Co-author Trenton Patterson*

We’re not saying you should do it, but there is a recipe for ridding oil and gas leases of pesky burdens: Enter into a new lease covering the same interest as the earlier lease and omit any reference to an intent that the later be subordinate to the earlier. You don’t even have to release the earlier lease. So says TRO-X, L.P. v. Anadarko Petroleum Corp.

You might remember a report on this case at the court of appeal, where we marveled at the skillful (or fortuitous, we’ll never know) way the Anadarko landman won the day via email. Continue Reading Texas Supreme Court Affirms Washout of a Back–in Interest


Co-author Chance Decker

In Murphy Exploration & Production Co. — USA v. Adams the Texas Supreme Court held that an offset well clause in an oil and gas lease did not require the lessee to drill wells calculated to protect against drainage. Four dissenting justices believed the majority disregarded the well-established meaning of “offset well” used in the oilfield for decades.

The facts

Murphy’s two oil and gas leases with the Herbsts had identical offset well clauses:

… in the event a well is completed as a producer … on land adjacent to and contiguous to the leased premises, and within 467 feet of the premises covered by this lease, that Lessee … is obligated to . . . commence drilling operations on the leased acreage and thereafter continue the drilling of such off-set well or wells with due diligence to a depth adequate to test the same formation … . (emphasis ours)

When a well on a neighboring tract triggered the clause, Murphy drilled a well on the Herbsts’ tract 2,100 feet from the triggering well.  Everyone agreed this well would not prevent drainage. The Herbsts argued the well did not satisfy the clause because it was not designed to protect against drainage.

Murphy responded that the well satisfied the clause because all the clause required was that the well be drilled on the leased premises to the same depth as the triggering well. That an offset well must actually protect against drainage or even be calculated to do so has no place in horizontal drilling in tight shale formations where drainage is minimal.

The ruling

The clause did not require Murphy to drill a well to protect against drainage. Murphy’s well satisfied the clause.

The opinion was based on two premises. First, the leases provided their own definition of “offset well”: Murphy had to drill a well:

  • on the Herbsts’ tract,
  • with due diligence,
  • to the same depth as the triggering well, and
  • drilling “such offset well” would satisfy the Clause.

“Such offset well” did not require proximity or actual protection from drainage, and the Court would not impose those terms.

Second, as it was entitled to do, to inform its interpretation the Court considered the “surrounding circumstances” under which the leases were negotiated and executed. The Court concluded that the leases were drafted with horizontal drilling in mind.  Expert testimony was that drainage is almost non-existent from horizontal wells in tight-shale formations like the Eagle Ford.  Thus, it would be “illogical” for an offset well clause to require a well – even an “offset well” – to even attempt to protect against non-existent drainage.

The dissent

According to the dissenters the commonly understood definition of “offset well” required Murphy to drill its offset at a location where a reasonably prudent operator would drill to protect the leasehold from actual or potential drainage, regardless of whether drainage was actually occurring.  The majority opinion effectively read “offset” out of the leases.

The dissent also challenged the majority’s conclusion that the Herbsts negotiated the leases with horizontal drilling in mind. They just wanted production, and the majority ignored other, non-shale formations.

Where will the Court go from here?

The Court purported to limit its holding to these facts, but the opinion could have far-reaching consequences. Wells drilled in the most active plays in Texas today are by and large horizontal, tight-shale wells. The opinion indicates the historical understanding of an “offset well” is antiquated in this context. How can operators protect against drainage that doesn’t exist? Does the Supreme Court believe they can’t and don’t have to even try?

Stay tuned!

We will soon have more on this topic in a lengthier client advisory.

Lessors who can’t get a break from the court, listen to a therapeutic car song for today’s musical interlude.

Co-author Brittany Blakey*

A few things you should know about the acreage retention clause:

  1. Foremost and always, read the instrument – not all clauses are created equal. But you know that.
  2. Consider the clause before perfunctorily filing P-15’s, plats, and other RRC forms.
  3. Absentmindedly relying on field rules to determine how much acreage you can retain? Do so at your peril.  And while your’re reading, read the rules pertaining to your acreage!

Two Texas Supreme Court decisions published on the same day confirm that retained acreage clauses that vary in language from one instrument to another will likely vary in effect. Depending on the language, the lessee might not be able to maintain all the acreage it planned on holding.  Continue Reading Ask and You Shall (Not?) Receive: Retained Acreage Clauses and the Texas Supreme Court

The question posed in our recent discussion of Devon Energy v. Apache Corporation was the meaning of “payor” under the Texas Division Order Statute. The answer, as far as it went, was that in a well drilled without a joint operating agreement the statute does not require the operator to pay lease royalties to mineral interest owners who have leased to a different working interest owner.

The questions raised by the answer

When are mineral owners who have leased to a non-participating working interest owner entitled to royalties under their lease … before or after payout? Arguably, the lessor (to the non-participating WI owner) is not entitled to lease royalties from the lessee of its cotenant (the operator) until after payout of the well.

Well then, what’s keeping the lease alive if it is past the primary term? Absent pooling, the answer could be “nothing”.

As promised, here is more on these questions in “Show Me the Money: Who is a Payor under the Texas Natural Resources Code?” prepared by my very knowledgeable Gray Reed colleagues Paul Yale, Chance Decker and Ethan Wood.

And a musical interlude about venue.

Co-author Sonya Reddy

Defendants accused of stealing trade secrets often claim that publicly available information can’t constitute a trade secret. Sometimes yes, but mineral ownership that can be determined from the public record only after lengthy, expensive, and labor-intensive research in the county courthouse can have trade-secret protection, according to Eagle Oil & Gas Co. v. Shale Exploration, LLC.

 It began like a routine exploration venture … Continue Reading Big Damages in a Texas Trade Secret Case

Co-author Chance Decker

You’ve secured the right leases.  You’ve drilled nice wells in the right locations.  Now, who will pay the royalty owners?  Follow Devon Energy Production Company, L.P. v. Apache Corporation, to be sure.

The takeaways

It is often a worthy strategy for the lessee to be aggressive with counterclaims against the lessor. Or how about we’re the Wehrmacht and the other guy is Poland.

Lessees should think twice about that strategy if it means complaining about the lessor’s public statements. In Lona Hills Ranch v. Creative Oil & Gas Operating LLC et al, that strategy ran afoul of the Texas Citizens Participation Act, Texas’s “anti-SLAPP” statute (“Strategic Lawsuits Against Public Participation”).

The TCPA authorizes dismissal of a legal action based on, relating to, or in response to a party’s exercise of the right of free speech, right to petition, or right of association. Continue Reading Texas Anti-SLAPP Statute Stalls Lessee’s Counterclaim

Briggs v. Southwestern Energy is another way to say “chaos” in Pennsylvania. The Superior Court ruled that fracking may constitute a trespass when subsurface frac-fluid and proppants cross boundary lines and extend into the subsurface estate of an adjoining property owner from whom the operator does not have a mineral lease, resulting the extraction of natural gas from beneath the adjoining property. Continue Reading Trespass by Fracking Recognized in Pennsylvania

Scenes from the trial lawyer’s conference room:

Client: “Lookee here! This paragraph says we win!”

Lawyer: Yes, but what about all the other paragraphs?”

“Those don’t matter.”

Why is that?”

“Because they don’t help us. Did you graduate from law school?”

But the court will harmonize all the provisions in the document.”

“If I want harmony I’ll go with the Everlys. If you’re afraid of a fight, I’ll find me a lawyer with a backbone. I’m thinking the tough, smart lawyer. That one that’s always on TV.”

and:

Client: “@*^& the words. I’ll tell ’em what the deal really was.”

(Repeat client disappointment)

In XTO Energy v. EOG Resources, a title dispute over the mineral estate in 1,653 acres in Atascosa and McMullen counties, Texas, the loser tried both, to no avail. Continue Reading Foreclosure Included the Minerals Because the Documents Said So

Co-author Chance Decker

What could go wrong when the well recovers two times its costs in nine months? Plenty, as we see in Dimock v. Sutherland Energy.

In a Seismic Exploration and Farmout Agreement, Dimock farmed out a 15-section area in Hardeman County, Texas, to Sutherland to drill the Hamrick #3.  Project payout was that point when revenues equaled two times Sutherland’s capital costs. The parties disagreed over whether payout occurred. The question was whether a $1 million seismic shoot after the well was drilled was a capital cost.

First, why do I care?

  • “Boilerplate” in contracts is there for a reason.
  • Should important terms be defined? This case suggests yes.
  • Grammar matters. An errant comma cost one of the parties money and time.
  • Defending a fiduciary duty claim will not be an enjoyable experience due to the high standard of behavior required of fiduciaries in Texas. Avoid fiduciary duties if you can. Seek them from the other guy if you can.

Continue Reading Farmout Agreement Worked Over by the Court