In PPC Acquisition Co. LLC v. Del. Basin Res., LLC[1], the El Paso Court of Appeals considered conflicting interpretations of retained acreage clauses and whether the leases terminated in whole or part due to (i) assignments of proration unit acreage (Form P-15) or (ii) by the reclassification of a gas well to an oil well.
Northern Trust Company (“Northern Trust”), Lowe Royalty Partnership, LLP (“Lowe”), and Colt Development LLC (“Colt”) own mineral interests in a 640-acre parcel of land in Reeves County, Texas, in varying percentages.[2] In 2000, the three entities entered into three different leases with Lyle Canon, who later assigned its rights to the leases to Tom Brown. In 2002, Brown drilled a gas well, known as the Colt No. 1 Well, and filed an “untimely” Form P-15 with the Railroad Commission designating a 640-acre proration unit.[3] Brown subsequently assigned its rights in the leases to J. Cleo Thompson, who reworked the gas well and reclassified it as an oil well in 2010. Thereafter, Thompson filed a new Form P-15 designating a 160-acre proration unit for the reclassified well. After additional assignments, and at the time of this suit, the leases were held by Delaware Basin Resources, LLC (“DBR”), OXY Delaware Basin, LLC, OXY USA WTP LP, and OXY USA, Inc. (“OXY”).[4]
In 2017, Northern Trust, Lowe, and Colt discovered the Colt 1 Well had been reworked into an oil well, and a 160-acre proration unit had been designated in place of the original 640-acre designation. Soon after, Northern Trust and Lowe executed new top leases with White Horse Exploration, who later assigned its interests in the two leases to PPC Acquisition Company, LLC (“PPC”).[5] The dispute arose when DBR and OXY were both faced with demands from PPC and Lessors to release acreage under the respective leases. DBR and OXY argued that their leases were fully valid and in full force and effect for the entire 640-acre parcel. Whereas PPC and the Lessors presented various arguments that the retained acreage clauses in all three leases caused the leases to terminate in whole in part in either 2003 or 2010, all of which the Court considered individually.[6]
The Court first addressed PPC and Northern Trust’s argument that the Northern Trust lease terminated in 2003 in its entirety due to Tom Brown failing to timely “dedicate” a proration unit to the Railroad Commission. The Court ultimately held that the Northern Trust retained acreage clause created a covenant, rather than a condition on the lease, and the breach of the covenant by the Lessee did not cause the lease to automatically terminate in whole or part.[7] The Court’s analysis turned largely upon the absence of the “clear and unequivocal” language necessary to create a condition or special limitation on the lease.
The Court began its analysis by outlining the well-established distinction between a condition and a covenant. The Court explained that a condition in an oil and gas lease provides for the lease to automatically terminate upon the absence of the stipulated event, whereas a covenant is considered a mere promise to perform a specific action, and failure to perform does not terminate the lease but does allow a remedy for nonperformance through damages.[8] Citing a recent Texas Supreme Court holding, the Court noted that they must look to the entire document to resolve the intentions of the parties but should not find a condition in the lease unless the language is so clear and concise that it cannot reasonably be given another meaning.[9]
The retained acreage clause in the Northern Trust lease provided that “after the expiration of the primary term and after all continuous operations have ceased, Lessee and/or its heirs, successors and assigns shall release all acreage not then dedicated to a proration unit designated by the appropriate regulatory body.…”[10] The Court explained that the Northern Trust retained acreage clause provided only that the Lessee “shall release” acreage that had not been dedicated to a proration unit, and that the clause lacked clear and unequivocal statement that the lease “shall terminate” if the Lessee failed to designate a proration unit.[11] The Court’s decision was reinforced by the presence of clear and unequivocal language that provided for automatic termination in other provisions of the lease, which demonstrated that the parties knew how to create a condition but had not chosen to do so in that instance.[12]
The Court then addressed PPC and Northern Trust’s argument that the Northern Trust retained acreage clause caused the lease to terminate in 2010, except for the 160 acres for the reclassified oil well. Northern Trust and PPC contended that the lease’s retained acreage clause was intended to be “rolling” so that there could be a continuing or partial termination of the lease if the wells proration unit were to be reduced. The Court noted that the retained acreage clause could not be considered “rolling” unless, like the issue above, the clause contained clear and unequivocal language to that effect.[13]
Northern Trust and PPC’s arguments were rejected because the Court determined that the retained acreage clause did not contain any language that indicated that the lease could continually or partially terminate on a “rolling” basis. Rather, the clause only specified one “snapshot” date on which it could be triggered, which was “after the expiration of the primary term and after all continuous operations have ceased….”[14] Another Lessor, Colt, argued that express language should not be necessary to create a rolling retained-acreage clause, and the Court should be able to infer the parties’ intent based on a wholistic review of the lease, as that would reflect the Lessor’s undeniable intent to maximize production and to promote development.[15] The Court was not persuaded by this argument and revisited guidance from the Texas Supreme Court and a former holding by the Court itself, where the Court had refused to find that a retained-acreage clause was rolling “in the absence of ‘clear, precise and unequivocal language evidencing the parties’ intent.”[16]
Similarly, Lowe and PPC contend that Lowe retained acreage clause caused the lease to terminate in 2010, except for the 160 acres for the reclassified oil well, premised on their contention that the Lowe lease does contain clear and unequivocal language evidencing the parties’ intent to create a “rolling” retained acreage clause.[17]
The retained acreage clause in the Lowe lease provided that if the Lessee fails to continually develop the leased premises, the lease “shall terminate” as to all leased premises except:
- Each well then producing or capable of producing oil and gas, or either, in paying quantities, and
- Forty acres around each such well which is classified as an oil well and 160 acres around each such well which is classified as a gas well or, in each case, such larger area as may be prescribed by the Railroad Commission of Texas as the proration unit for such well ‘Well Production Unit’ . . .”
- . . . Thereafter operations on or production from . . . any Well Production Unit will perpetuate this lease only as to that Well Production Unit. This lease shall terminate as to each Well Production Unit, respectively, [60] days after the date that production from and operations with respect to such Unit cease; unless, within such [60] day period, Lessee re-establishes production or commences drilling or workover operations on said Well Production Unit….[18]
Ultimately, the Court found that section (iii) of the clause demonstrated the parties’ intent for the retained acreage clause to be triggered on more than one occasion, which was either when production from or operation to a particular unit ceased or when continuous operations ceased (i.e., on a “rolling” basis).[19]
Next, the Court considered whether the Lowe retained acreage clause was triggered in 2010 when the well was reworked into an oil well. DBR and OXY argued that reworking the well did not cause production from or operation on the well to cease, because the well was always producing oil or gas, except when the former Lessee was actively reworking the well. The Court disagreed and held that the retained acreage clause in the Lowe lease was triggered when the well was reworked.[20] The Court explained that the retained acreage clause did not permit the lease to be perpetuated by operations in the generic sense because the clause expressly proscribed that those operations must be from the “Well Production Unit,” which had been explicitly referred to as the proration unit.[21] Therefore, the Court found that the parties intended to relate the continuation of the lease to the size of a proration unit, thus allowing for the lease to partially terminate if there was a reduction to the proration unit through a halt in operations or production from the established unit.[22]
Finally, the Court shed light on the phrase “in each case, such larger areas as may be prescribed by the Railroad Commission of Texas as the proration unit…” that was also encompassed in the Lowe lease. The Court found this phrase to signify field rules that set minimum distances between wells.[23] The Court held that because the field rule for gas wells permitted only one well to each 640-acre proration unit, the field rules prescribed a 640-acre proration unit for gas wells but permitted larger proration units under certain circumstances. The Court did make mention that if the lease would have explicitly linked the amount of acreage the Lessee could retain to only the Lessee’s regulatory filings and not the field rules, the acreage within the regulatory filings would control.[24]
This case is yet another episode in the endless struggle of lessors and lessees to interpret and satisfy retained acreage provisions and obligations. Of particular interest, in this case, is the notion that reclassifying a well and filing an amended P-15/P-16 designating lesser acreage can, in some circumstances, trigger a “rolling” retained acreage provision. As always, Texas courts attempt to avoid lease forfeitures absent clear and unequivocal special limitations in a lease. We have also seen this question arise in the context of term farmout agreements or assignments when there has been a well reclassification. Whether the term assignment allows acreage to be earned and retained on a “snapshot” or “rolling” basis may come into play in that context as well.
[1] 619 S.W.3d 338 (Tex. App.—El Paso 2021, no pet.)
[2] Id. at 343.
[3] Id.
[4] Id.
[5] Id. at 343-44.
[6] Id. at 344.
[7] Id. at 349.
[8] Id at 349 -50.
[9] Id. at 350. See also Endeavor Energy Resources, L.P. v. Discovery Operating, Inc., 554 S.W.3d 586, 606 (Tex. 2018)
[10] PPC Acquisition Co. LLC v. Del. Basin Res., LLC at 347.
[11] Id. at 351.
[12] Id.
[13] Id. at 352.
[14] Id.
[15] Id. at 363.
[16] Id. See also Chesapeake Expl., L.L.C. v. Energen Res. Corp., 445 S.W.3d 878, 886 (Tex. App. 2014)
[17] PPC Acquisition Co. LLC v. Del. Basin Res., LLC at 357.
[18] Id. at 353.
[19] Id. at 358.
[20] Id. at 359.
[21] Id. at 358.
[22] Id. at 358-59.
[23] Id. at 354.
[24] Id. 354-55.
Brad represents clients in connection with upstream energy transactions, complex mineral titles, pooling issues, lease analysis, joint operating agreements, surface use issues, title curative and general oil and gas business matters.