The Collins mineral lease covers 1131.5 acres in Bienville Parish spread across 10 semi-contiguous tracts.
The lease
Provision 6 of the form lease provides: In the event of cessation of production for any cause following expiration of the primary term, the lessee would be entitled to continue the lease in force by restoring production or conducting operations on the land or on lands pooled therewith within 90 days. (This is a severely simplified summary. You might want to read it yourself)
Exhibit A contains a Pugh Clause (again, simplified): Two years following the expiration of the primary term or any extension or renewal, in the event a portion or portions of the land is pooled with other land so as to form any pooled unit or units (emphasis mine), operations on such unit or units will not maintain this lease in force as to the land not included in such unit or units.
In the event of any inconsistencies the terms of Exhibit A supersede the form lease.
Provision 7 of the lease authorizes the lessee to voluntarily pool acreage. Neither Paragraph 7 nor Exhibit A mention compulsory units or the Commissioner of Conservation.
Five compulsory Haynesville Shale production units collectively encompassing all of the lease acreage were established by the Commissioner of Conservation. XTO operates the wells in these units. Two wells were drilled on portions of the lease included in a unit encompassing Section 18 of the land. Following expiration of the primary term, those wells did not produce during two periods of time exceeding 90 days each.
Triple C’s claims
In Triple C Minerals LLC v. XTO Energy, Inc., Triple C sued for termination of those portions of the lease in the unit for Section 18 arguing that the Pugh clause applies to compulsory pooled units and divides the lease on a unit-by-unit basis. Thus, maintenance of one unitized portion of the lease did not automatically maintain the other portions. The absence of production on Section 18 for two 90-day periods resulted in termination of the lease as to that acreage.
XTO’s response
Because the Pugh clause does not specifically state that it applies to compulsory pooled units, it should be interpreted against such application. The clause was not triggered because it applies only to voluntary pooled units created under the lease’s pooling clause and not to compulsory units created by the Office of Conservation. Even if the Pugh clause was triggered, it did not divide the lease on a pooled-unit-by-pooled-unit basis. Thus, production from wells on other sections maintained the entire lease.
The Court’s analysis
Summary judgment granted in favor of XTO. The Pugh clause was not triggered by compulsory unitization. Under Louisiana law an oil and gas lease is an indivisible obligation unless the parties unambiguously agree otherwise. Creation of compulsory units by the Office of Conservation does not divide a mineral lease. To apply to compulsory units, a Pugh clause must be drafted to clearly apply to compulsory units.
No ambiguity
The Court declined to consider extrinsic evidence. That process would apply to ambiguous contracts but those principles fail when long-standing jurisprudence sets a more specific interpretive role. Ambiguity as to the Pugh clause’s applicability to compulsory units should be resolved against the party seeking to sever the lease. The language of the Pugh clause clearly provides that it applies to voluntary units. The lease was not ambiguous
Your musical interlude. (All you need to know is that he loved Alida since he was 14 but mama does not approve. If she won’t let him have her he will put her in a wagon and take her home.) Not a contemporary love story!