AUSTIN – Noting the difference in drilling technology and drainage in the Eagle Ford Shale compared to a vertical well, a sharply divided Texas Supreme Court Friday said Murphy Exploration met its lease requirements for drilling an offset well that mineral owners claimed was too far from the lease boundary.
Landowners and drillers, who took opposing sides in the dispute, were closely following the case.
The five-justice majority said that Murphy Exploration & Production Company-USA complied with the offset-well provisions in leases of two contiguous 302-acre tracts in Atascosa County. Landowners, including Shirley Adams and William Herbst, contended that Murphy drilled too far from the well that triggered the offset-well provision to satisfy the lease requirement.
Writing for the majority, Justice Debra Lehrmann said that horizontal drilling is unlike vertical drilling, where placement of an offset well is an important factor in minimizing the amount of oil or gas being drained.
“First, the only locations that matter in the horizontal-drilling context are the locations of the perforated and fractured portions of the horizontal wellbore,” Lehrmann said. “A well may be drilled in close proximity to the lease boundary, yet have absolutely no chance of preventing (or causing) draining depending on the direction of the horizontal wellbore and the placement of the perforations.”
The majority declined to “read into the lease more stringent obligations than the parties intend.”
“Herbst’s reading of the offset provision to contain a proximity requirement constitutes a significant deviation from the language the parties chose and a failure to acknowledge the circumstances in which the leases were executed,” Lehrmann said.
Joining the majority opinion were Chief Justice Nathan Hecht and Justices John Devine, Jeff Brown and Jimmy Blacklock. The ruling overturned a 2016 ruling from the Fourth Court of Appeals in San Antonio, which had reversed a trial court summary judgment for Murphy.
Justice Phil Johnson wrote the dissenting opinion and was joined by Justices Paul Green, Eva Guzman and Jeffrey Boyd. Johnson said the only evidence outside of the leases were depositions indicating that the landowners were not negotiating the leases on the basis of engineering or geological principles but to protect their minerals from being poached by any type of well on adjacent property.
“The Court discounts the fact that the leases are not limited to the Eagle Ford Shale, but instead encompass all the minerals under the lease acreage, and that the leases do not limit themselves to horizontal wells, but instead also specifically contemplate and reference vertical wells,” Johnson said.
Macey Reasoner Stokes of Baker Botts represents Murphy. Mary A. Keeney of Graves Dougherty Hearon & Moody represents the landowners.
In an amicus brief, the Texas Land & Mineral Owners Association said the court should continue to uphold the rights of landowners to protect their mineral interests from being drained by a neighboring owner. This is necessary even in tight shale formations, the group said, because of the rule of capture underpinning the state’s oil and gas jurisprudence.
The Texas Oil and Gas Association had argued that Texas courts should not dictate the location of offset test wells using old drainage precedent based on vertical drilling technology.
“Precisely because Eagle Ford Shale fracs are most productive near the wellbore, horizontal wells are now drilled as close as 200 feet apart,” TxOGA said in its amicus brief. “And the only way to actually prevent drainage by a shale well is to frac directly into the other well’s fractures, causing it to produce sand rather than petroleum. Thus, leases such as this one that are drafted to address production from the Eagle Ford Shale do not impose a duty to drill protection wells to prevent drainage.”
Read the majority opinion here and the dissenting opinion here.