151 Pioneer Natural Res. USA, Inc. v. W.L. Ranch, Inc.

Tuesday, September 1st, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

In Pioneer Natural Res. USA, Inc. v. W.L. Ranch, Inc.1, the court considers the relationship between a partial release (“Pugh”) clause and a pooling clause in a lease and finds the pooling clause to be controlling. The W.L. Ranch lease had a primary term of one year and so long thereafter as “operations” were conducted upon “said land.” The lease also authorized pooling and, if pooled, “operations” on the pooled unit would extend the primary term. Prior to the expiration of the primary term, the leased acreage was pooled to form a 378 acre unit, and Pioneer commenced drilling a horizontal well. However, the wellbore did not penetrate the W.L. Ranch lease until after the primary term expired.  The well was eventually plugged and abandoned.2

W.L. Ranch brought an action against Pioneer for trespass, negligence and fraud, alleging that Pioneer had drilled the well across its property after expiration of the lease. Although the lease had clearly been pooled and operations had clearly commenced before the expiration of the primary term, the lease had a partial release clause in the Addendum which read as follows:

If at the expiration of the Primary term or any time thereafter, oil or gas is not being produced in paying quantities from the lease premises, or Lessee is not then engaged in the actual drilling operations on the lease premises, this lease shall terminate as to all lands and horizons covered hereby. Lessee shall maintain the lease with respect to producing acreage at the end of the primary term from the surface to a depth of 100 feet below the stratigraphic equivalent of the deepest productive formation in any well pooled with or drilled on the 103.75 acres during the primary term.3

This lease also provided that in the event of a conflict between the Addendum and the lease, the Addendum would control.4 W.L. Ranch argued that the Addendum refers only to “lease premises,” not to unitized or pooled lands, and because there were no timely operations on the “lease premises,” the lease terminated.5 The trial court entered a partial summary judgment and held that the lease had terminated.6

The Court of Appeals reversed, noting that the Addendum included a reference to production from “any well pooled with or drilled” on the leased acreage.7 Therefore, the court found from the Addendum itself that the parties did not intend to eliminate pooling from the lease.8

More importantly, the court relied upon a presumption as to production from the Southland Royalty case:

One of the legal consequences of a unitized lease as between the lessor and lessee, in the absence of express agreement to the contrary, [sic] the life of the lease is extended as to all included tracts beyond the primary term and for as long as oil, gas or other minerals are produced from any one of the tracts included in the lease, with each lessor relinquishing his right to have his own tract separately developed.9

In the W.L. Ranch lease, the parties agreed to a unitized lease without an express agreement that the lease could not be extended by commencement of operations or production on land other than from the ranch. The court extended the presumption arising out of a pooling clause (as expressed in Southland Royalty as to production) to hold that unit operations, in the absence of an express agreement to the contrary, will hold the lease. The court then held that the partial release clause was not an express agreement that the lease could not be extended by operations. The court also held that even if there was a conflict between the two provisions, it was not an irreconcilable conflict, and it is reasonable to conclude that the parties intended to agree to the pooling which was effected by Pioneer. Therefore, the lease did not terminate upon the expiration of the primary term, and drilling operations commenced on the unit effectively extended the primary term of the lease by virtue of the pooling of the lease with the other leases in the unit.10

1.   127 S.W.3d 900 (Tex. App.–Corpus Christi 2004, pet. denied).
2.   Id. at 904-05.
3.   Id. at 905 n.6.
4.   Id. at 905 n.7.
5.  Pioneer., 127 S.W.3d at 905.
6.  Id. at 904.
7.  Id. at 906 (emphasis deleted).
8.  Id.
9. Id. at 906 (emphasis in original) quoting from Southland Royalty Co. v. Humble Oil & Ref. Co., 151 Tex. 324, 249 S.W.2d 914, 916 (1952).
10. Id. at 906.