AUSTIN – In a pair of decisions released Friday, the Texas Supreme Court defended seemingly contradictory positions pertaining to oil and gas leases applied to less acreage than the Texas Railroad Commission allows.
The pair of cases is being closely watched by the oil and gas industry as horizontal drilling activity sparks disputes over who owns what tract. Nine of the state’s intermediate courts of appeals have reached conflicting decisions in the last four years on “retained acreage” questions. The Railroad Commission sets a proration unit for each well to prevent waste and promote conservation and development of oil and gas resources.
In one of the cases, Endeavor v. Discovery, the court said a driller’s regulatory filings define the protected acreage around a well, even when the amount of acreage assigned by the operator is less than allowed under Railroad Commission field rules.
In the other case, XOG v. Chesapeake, the court held that acreage included within the proration unit for each well prescribed by field rules refers to acreage set by the commission, not acreage assigned by the operator.
Writing for the court in the XOG case, Chief Justice Nathan Hecht dismissed the company’s contention that the two rulings will generate confusion in the industry.
But unquestionably, parties can contract as they will within the law, and when it comes to retained-acreage provisions, they do exactly that,” said Hecht. “The parties and amici curiae in both cases acknowledge that differences abound. This case and Endeavor apply the same principles and ascribe the words the parties chose their plain meaning. That is not confusing.”
XOG Operating and Geronimo Holding sued Chesapeake, alleging the operator lost rights to half of 1,600 acres in Wheeler County it claimed under the lease through its regulatory findings. The trial court sided with Chesapeake based on the lease. The Amarillo Court of Appeals, in a 2-1 decision agreed, and the Supreme Court affirmed.
The dissenting justice in the court of appeals had relied on the Eastland Court of Appeals Ruling in the Endeavor case. Endeavor Energy Resources and Endeavor Petroleum took four leases in the Spraberry Field in Martin County in 2004 and 2007 and drilled four successful wells, one in each of four 160-acre tracts. Endeavor admits to a clerical error when it filed plats at the Railroad Commission in 2007 designating about 81 acres of protected land around each well, although the commission’s rules allowed 160 acres for each proration unit.
Patriot Royalty and Land believed the Endeavor leases had automatically terminated on the disputed acreage and paid the landowners a bonus and higher royalties for new leases. Patriot assigned the leases to Discovery, which drilled four producing wells.
The trial court granted summary judgment for Discovery and Patriot, finding that Endeavor’s leases had terminated. The 11th Court of Appeals in Eastland affirmed the trial court ruling in 2014.
In the Supreme Court’s opinion, Justice Jeffrey Boyd said Texas courts have consistently recognized that operators, and not the commission, “assign” acreage to a proration unit.
“Endeavor’s argument that the Commission could be the ‘assignor’ is not reasonable because the Commission does not ‘assign’ acreage to proration units – it merely quantifies the amount of acreage an operator assigns,” said Boyd.
The court said that Endeavor retained exactly what it bargained for. “To retain 160 acres per well, Endeavor needed to actually assign 160 acres to each well,” Boyd said.
John “Jad” Davis of Davis, Gerald & Cremer represents Discovery and Patriot. Scott Brister of Hunton Andrews Kurth represents Endeavor.
A law partner of Davis, Ryan Clinton, represents Chesapeake. John R. Hays Jr. of Jackson Walker represents XOG.