Lease Disputes

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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.

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

There are specific requirements for proving that an oil and gas lease has survived past its primary term. Fail to hit them all when the lease is challenged at the courthouse, and disappointment will be order of the day.

The heart of the dispute in J&L Oil Company v. KM Oil Company was whether plaintiff J&L satisfied the requirements of a Pugh clause in a 1951 lease. J&L sued KM for impinging upon J&L’s lease on 55 acres in Caddo Parish, Louisiana. Summary judgment in favor of KM, the alleged impinger, was affirmed. Continue Reading Lack of Proof Dooms Pugh Clause Defense

Co-author Chance Decker

The Texas Supreme Court recently heard oral argument in three intriguing oil and gas cases.  Here’s what you need to know about two of them (We’ll address the third case soon).

Adams v. Murphy Exploration & Production Co. USA

Did lessee Murphy comply with an offset-well clause that doesn’t state where the offset-well must be drilled?  When a well was drilled on an adjacent tract, Murphy drilled its offset-well more than 2,000 feet from the triggering well. Continue Reading Opinions to Expect From the Texas Supreme Court

Co-author Trevor Lawhorn

*Kind of; this is a federal court predicting what the Ohio Supreme Court would do.

In Ohio, in calculating royalties in a market-value-at-the-well lease (as distinguished from a “proceeds” lease), post-production costs are to be shared proportionately by the working interest and royalty owners. The lessee’s duty to market does not extend to expenses incurred in sales not at the well-head. This is consistent with other producing states such as Texas and Pennsylvania.  Continue Reading Ohio Takes a Position on Market-Value-at-the-Well Royalty Clauses*

Co-author  Chance Decker

What does it take these days to get money from a Texas jury? Not much, it seems; in XTO v. Goodwin the trick was convincing a higher court that you should keep it.

Let’s start with the minefield that is the law of evidence:

  • Expert opinion testimony must be based on facts, and sound reasoning and methodology.
  • Conclusory or speculative opinion testimony is not relevant.
  • An opinion with no factual substantiation is speculative or conclusory.
  • Expert testimony based on unreliable data or flawed methodology is unreliable and does not satisfy the relevancy requirement.
  • Unreliable expert testimony is legally no evidence.

Continue Reading Trespass But no Damages in a Texas Case

Updated for a math infraction, thanks to several astute readers.

In Glassell Producing Company v. Naquin, the question was:

Did a conveyance among siblings create a real right in property, or was it an appendage of a lease that ceased to burden the property once that lease was terminated? Continue Reading An “Appendage” Determines a Louisiana Royalty Dispute

Co-author Chance Decker

How many times must an operator suffer for a mistake in a unit declaration? Samson Exploration LLC v. T. S. Reed Properties Inc. makes it twice. (See Hooks v. Samson Lone Star for the first round). The Texas Supreme Court ruled that a lessee could not avoid a contractual obligation to pay royalties from a zone shared by two pooled units. Continue Reading Unit Operator Pays For a Problem of its Own Making