Exclusive: Referees gather after Cowboys – Packers

Have you ever wondered about the original purpose of the retained acreage clause? According to Professor Kramer, it was “to prevent the lessee from losing those portions of a lease that had productive wells thereon if the rest of the lease terminated”. The term has been 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.”*

To the Point – The Lessons

  1. Lease clauses evolve over time. Before you march off to the courthouse armed with righteousness, mean lawyers, and a full head of legal steam, read the lease carefully to determine what it says about your problem. An old case addressing, for example a retained acreage clause, might not yield the same result if yours is written in a different way.
  2. A position based on an interpretation of a lease that is not consistent with the plain language will fail. If the parties intended a certain purpose they would have said so, but if they didn’t, it’s not up to the court to rewrite the lease.
  3. Inequitable or not, the language of the lease controls.

Chesapeake Exploration L.L.C. v. Energen Resources Corporation involved the retained acreage clauses of two oil and gas leases.  According to the leases, when continuous development ends, the lease terminates, except as to acreage for “each proration unit established under … [the] rules and regulations [of the RRC … ] or upon which there exists (either on the above-described land or on lands pooled or unitized therewith) well capable of producing oil and/or gas … “.

Under the pooling clauses, drilling and production anywhere on pooled acreage is treated as if it were on the land described in the lease, regardless of where the well is located.

The two leases covered Section 25, 80 acres of which was pooled with 560 acres in adjacent Section 18 to form the Cadenhead No. 1 Pooled Gas Unit. The well was drilled and completed on Section 18 and has continually produced. The Cadenhead No. 2 Pooled Gas Unit consisted of 560 acres in Section 25 and 80 acres in Section 18. That well was also on Section 18. The operator designated all of Section 25 as the proration unit for No. 2. Two months later continuous development ended on the leased premises. The No. 1 continues to produce, the No. 2 was P&A’ed. Energen drilled a well on the 560 -acre portion of Section 25 that had been pooled with the 80 acres of Section 18.

The Issue and the Result

Did the leases remain in effect as to all of Section 25 or only as to an 80 acre portion? The court concluded that the leases remained in effect for all of Section 25. Because the Cadenhead No. 2 was capable of producing, the lease was preserved as to its designated proration unit, all of Section 25, a portion of which had previously been pooled with Section 18.

The plain grammatical language of the retained acreage clauses do not provide for rolling termination of non-producing proration units, as argued by Chesapeake. Instead, production anywhere on Section 25 or land pooled was sufficient to maintain the leases as to the entirety of Section 25 as long as a well capable of producing was on the land or land pooled therewith. Under the __ clause, the leases continued as to all the leased land beyond the primary term as long as oil or gas was being produced from anywhere on the property.

Chesapeake argued that the parties could not have intended for production on a single unit to maintain the entire lease indefinitely after continuous development ceased. The court acknowledged the equitable appeal of this argument, but it was refuted by the language of the lease. Operations anywhere in the unit are treated as if they have taken place on each tract within the unit.

Is This Ruling Correct?

I’m not so sure it is, but this post is already too long. I might revisit it in the future.

I admire lawyers who make it look easy. Stevie Ray Vaughn had a way of doing that with a guitar.

*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)

Co-author Travis Booher

Efforts to introduce forced pooling into Texas law continue. House Bill 100, the Oil and Gas Majority Rights Protection Act, has been introduced by Rep. Van Taylor in the Texas legislature. Today’s post summarizes the bill. Upcoming entries will ponder whether it is a victory over the tyranny of the myopic minority or a fascist invasion of our God-given and hard-earned property rights.

The bill authorizes a working interest owner to apply to the Railroad Commission for an order for the unit operation of a common source of supply or a part of that common source of supply.

The application must:

• Describe the unit area,

• Identify the operations contemplated,

• Include a copy of the plan and all related agreements, such as an operating agreement (including the provisions you would typically find in an operating agreement),

and allege that:

• The minimum required approval of the plan has been met (more on this later),

• Each owner has been given an opportunity to enter into the unit on the same basis, and

• The applicant has made a good faith effort to voluntarily unitize all the interests.

(§ 104.051)

In order to approve an application the Railroad Commission must make these findings after a hearing:

• The plan is reasonably necessary to conduct unit operations and to prevent waste, protect correlative rights and promote the conservation of oil and/or gas,

• The estimated incremental recovery of oil and/or gas is reasonably anticipated to exceed the estimated incremental expense of the operations,

• Productive limits of the common source of supply have been reasonably defined by exploration and development,

• If only a portion of the common source is to be unitized, operations will not have a material adverse effective on the remainder of the common source,

• Unsigned owners have been given a reasonable opportunity to enter into a unit agreement on the same basis as those who have signed,

• The applicant has obtained the permission of a minimum number of working interest and royalty interest owners (see below for percentages),

• Unit expenses to be charged are reasonable and necessary,

• Expenses for operations will be for the common benefit of all interest owners and will be allocated on a fair and equitable basis and will not favor the unit operator over other unitized owners,

• A working interest owner will have a reasonable right to review all records pertaining to operations.

• The plan is, in all respects, fair, reasonable and equitable.


To get a plan approved, the applicant must have a super majority of at least 70% of the aggregate working interest and a super majority of at least 70% of owners of royalty interests that complete and return an approval or ratification and a ballot. (§104.056)

A tract’s fair share of production must measure by the value of each tract, taking into account acreage, quantity of oil and gas from the tract, the geological struture, and other factors. (§104.103)

The operator may charge as much as 300% penalty to workingineerest owners who do not pa their share of expenses, and will have a lien on working interests to secure payment of operating expenses. (§104.108)

Surface use is addressed:

• A conflict between a lease and the unit plan is to be resolved in favor of the unit plan.

• Lease or surface use provisions that conflict with the use of the surface for unit operations so as to render the unit plan uneconomical may be amended by the RRC.


There are provisions for storage of CO2. (§§104.209 and 104.210).

We see benefits to Texas oil and gas production and pitfalls for some royalty and small working interest owners. More to come.