commission amended the Spraberry rules in 2008, clarifying the permissible size of
standard proration units, and also adopting specific rules for the assignment of “tolerance” acreage:
The acreage assigned to an individual well shall be known as a proration unit. The
standard drilling and proration units are established hereby to be EIGHTY (80)
acres. No proration unit shall consist of more than EIGHTY (80) acres except as
hereinafter provided. The two farthermost points in any proration unit shall not be
in excess of THREE THOUSAND (3,000) feet removed from each other; provided
however, that in the case of long and narrow leases or in cases where because of
the shape of the lease such is necessary to permit the utilization of tolerance
acreage, the Commission may after proper showing grant exceptions to the
limitations as to the shape of proration units as herein contained. All proration units
shall consist of continuous and contiguous acreage which can reasonably be
considered to be productive of oil. No double assignment of acreage will be
accepted.
Notwithstanding the above, operators may elect to assign a tolerance of not more
than EIGHTY (80) acres of additional 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.
Operators shall file with the Commission certified plats of their properties in said
field, which plats shall set out distinctly all of those things pertinent to the
determination of the acreage credit claimed for each well . . . .
Tex. R.R. Comm’n, Final Order Amending Field Rule Nos. 2 and 3 in the Spraberry (Trend Area)
Field Various Counties, Texas, Oil and Gas Docket No. XX-XXXXXXX (Dec. 16, 2008). After the
2008 amendment, the Spraberry field rules still required operators to file certified plats describing
their proration units. See id.
15
Lease language
The leases at issue here contain both continuous-development and retained-acreage
clauses. The continuous-development clauses provide that the leases
shall automatically terminate as to each proration unit upon which there is no well
or wells thereon located and then producing oil or gas in commercial quantities
unless Lessee is then engaged in drilling or reworking operations in accordance
with the other provisions hereto. In the event Lessee is engaged in drilling or
reworking operations at the expiration of the Primary Term, this lease shall remain
in full force and effect as to all proration units so long as a continuous drilling
program is maintained whereby not more than one-hundred twenty (120) days shall
elapse from the completion of one well to the commencement of another well until
all proration units are tested.
Each lease’s retained-acreage clause identifies the acreage retained by referring to the
Commission’s regulatory concepts of proration units and allowables. Specifically, the clauses
provide that, at the end of the leases’ primary term or “upon the cessation of the continuous
development . . . whichever is later,” the
lease shall automatically terminate as to all lands and depths covered herein, save
and except those lands and depths located within a governmental proration unit
assigned to a well producing oil or gas in paying quantities and the depths down to
and including one hundred feet (100’) below the deepest productive perforation(s),
with each such governmental proration unit to contain the number of acres required
to comply with the applicable rules and regulations of the Railroad Commission of
Texas for obtaining the maximum producing allowable for the particular well.
[Emphases added]
The parties do not dispute that the continuous-development period for section 9 ended on
February 9, 2008, 120 days after Endeavor completed well #2, or that section 4’s continuous-
development period ended on February 5, 2009, 120 days after Endeavor completed well #4. Under
the retained-acreage clauses, these dates capture at a particular moment in time the amount of
acreage Endeavor stood to retain upon the clauses’ triggering event.
16
The retained-acreage clauses also specify the acreage excepted from termination.
Specifically, the leases do not terminate as to all “lands and depths located within a governmental
proration unit assigned to a well producing oil or gas in paying quantities.” The clauses provide
further that each such proration unit must “contain the number of acres required to comply with
the applicable rules and regulations of the Railroad Commission of Texas for obtaining the
maximum producing allowable for the particular well.” Thus, Endeavor retained acreage
consisting of the governmental proration unit “assigned to” each well, and any such unit must
contain the amount of acreage required to comply with the applicable Commission rules for
obtaining the “maximum producing allowable” for the particular well.
The parties’ dispute over the meaning of this clause focuses primarily on the phrases
“proration unit assigned to a well” and “maximum producing allowable for the particular well.”
When Endeavor filed its plats with the Commission, it assigned 81.21 acres as the proration unit
for each of the wells in section 9 and 81.0 acres for each of the wells in section 4. But Endeavor
contends that it retained rights to proration units of 160 acres for each well because the
Commission rules allow for a maximum total of 160 acres including the tolerance acres, and that
is the amount of acreage that would result in the “maximum” allowable under the Commission’s
rules. Like the trial court and the court of appeals, we disagree.
1. “Proration unit assigned to a well”
Endeavor contends that the clauses’ reference to a proration unit “assigned to” a well is
ambiguous because it does not identify whose assignment controls. Specifically, Endeavor argues
that, although we could reasonably construe the phrase to refer to the 81-acre proration units
Endeavor “assigned to” the wells in the plats it filed with the Commission, we can also reasonably
17
construe it to refer to the proration units the Commission has “assigned to” the wells through its
special field rules. The court of appeals disagreed and held that the clause unambiguously refers
to Endeavor’s assignments because the Commission’s rules required Endeavor, as the operator, to
assign acreage to its proration units.9
“Deciding whether a contract is ambiguous is a question of law for the court.” N. Shore
Energy, L.L.C. v. Harkins, 501 S.W.3d 598, 602 (Tex. 2016) (quoting J.M. Davidson, Inc. v.
Webster, 128 S.W.3d 223, 229 (Tex. 2003)). In construing an oil and gas lease, our primary goal
is to determine the parties’ intent as expressed by the lease’s plain language. Id. To do this, we
“‘construe contracts from a utilitarian standpoint bearing in mind the particular business activity
sought to be served, and avoiding unreasonable constructions when possible and proper.’” Id.
(quoting Plains Expl. & Prod. Co. v. Torch Energy Advisors Inc., 473 S.W.3d 296, 305 (Tex.
2015)). Of course, no ambiguity exists if the contract’s language can be given a “definite or
certain” meaning. Id. (quoting Plains Expl., 473 S.W.3d at 305). Conversely, “a contract is
ambiguous if it is susceptible to more than one reasonable interpretation.” Id. (citation omitted).
“An ambiguity, however, does not arise ‘merely because parties to an agreement proffer different
interpretations of a term.’” Id. (quoting DeWitt Cty. Elec. Coop., Inc. v. Parks, 1 S.W.3d 96, 100
(Tex. 1999)). For there to be an ambiguity, both parties’ interpretations “must be reasonable.” Id.
(quoting Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex.
1996)).
9
448 S.W.3d at 177 (“[W]e conclude that the parties intended for the Endeavor Leases to terminate as to
acreage that was not included in a governmental proration unit assigned to a well by Endeavor in a certified proration
plat filed with the [Commission].”) (emphasis added).
18
Discovery cites a number of authorities for the proposition that operators, and only
operators, “assign” acreage to proration units, pointing to various Commission regulations, cases,
and examples from practitioners. We agree with Discovery that the leases’ reference to “assigned”
proration units is unambiguous because the only reasonable construction of that reference is to the
operator’s assignment of a proration unit through its filing of a proration plat with the
Commission. Within the regulatory context in which these leases exist, their references to acres
“assigned to . . . proration units” must necessarily be construed in light of the Commission’s rules
as the standards governing the parties’ contractual agreement. And as we have explained, both the
Commission’s statewide and field rules recognize that the operator is responsible for “assigning”
acreage to a proration unit through its regulatory filings. As Discovery notes in its brief, Texas
courts have consistently recognized that operators, and not the Commission, “assign” acreage to a
proration unit.10
Endeavor’s argument that the Commission could be the “assignor” is not reasonable
because the Commission does not “assign” acreage to proration units—it merely quantifies the
10
See Broussard v. Texaco, Inc., 479 S.W.2d 270, 271–72 (Tex. 1972) (noting operators “assigned” 296.79
acres out of a 476 acre lease to proration units, leaving “179.21 producing acres . . . unassigned”); Corzelius v. Harrell,
186 S.W.2d 961, 971 (Tex. 1945) (observing that field rules required operator to file plat “showing the acreage to be
assigned to each well, [the] proven productive acreage, and the dimensions of the unit on which each gas well is
located”); Unit Petroleum Co. v. David Pond Well Serv., Inc., 439 S.W.3d 389, 396 (Tex. App.—Amarillo 2014, pet.
denied) (holding leasehold-interest owner has an “exclusive executive right to establish a proration unit encompassing
any part of its leasehold estate”); Luecke, 38 S.W.3d at 634 (“[A]n operator must . . . designate the proration unit and
the acreage assigned to it . . . .”); Verble v. Coffman, 680 S.W.2d 69, 70 (Tex. App.—Austin 1984, no writ) (operator
“assigned an 80 acre proration unit for the well”); May v. Cities Serv. Oil Co., 444 S.W.2d 822, 823 (Tex. Civ. App.—
Beaumont 1969, writ ref’d n.r.e.) (“[T]he operator assigned acreage . . . to the production allowable unit.”); Expando
Prod. Co. v. Marshall, 407 S.W.2d 254, 256 (Tex. Civ. App.—Fort Worth 1966, writ ref’d n.r.e.) (noting “acreage
assigned” to well’s unit by the operator); see also 16 TEX. ADMIN. CODE § 3.86(g)(4) (requiring operators to file a
“proration plat” that “depict[s] the lease . . . showing the acreage assigned to the proration unit for the . . . well”); id.
§ 3.40(a) (noting that operators “creat[e] a . . . proration unit by filing an original certified plat”); id. § 3.40(d)
(prohibiting operators from “assign[ing]” acreage to a well’s “proration unit” that has already been “assign[ed]” to
another well’s unit).
19
amount of acreage an operator assigns. Consistent with its statewide rules, the Commission’s
special field rules for the Spraberry Trend provide that operators “shall file with the Commission
certified plats of their properties in said field, which plats shall set out distinctly all of those things
pertinent to the determination of the acreage credit claimed for each well.” Tex. R.R. Comm’n,
Final Order Amending Field Rule Nos. 2 and 3 in the Spraberry (Trend Area) Field Various
Counties, Texas, Oil and Gas Docket No. XX-XXXXXXX (Dec. 16, 2008).
Indeed, the Commission reviews an operator’s filings to determine whether the operator’s
assignment conflicts with the Commission’s prohibition against the double-assignment of acreage
or the over-assignment or under-assignment of acreage based on the applicable field rules. See 16
TEX. ADMIN. CODE § 3.40(d) (“[A]creage assigned to a well for drilling and development, or for
allocation of allowable, shall not be assigned to any other well or wells completed or projected
to be completed in the same field . . .”). As the Commission has explained in its amicus brief in
this case, if the operator’s assignment of acreage complies with the rules, the Commission will
input that acreage into a well-tracking system, and it becomes “the lawfully assigned proration
acreage for purposes of the [Commission’s] records.” The Commission then “automatically
generate[s] a maximum allowable for that particular well pursuant to” the applicable proration
formula. This is a well-established practice. See, e.g., Luecke, 38 S.W.3d at 634 (“Thus, an
operator must first designate the proration unit and the acreage assigned to it, then certify that the
acreage is productive before receiving the well’s production allowable.”) (emphasis added).
20
Indeed, the numerous amici11 who filed briefs in this case nearly all agree that the operator, not
the Commission, “assigns” lands to proration units.
We conclude that the leases’ use of “assigned” is unambiguous, and refers to the lessee’s
assignment of acreage through its regulatory filings. Nevertheless, Endeavor argues that we cannot
reasonably read the leases to make its leasehold interest dependent upon its regulatory filings
because the Commission uses proration records not to determine title but simply to assess a proper
amount of allowables. Stated differently, Endeavor contends that a court cannot use regulatory
filings as a basis for changing title. While we agree that the Commission “is a conservation body
and does not have jurisdiction to effect a change of property rights,” Elliott v. Davis, 553 S.W.2d
223, 227 (Tex. Civ. App.—Amarillo 1977, writ ref’d n.r.e.), Endeavor’s argument ignores the
contractual nature of its leasehold interest and the regulatory context in which it exists. Although
the Commission does not unilaterally determine title by approving or accepting an operator’s
assigned proration unit, the parties are free to agree that the operator’s leasehold interest will
survive and continue only to the extent of that assignment.
That is exactly what the parties did here. The retained-acreage clauses that govern
Endeavor’s rights following the expiration of the leases’ primary terms unambiguously provides
that those rights extend only to a proration unit “assigned to” a well, and within this regulatory
context that can only refer to the operator’s assignment. The operator’s assignment affects the
operator’s leasehold interest because Endeavor’s contractual agreement, made within the context
of the Commission’s applicable rules, requires that result. Endeavor’s leases designated the
11
Amici include the Permian Basin Petroleum Association, the Texas Independent Producers and Royalty
Owners’ Association, Pennington Resources, LLC, Redwood Exploration Company, LLC, Tyner Energy, LP, the
Railroad Commission, the Texas Oil and Gas Association, and Browning Oil Company, Inc.
21
amount of retained acreage as the amount in the proration unit assigned to the wells per the
Commission’s rules. And consistent with the Commission’s rules, Endeavor assigned a specific
amount of acreage to the proration units for the wells at issue in this case by filing certified
proration plats. We hold that under the leases’ unambiguous language, those assignments govern
the leasehold interests Endeavor retained.
2. “Obtaining the maximum producing allowable”
Endeavor argues, however, that its retained acreage includes 160 acres per well because
the leases provide that “each [assigned] governmental proration unit” must “contain the number
of acres required to comply with” the Commission’s rules for obtaining “the maximum producing
allowable for the particular well.” Endeavor contends that, regardless of the meaning of the
“assigned to” clause, the “maximum producing allowable” clause makes clear that Endeavor’s
retained proration units must consist of 160 acres, rather than the 81.21 and 81.0 acres it actually
(but mistakenly) assigned to its wells.
More specifically, Endeavor argues that the leases’ references to “maximum producing
allowable” means that each proration unit automatically consists of the greatest amount of acreage
the Commission’s rules permit an operator to assign, because that amount will result in the
“maximum producing allowable.” As described above, the Commission’s special rules for the
Spraberry Trend provide for a “standard drilling and proration unit” of 80 acres, but allow
operators to “elect to assign a tolerance of not more than” 80 additional acres and thereby “receive
allowable credit for not more than” 160 acres.12 According to Endeavor, it retained 160 acres per
12
The Commission’s statewide rules define “tolerance acreage” as “[a]creage within a lease, pooled unit, or
unitized tract that may be assigned to a well for proration purposes pursuant to special field rules in addition to the
amount established for a prescribed or optional proration unit.” 16 TEX. ADMIN. CODE § 3.38(a)(6).
22
well because that is the amount that would result in the “maximum producing allowable” under
the Commission’s rules.
Discovery, on the other hand, contends that the retained-acreage clauses require the
operator to file a plat assigning only the amount of acreage necessary to obtain the maximum
producing allowable as determined by the applicable field rules for the particular well at issue.
According to Discovery, Endeavor required only 80 acres per well to obtain the maximum
producing allowable for each of its wells. The court of appeals agreed with Discovery, holding
that the parties intended this clause “to define the amount of acres that Endeavor was to include in
the governmental proration units that it assigned in its certified proration plats filed with the
[Commission].” 448 S.W.3d at 178.
We agree with Discovery. We construe the retained-acreage clauses as requiring Endeavor
to include in its certified plats only “the number of acres required to comply with the applicable
rules and regulations of [Commission] for obtaining the maximum producing allowable for the
particular well.” If Endeavor’s regulatory filings included an amount sufficient to obtain the
maximum producing allowable, then that amount—however small it might be—would be excepted
from termination under the retained-acreage clauses.
Under the special field rules, the maximum producing allowable for Endeavor’s wells
depends in part on the amount of acreage it assigned to each well. Rule 4 provides that the
maximum producing allowable for a well on an 80-acre proration unit is 515 barrels per day.13
13
The actual maximum producing allowable for Endeavor’s wells is determined by an equation set out in
Spraberry (Trend) Area Rule 4:
RULE 4: The maximum daily oil allowable for each well on an EIGHTY (80) unit in the subject
field shall be 515 barrels of oil per day, and the actual allowable for an individual well shall be
determined by the sum total of the two following two values:
23
Thus, the smallest amount of acreage that an operator can assign and remain in compliance with
the applicable field rules is 80 acres, and the maximum producing allowable under that assignment
is 515 barrels. If production exceeds that amount, this clause requires the operator to assign
additional acreage—tolerance acreage—to each well if the operator desires to increase the
maximum production allowable for each well. Thus, if Endeavor included in its certified plats the
minimum amount of acreage sufficient to comply with the Commission’s rules for obtaining the
maximum producing allowable for each of its wells, that is the amount it stood to retain upon the
retained-acreage clauses’ triggering event.
Endeavor assigned roughly 81 acres to each of its wells. It is undisputed, however, that
Endeavor’s wells could not achieve the maximum producing allowable for that amount of acreage
under Rule 4. In fact, when this dispute arose, the Commission’s hearings examiner acknowledged
that “the 81.0 acre allowables will allow the wells to produce an amount of oil far in excess of the
amount of oil the wells are currently capable of producing.” Thus, Endeavor assigned to each of
its wells an amount of acreage that “compl[ied] with the applicable rules and regulations of the
[Commission] for obtaining the maximum producing allowable for the particular well.” Having
met the threshold requirement for compliance with the field rules, Endeavor retained exactly what
1. Each well shall be assigned an allowable equal to the top allowable established for a well
having a proration unit containing the maximum acreage authorized exclusive of tolerance
acreage multiplied by SEVENTY FIVE percent (75%) and by then multiplying this value
by that fraction the numerator of which is the acreage assigned to the well and the
denominator of which is the maximum acreage authorized for a proration unit exclusive of
tolerance acreage.
2. Each well shall be assigned an allowable equal to TWENTY FIVE percent (25%) of the
maximum daily oil allowable above.
Tex. R.R. Comm’n, Final Order Amending Field Rule 4 in the Spraberry (Trend Area) Field Various Counties, Texas,
Oil and Gas Docket No. 7C-0258301 (Jan. 15, 2009).
24
it bargained for: approximately 81 acres per well. Under the leases’ unambiguous language, all
unassigned acreage reverted to the lessors.
To retain 160 acres per well, Endeavor needed to actually assign 160 acres to each well.
Rule 3 provides that Endeavor could have attempted to assign to each of its existing proration units
an additional 80 acres of “tolerance acreage.” Although such an assignment would hypothetically
raise each well’s maximum producing allowable, when productive acreage is a component of the
maximum producing allowable—as it is here—the operator must “verify[] that additional acreage
is actually necessary or required to achieve the maximum allowable.” Philip C. Mani, Interpreting
and Drafting Retained Acreage Provisions—Partial Termination of Leasehold Rights, STATE BAR
OF TEX. OIL, GAS, & MINERAL TITLE EXAMINATION COURSE, at 6 (2015). Indeed, if a well “is
draining a certain amount of acreage, but the operator intends to claim more than that amount, the
operator may open itself up to claims that it is not acting in good faith in purporting to retain a
substantially greater amount of acreage.” Id.; see also Petry at 4 (“If the technical evidence clearly
show that the well is draining eighty (80) acres, but the client operator is claiming three hundred
twenty (320) acres under the maximum allowable, that client may open itself up to claims that it
did not act in good faith in retaining the full 320 acres.”). Of course, this question is not directly
before us, as Endeavor did not assign any tolerance acreage to its proration units.
In summary, Endeavor’s retained-acreage clauses provided that its leases would
automatically terminate except for lands “located within a governmental proration unit assigned
to a well . . . with each such governmental proration unit to contain the number of acres required
to comply with the applicable rules and regulations of the [Commission] for obtaining the
maximum producing allowable for the particular well.” The applicable field rules required
25
Endeavor to “file with the Commission certified plats of their properties,” and for those plats to
“set out distinctly all of those things pertinent to the determination of the acreage credit claimed
for each well.” Endeavor assigned 81-acre proration units to each of its producing wells, as
depicted in the certified plats it filed with the Commission. Thus, at the clauses’ triggering event—
the end of each lease’s continuous-development period—Endeavor retained only the acreage it had
assigned to each well. That amount was 81 acres—not 160 acres. Consequently, Endeavor’s leases
terminated as to the acreage that Discovery’s leases cover, which Endeavor did not assign to a
producing well.
Other construction rules
Endeavor argues that two additional rules of construction require the conclusion that it
retained its lease as to 160 acres per well. Again, we do not agree.
1. Forfeiture
Endeavor contends that the court of appeals’ construction of its leases’ retained-acreage
clauses violates the “rule against forfeiture” because it “divest[ed] Endeavor of 320 acres of
productive property, and did so without compensation.” Although we have noted that “[f]orfeitures
are not favored in Texas, and contracts are construed to avoid them,” Fischer v. CTMI, L.L.C., 479
S.W.3d 231, 239 (Tex. 2016) (quoting Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d
768, 774 (Tex. 2009)), we agree with the court of appeals that its construction does not result in
forfeiture, but rather a partial termination of the leases under their own terms. This result arises
from the fact that the retained-acreage clauses operate as special limitations on Endeavor’s
26
leasehold interests.14
A special limitation in an oil and gas lease provides that the lease will automatically
terminate upon the happening of a stipulated event. This event may be the cessation of production
in contravention of the lease’s terms,15 failure to commence drilling or reworking operations within
the time the lease required,16 or an operator’s failure to timely pay a shut-in royalty the lease
required.17 And although whether a lease has terminated “‘is always a question of resolving the
intention of the parties from the entire instrument,’” we will not find a special limitation “unless
the language is so clear, precise, and unequivocal that we can reasonably give it no other meaning.”
Anadarko, 94 S.W.3d at 554 (quoting Fox. v. Thoreson, 398 S.W.2d 88, 92 (Tex. 1966)).
The plain, grammatical language of Endeavor’s leases shows that the parties intended the
leases to continue only as to acreage that had been assigned to a well as reflected in the certified
plats Endeavor filed with the Commission, and that the leases “shall automatically terminate” as
to all acreage not assigned to those proration units. This is precisely the type of clear and
unequivocal language that imposes a special limitation on a lease. Here, the leases required
14
Forfeitures, which generally arise from the failure to comply with a condition subsequent, cut short the
natural limit of the leasehold interest. A.W. Walker, Jr., The Nature of the Property Interests Created by an Oil and
Gas Lease in Texas, 8 TEX. L. REV. 483, 486 (1930) (“A condition subsequent is a forfeiture provision; it renders the
estate liable to be defeated by the happening of the event expressed in the condition prior to the normal termination of
the estate.”). By contrast, a special limitation “does not operate to cut short the estate but simply fixes one of the
natural limits of the estate beyond which the estate cannot endure, being similar in this respect to a general limitation,
and, like a clause of general limitation, is in no proper sense a forfeiture provision.” Id. (footnote omitted).
15
See Freeman v. Magnolia Petroleum Co., 171 S.W.2d 339, 342 (Tex. 1943) (“Here the parties agreed that
if no gas was being produced on April 7, 1940, the lease should terminate.”).
16
See Samano v. Sun Oil Co., 621 S.W.2d 580, 584 (Tex. 1981) (“When production stopped on May 4, 1977,
during the secondary period, Sun had an express sixty days to drill or rework the well. When it failed to do so, the
lease by its express terms automatically terminated.”).
17
See id. at 583–85.
27
Endeavor to either (1) continue developing the tracts at issue, or (2) by the end of the continuous-
development period, assign sufficient acreage to the wells’ respective proration units to achieve
the maximum producing allowable for those wells. Because Endeavor did not assign the
undeveloped acreage to a proration unit, Endeavor’s leases automatically terminated as to those
lands. Lessees who agree to leases like those at issue here must meet “the condition which they
imposed upon themselves . . . . For their failure to do so they have only themselves to blame.”
Freeman, 171 S.W.2d at 342.
2. Construed as a whole
Finally, Endeavor argues that only its construction is consistent with the rest of the contract.
Specifically, Endeavor notes that the leases’ continuous-development clauses use the term
“proration unit” to refer to a part of the lease “even if it had no well.” Yet Discovery construes
“assigned to,” as used in the retained-acreage clause, to refer to the proration unit the operator
assigns to a specific well. Endeavor contends that, because the term must bear the same meaning
in both clauses, the term “assigned” as used in the retained-acreage clause must refer to what the
Commission assigns, not what the operator assigns. We disagree.
The continuous-development clauses provide that the leases will terminate “as to each
proration unit upon which there is no well or wells thereon located and then producing oil or gas
in commercial quantities.” We do not agree that this clause suggests that a proration unit can exist
where “there is no well.” Rather, it refers to a proration unit upon which there is no well that is
both (1) located on the proration unit, “and” (2) producing oil or gas in commercial quantities
when the termination occurs. “‘And’ is a conjunction that means ‘along with or together with.’”
Harkins, 501 S.W.3d at 604 (quoting And, WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY
28
80 (2002)). Given the retained-acreage clauses’ identical requirement that proration units contain
a producing well, we agree with Discovery’s interpretation.
IV.
Conclusion
We conclude that the retained-acreage clauses in the leases at issue permitted Endeavor to
retain the amount of acreage Endeavor “assigned to” each well in the plats it filed with the
Commission. Thus, we affirm the court of appeals’ judgment.
_____________________
Jeffrey S. Boyd
Justice
Opinion delivered: April 13, 2018
29