Co-author Rusty Tucker
PPC Acquisition Co., LLC, et al. v. Delaware Basin Res., LLC, et al. addressed retained acreage clauses in three separate oil and gas leases covering the same 640-acre tract in Reeves County, Texas.
Did the lessees hold acreage under the leases based on one producing well, the Colt #1 that was completed in 2003? OR, did the lessees’ failure to drill additional wells, re-classification of the well from gas to oil, and failure to timely file a RRC Form P-15 with a limited acreage designation terminate the leases for all or part of the acreage?
Undivided interests in the minerals are owned by Northern Trust, Lowe and Colt, each of whom executed a lease in 2000. The primary terms expired in 2003. Tom Brown completed the Colt #1 as a gas well and filed a P-15 designating a 640-acre proration unit in the Devonian Field. The well produced continuously until it was reworked and reclassified as an oil well in December 2010, at which time a P-15 was filed designating a 160-acre proration unit in the Wolfbone (Trend Area) Field.
The original three leases are owned by DBR and OXY. In 2017 Northern Trust leased all 640 acres and Lowe leased 640 acres, less and except the “160 acres in the NW corner held by the Colt #1 Oil Well…” Those leases were acquired by PPC Acquisition.
DBR and OXY sued to quiet title in the three leases, claiming their interest encompassed the entire 640-acre tract. PPC countered that the retained-acreage clauses caused the leases to terminate at various times for various reasons.
The trial court held that DBR and OXY retained a full interest in the entire 640-acre tract with respect to all three leases and PPC’s subsequent leases from Lowe and Northern Trust were to be removed as clouds on DBR and OXY’s title.
The decision cites the retained acreage and continuous operations clauses in full. We can’t do that here. See in the opinion the highlighted clauses in each lease: Northern Trust, pp. 9-10; Lowe, pp. 20-21; Colt, p. 32). Warning: The facts in the 38-page opinion are far more complex than discribed in this post.
“Snapshot” or “rolling” clauses?
Did reclassification of the Colt #1 from gas to oil in 2010 terminate a portion of the three leases? A retained-acreage clause functions as a “snapshot” provision when it can only be triggered once, such as at the end of the primary term or when continuous operations have ceased.
A “rolling” clause may be triggered at various specified times throughout the duration of the lease (e.g., requiring the lessee to continually release acreage to the lessor any time a well’s proration unit is reduced). To be “rolling,” the clause must have clear and unequivocal language to that effect.
Northern Trust Lease
- This clause was a “snapshot” provision.
- The clause specified only one date on which it would be triggered (at the end of the primary term and after all continuous operations had ceased). If the clause couldn’t cause automatic termination in 2003, it couldn’t do so in 2010.
- The lease didn’t partially terminate in 2010 when the Colt #1 was reclassified from gas to oil, which held a smaller proration unit
- The clause unequivocally could be triggered at other times and on more than one occasion.
- Thus, when the Colt #1 was reclassified in 2010, it held only a 160-acre proration unit and the lease terminated as to the remaining 480 acres.
- Because the lease didn’t evidence the parties’ intent to create a rolling clause, the lease didn’t partially terminate in 2010 when the Colt #1 was reclassified.
This post covers a portion of the decision. Tomorrow the court discusses covenants and special limitations.
And your musical interlude, for Mr. Potato Head. RIP at the age of 68.