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.

Scenes from the trial lawyer’s conference room:

Client: “Lookee here! This paragraph says we win!”

Lawyer: Yes, but what about all the other paragraphs?”

“Those don’t matter.”

Why is that?”

“Because they don’t help us. Did you graduate from law school?”

But the court will harmonize all the provisions in the document.”

“If I want harmony I’ll go with the Everlys. If you’re afraid of a fight, I’ll find me a lawyer with a backbone. I’m thinking the tough, smart lawyer. That one that’s always on TV.”

and:

Client: “@*^& the words. I’ll tell ’em what the deal really was.”

(Repeat client disappointment)

In XTO Energy v. EOG Resources, a title dispute over the mineral estate in 1,653 acres in Atascosa and McMullen counties, Texas, the loser tried both, to no avail. Continue Reading Foreclosure Included the Minerals Because the Documents Said So

Co-author Chance Decker

The ruling from the Supreme Court of Texas in JP Morgan Chase Bank, N.A., et al v. Orca Assets, G.P., L.L.C. was foreseeable. Experienced energy professionals who pass on the opportunity to examine title for themselves are not sympathetic plaintiffs in a suit claiming reliance on oral statements of the lessor.

How did this happen?  Continue Reading Fraud Claim Rejected for Unreasonable Reliance

Let’s get right to the takeaway: Despite the humble hourly rate operators are typically willing to fork over for title examination, the job isn’t easy and you’d better put your trust in a practitioner with expertise, patience, and an eye for detail.

It took a court of appeal two tries to get this one right, after being enlightened by an aggrieved party. These errors are typically discovered in the real life of a producer when an aggrieved royalty owner says you’ve overpaid somebody else. Let’s hope the well is still producing when they bring the matter to your attention. Continue Reading Mineral Title Examination – It’s Not Easy  

Chauvin v. Shell Oil Company et al is the pot full of legal unpleasantness that can be stirred up by landmen trying to buy easements, leases, and the like.

A number of plaintiffs – descendants of grantors of two parcels of land in St. Charles Parish, Louisiana – were contacted by pipeline companies seeking servitudes. Apparently believing that betting on litigation offered a better return than the trifecta at the Fairgrounds, the descendants sued Shell and several pipeline companies holding servitudes from Shell for trespass. In the end, the court denied the plaintiff’s claims; they couldn’t carry their burden to prove their ownership of the property. Continue Reading Trespass Plaintiff: First, Prove Your Ownership

Co-author Chance Decker

Gloria’s Ranch v. Tauren et al – the Louisiana lenders’ bad dream

Anyone seeking stability in the law governing E&P activities in Louisiana will view the lower court decision as a grave error that must be corrected. Virtually every mortgage provides safeguards to protect collateral and manage lenders’ risk. The court of appeal reasoned that because of those provisions, the lender controlled the ability of the borrower to execute a release of a mineral lease, resulting in solidary liability when the borrower-lessee failed to release its lease. Continue Reading An Oil and Gas Case to Expect From Louisiana, and Another From Texas

To begin, choose from these candidates for the all-world spendthrift hall of fame:

  • Imelda Marcos.
  • Every Congress since you and I were little babies.
  • Any MLB team that would trade for Giancarlo Stanton.
  • All Power Five football schools not named Vanderbilt.
  • The eventual winner of the Amazon HQ2 sweepstakes.
  • Robert Baratheon, Lord of the Seven Kingdoms.

In Bradley v. Shaffer, Darrell, a beneficiary of a mineral trust established by his grandparents, purported to convey to Bradley his mineral interests that were subject to the trust and any interest held in trust that he might acquire in the future. The trustees sued, alleging that Darrell had no authority to convey his beneficial interest. Bradley argued that an extension of the trust violated the Rule Against Perpetuities.  Spoiler: It didn’t.

A primer on Texas trust law … who owns what and other rules:

Continue Reading Mineral Conveyance Thwarted by a Spendthrift Provision

Conoco Phillips Company v. Ramirez et al is a helpful reminder when preparing a document transferring title:

  • “Family vernacular” is a great way to communicate in wedding toasts and funeral eulogies, not so much in land conveyances.
  • Absent an express reservation, a conveyance of land includes both the surface and the underlying minerals.
  • When there is a claim of ambiguity, extrinsic evidence may not be used to create doubt as to the plain meaning of the words.

Continue Reading Informal Description Dooms Oil and Gas Leases

Co-author Chance Decker

You are selling properties. The buyer thinks you own the deep rights but you know your long-time partner owns them. You attend the closing. You don’t tell the buyer that he’s got the ownership wrong. You are protected by a contract. Do you fess up? What if it means $6.8 million?

In Freeman, et al v. Harleton Oil & Gas Chesapeake agreed to buy three-year term assignments of Buffco’s and Twin Eagle Resources’ interest in 14,000 acres in East Texas for $232 million. Continue Reading An Oil Patch Morality Play – Part 1