Co-author Derek Younkers *

And what a difference it was! In Apache Corp. v. Apollo Expl. LLC et al, Apache and others acquired an oil and gas lease on 100,000+ acres in the Texas Panhandle. The primary term was three years. The effective date was January 1, 2007, “from which date the anniversary dates of this Lease shall be computed”.  Extension beyond the primary term required a producing well and the creation of three blocks of equal acreage from which the lessees would drill wells to a combined depth of 20,000 feet per block per year.

The parties recorded a Memorandum of Lease in the public records. The Memorandum recited that it was “subject to other provisions of the Lease” and “the Primary Term thereof expires on the 31st day of December 2009.”

The other lessees sold 75% of their working interest to Apache by a series of substantially identical purchase-and-sale agreements. Section 2.5 granted each Seller a back-in working interest for up to one-third of the interests it conveyed to Apache once the wells reached “Two Hundred Percent … of Project Payout.”

Section 4.1 required Apache to offer “all of [its] interest in the affected Leases (or parts thereof) to Seller at no cost to Seller” should Apache’s drilling commitment for the year result in the loss or release of any of the leases.

In 2014, Apache bought lessee Gunn’s remaining interest of the leases and its PSA rights.

In 2015, Apache failed to drill 20,000 feet in the North Block of the lease.

The question for the Court: Did the North Block expire on December 31, 2015, or January 1, 2016?  The day the North Block expired determined whether Apache breached the contract by failing to offer the lease back to Sellers or had until the end of 2016 to drill the 20,000 feet.

The Sellers sued for breach of contract and declaratory relief. Apache filed four motions for summary judgment asking the Court to rule that:

(1) Apache complied with § 4.1;

(2) § 2.5’s 200% provision meant that Apache had to reach a 2:1 return on investment before Sellers could exercise their back-in option;

(3) the North Block expired on January 1, 2016; and

(4) § 4.1 required Apache to only offer back each Seller’s original interest, not all of the interests.

The Court applied the common-law default rule for describing time when parties use the words “from” or “after.” Under the rule, the date from or after a period is to be measured is excluded in calculating time periods. Thus, a period of years ends on the anniversary of the measuring date, not the day before. No language in the lease manifested a clear intent to displace the rule.

The Memorandum stipulated the lease would expire on December 31, 2009, but by its terms the Memorandum was subordinate to the lease. The lease was not ambiguous, so the Court ignored extrinsic evidence of the December date and found the primary term ended on January 1. Thus, the North Block expired on January 1, 2016.

The Court found that Section 4.1 only required Apache to offer back to each seller its original interest. A contrary interpretation would require Apache to offer each seller 100% of the same interests. (The court of appeal decision focused more on this issue.)

Finally, Section 2.5 meant a 2:1 ratio of profits to expenses. The Sellers’ argument that they could back in when profits equaled expenses would render the 200% language meaningless.

The Court remanded the case for further proceedings.

Your musical interlude.

* Derek is a rising 2-L at Baylor Law School and a Gray Reed summer associate.

Co-author Rees LeMay*

In Apollo Exploration, LLC v. Apache Corp., Texas’ 11th Court of Appeals analyzed several provisions of purchase and sale agreements in a complex oil and gas transaction and demonstrated a measured, text-centered approach to the interpretation of contract language.

Significant parts of the holding hinged on the Court’s reference to defined terms in the contracts, highlighting the importance that contracting parties clearly clarify contract terminology. The lesson for the scrivener is to know and understand two things: The effect of each word in the document, and the “big picture”: What, ultimately, are the parties trying to accomplish? This is as necessary as it is difficult, especially when the document is long and the transaction is complex.

The case is of particular interest in the context of PSAs, which address, and therefore must define, back-ins, “payout”, “leases” and a host of other terms. Apollo and its co-appellants had collectively owned 98% of the working interest in 109 oil and gas leases, covering significant tracts in the Panhandle. Apache purchased 75% of the interests, entering into four separate (but largely identical) PSAs.

The meaning of “all” and “affected leases”

Apache was to provide the sellers with an annual review and commitment for development of the leases in each the coming year. If the contents of the reports would result in the loss or release of any of the leases, Apache would then have to “offer all of [its] interest in the affected Leases” to the seller, and to transfer them to the seller upon the seller’s acceptance.  The fight centered on construction of the simple word “all,” as well as the term “affected leases.” As to the latter, Apollo argued that, to the extent that some leases covered fractional mineral interests in overlapping acreages, the term “affected leases” required Apache to offer all leases covering a given acreage, even if only one would be lost. Apache countered that it need only offer the specific leases that were set to be lost. The court, focusing largely on the definition of “Leases” in the PSAs themselves, agreed with Apache.

As to the construction of “all,” though, the Court, relying on the dictionary definition of the word, concluded that the term expressly required Apache to offer all of its interests in an affected lease to each of the sellers. Apache argued that this interpretation would render compliance functionally impossible. The court disagreed, noting that the interests could potentially be transferred to the sellers collectively, or that only one seller might accept. The court saw this result as an “unavoidable” consequence of the PSAs’ express language. Apache was bound by the documents as they were written.

You will live or die by your defined terms

The second disputed provision preserved to each seller a back-in option for up to one-third of its conveyed interest once the project reached 200% of “Project Payout.” Again, the court gave great weight to the PSA’s defined term.  The PSA definition of “Project Payout” provided a definite formula for the calculation. The court rejected Apache’s argument that it needed to achieve a 2:1 return on its overall investment for the back-in option to trigger, instead holding the parties to the expressly defined terms they had agreed on.

Of special interest to trial lawyers are pages 38 to 58, in which the court resolving disputes over the trial court’s striking of several of Apollo’s expert witnesses for reliability and untimely designation of adjusted opinions.

*Rees is a rising 3L at Duke Law school and was a Gray Reed summer associate.

Your musical interlude … Edwin Edwards, RIP

Just because anthropogenic climate change is a legitimate concern doesn’t mean that the most radical pronouncements from the idealogues aren’t fair game for criticism.

Not an idealogue, Bjorn  Lomborg, thinks we should worry about it  … a little bit. That caution has earned him derision as a skeptic or worse, a denier merely because he believes the “threat” is overstated and the proposed cures are needless and far more expensive than the disease.

Now for the vote-trolling presidential aspirants.

How many trillions for the Green Nude Eel?

Uncle Joe Biden opens with an unmuscular $1.7 Trillion and, in honor of his past, is accused of stealing ideas from the GND.  He sweetens the pot by refusing to take money from fossil fuel interests. Continue Reading What’s the Bidding on the Green New Deal?