685 Hardin-Simmons Univ. v. Hunt Cimarron Ltd. P’ship, No. 07-15-00303-CV, 2017 WL 3197920 (Tex. App.—Amarillo July 25, 2017, pet. filed)

Tuesday, August 7th, 2018

Richard F. Brown

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

Hardin-Simmons Univ. v. Hunt Cimarron Ltd. P’ship, No. 07-15-00303-CV, 2017 WL 3197920 (Tex. App.—Amarillo July 25, 2017, pet. filed) (mem. op.) held that the reworking clause of a lease extended the term beyond the expiration of the primary term, but the retained acreage clause was nevertheless triggered by the expiration of the primary term. Lessor and Lessee entered into an oil and gas lease in 2006 covering approximately 4,960 acres in Cochran County (the “Frost property”). The lands described in the lease were an area that had seen substantial oil and gas activity since the late 1950s. There were many legacy wells on the Frost property, both production wells and injection wells, from an abandoned waterflood. The 2006 lease was depth limited from the surface to the base of the San Andres. Lessee had drilled some of the legacy wells on the Frost property, Lessee operated some of the productive acreage still producing on the Frost property, and Lessee operated on adjacent lands. During the five-year primary term of the 2006 lease, Lessee did not drill any new wells, recomplete any legacy wells in a new production zone, or convert any legacy wells into injection wells. However, shortly before the expiration of the primary term, Lessee did commence reworking operations on ten legacy wells. Apparently, Lessee was planning on a waterflood. There was a jury finding that some of the legacy wells were producing in paying quantities on the date the primary term expired. Lessor contended the Lease expired as to all non-productive acreage. Lessee contended that the entire lease was still in effect under the reworking clause in the lease. The issues in the case were the construction and operation of the reworking clause, retained acreage clause, and continuous development clause.

The reworking clause provided, in part, as follows:
[i]f at the expiration of the primary term, oil or gas is not being produced from the land and depths subject to this lease but Lessee is then engaged in . . . the reworking of any well on said land, this lease shall remain in force in accordance with its terms so long as . . . reworking operations are prosecuted (whether on the same or different wells) with no cessation of more than one hundred twenty (120) consecutive days. . . .

“In a typical reworking clause, reworking operations include ‘any and all actual acts, work or operations in which an ordinarily competent operator, under the same or similar circumstances, would engage in a good faith effort to cause a well or wells to produce oil or gas in paying quantities.’” Lessor contended the reworking clause was inapplicable to extend the lease beyond the primary term because Lessee did not drill any new wells pursuant to the lease, and therefore there were no wells Lessee could “rework.” Prior to the expiration of the primary term, producing (legacy) wells had been drilled on the leased property, Lessee was engaged in reworking operations on those particular wells, and reworking commenced prior to the expiration of the primary term of the lease. The court ruled that Lessor’s argument failed because the lease does not specify that legacy wells are excluded from the potential inventory of wells to be reworked.

Lessee contended the lease remained in full force and effect as to the entire acreage because the term of the lease was extended by the reworking clause. Lessor contended that, even if the reworking clause was applicable, it did not extend the primary term of the lease. It only extended the overall term of the lease as to “producing acreage” relevant to the wells being reworked.

Paragraph 12.a of the lease provided for a continuous development program, but began with a Pugh clause as follows:

12.a. At the end of the primary term and subject to the other terms hereof, this lease shall continue as to, and only as to, land included in a “production unit”, as said term is hereinafter defined in paragraph 12.b. This lease shall terminate as to all other acreage. . . . Such drilling shall constitute a “continuous development program” by which Lessee may keep this lease in force and effect as to all lands and depths then covered hereby and thereby postpone the partial termination date provided below in paragraph 12.b. . . .

Paragraph 12.b, the retained acreage clause, provided in relevant part as follows:

12.b. At the later of the end of the primary term or the cessation of the continuous development program for which provision is above made (herein called the “partial termination date”) this lease shall terminate as to all lands and depths covered hereby, save and except as to the acreage and depths included in a production unit which said unit is defined as being: . . . (ii) 40 acres around each producing oil well which is not in a Unitized Tract; . . . (iv) 40 acres around any disposal well used for the disposal of water from, and only from, the land covered by this lease. . . .

Lessor argued that because the reworking clause provided “this lease shall remain in force in accordance with its terms,” then the continuation of the lease was still controlled by “its terms”—specifically including the Pugh clause and retained acreage clause.

The court noted that a comparison of the provisions of the reworking clause with the provisions of the continuous development and retained acreage clauses undermined Lessee’s argument for an extension as to the entire lease. The reworking clause provides that the lease remains in force “in accordance with its terms” for so long as reworking operations are prosecuted, which incorporates the terms of the lease agreement—including the Pugh clause and retained acreage clause. In contrast, the continuous development clause specifically provides that the lease will be kept “in force and effect as to all lands and all depths” covered by the lease agreement, during any continuous development program. The court reasoned that the retained acreage clause defined the “partial termination date” as the “end of the primary term or the cessation of the continuous development program,” not the “reworking program,” thereby indicating differential treatment of the two savings provisions.

Therefore, according to the express terms of the Pugh clause and retained acreage clause, at the end of the primary term, the lease continued only as to acreage included within a defined “production unit,” including wells being reworked. The court concluded that Lessee was in effect as to the 40 acres around each oil well that was producing in paying quantities and each water disposal well that was active as of the end of the primary term.

This is a lease construction case, but it highlights the stacking of savings clauses to save a lease and the distinction between the primary term and the extended term.