In Zarvona Energy v. Black Stone Minerals Company, a Texas Court of Appeals reiterated that the cessation-of-production clause in an oil and gas lease cannot be read in absolute terms as a lessor might want it to be. The Court also grappled with ambiguities among four different provisions in the lease.
Co-author Skyler StuckeyIn Endeavor Energy Resources, L.P. v. Energen Resources Corp. et al. the Supreme Court of Texas construed a continuous development clause in an oil and gas lease covering 11,300 acres in Howard County. After the primary term, lessee Endeavor could retain acreage by drilling a new well every 150 days. The clause gave Endeavor “ … the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between the completion of one well and the driling of a subsequent well.
After the primary term, Endeavor drilled 12 wells that extended the lease. Endeavor began drilling a 13th well 320 days after completing the preceding well. In the ensuing period Energen top-leased the supposedly non-retained parcels. Litigation ensued.
The dispute focused on how to calculate the number of “unused days”. Endeavor argued that it could carry forward unused days across multiple 150-day terms. Energen argued that unused days in any given 150-day term could be carried forward only once, to the next term.
Continue Reading Texas Supreme Court Deems Continuous Development Clause Ambiguous
Quick answer: It depends on what the lease says. Last week featured a tug-of-war between a producer and the community in which it operates; this week in HJSA No. 3 LP v. Sundown Energy LP it’s the producer and the lessor.
HJSA owns the mineral estate under 30,540 acres in Ward County, Texas. Sundown is the lessee. After six years the lease could be maintained only as to individual tracts from which there was production in paying quantities and as to other tracts only if Sundown was engaged in a “continuous drilling program”.
Dueling lease provisions (emphasis mine)
Paragraph 7B says:
The first such continuous development well shall be spudded in on or before the sixth anniversary of the Effective Date, with no more than 120 days to elapse between completion or abandonment of operations on one well and the commencement of drilling operations on the next ensuing well.
Paragraph 18 is a 90-day temporary cessation clause that defines drilling operations as:
“ … actual operations … (spud-in with equipment capable of drilling to Lessee’s objective depth); reworking operations, including fracturing and acidizing; and reconditioning, … “.
Continue Reading Spudding? Reworking? What are “Operations” Under an Oil and Gas Lease?