Co-author Brittany Blakey*
A few things you should know about the acreage retention clause:
- Foremost and always, read the instrument – not all clauses are created equal. But you know that.
- Consider the clause before perfunctorily filing P-15’s, plats, and other RRC forms.
- 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.
Endeavor obtained Spraberry leases. The Leases identified the acreage that could be retained by referencing Railroad Commission’s regulatory concepts of proration units and allowables:
“[The] lease shall automatically terminate . . . save and except those lands and depths located within a governmental proration unit assigned to a well . . . [containing] 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.”
Spraberry field rules allotted 80 acres to a proration unit with an additional 80 acres of “tolerance acreage” at the operator’s election.
“Assigned” has a meaning …
In its P-15’s and plats filed with the Commission Endeavor assigned 80 acres to each well. A dispute arose as to whether top leases for undeveloped, un-retained acreage were valid. Endeavor alleged that the top-leased acreage was included in the 80-acre units as “tolerance acreage.”
Not so, said the court. “Assigned” referred to the lessee’s assignment of acreage through its regulatory filings. The top-leased acreage was not held by the Endeavor lease due to the express language of the clause. Having “assigned” 80 acres, Endeavor retained “exactly what it bargained for: approximately 80 acres per well.”
Result: Ask all you want; you shall NOT receive, not even what you need.
Second Lesson: XOG Operating, LLC v. Chesapeake Exploration
Like Endeavor, at issue was the amount of acreage that would be retained by drilling. Under an assignment of leases, Chesapeake would retain acreage within the proration or pooled unit for each well. “Proration unit” was defined to include the boundaries of a proration unit “then established or prescribed by field rules.” Chesapeake filed a Form P-15 for each well and assigned proration units totaling 800 acres.
“Prescribed” saves the day …
The court held that acreage “included within the proration unit for each well … prescribed by field rules” referred to acreage set by the field rules, not acreage assigned by the operator. At the time, the field rules defined a “prescribed” proration unit as 320 acres. Therefore, under the retained acreage provision Chesapeake retained 1,920 acres for the five wells it drilled, not only 800 acres.
Result: Ask in the right way and you SHALL receive.
Want to learn more?
Find additional reading on the impact of these cases in Gray Reed’s client advisory. Have you considered the perils of assigning too much acreage to a proration unit?
*Brittany is an accomplished Texas Tech grad now in the combined Baylor University JD-MBA program and a Gray Reed summer associate.