689 Chieftain Expl. Co. v. Gastar Expl. Inc., No. 10-15-00037-CV, 2017 WL 3860357 (Tex. App.—Waco Aug. 30, 2017, no pet. h.)

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.

Chieftain Expl. Co. v. Gastar Expl. Inc., No. 10-15-00037-CV, 2017 WL 3860357 (Tex. App.—Waco Aug. 30, 2017, no pet. h.), rule 53.7(f) motion granted (Dec. 20, 2017) (mem. op.) held that an owner of a NPRI was not entitled to share in pooled unit royalty, because the lease subject to the NPRI was not pooled based on the plain language in the applicable lease pooling clause and unit designation. Lone Oak owned an undivided mineral interest in 3,466 acres, including 56 acres in Tract 17. Chieftain acquired an NPRI burdening the Lone Oak mineral estate. Lone Oak leased, apparently to Gastar (although the opinion does not expressly identify the lessee). The lease provided that the lessee “may pool all or any portion of the leased premises comprising at least 50 percent of the unit.” Gastar, et al., formed the Streater Gas Unit. The Unit encompassed 702.3 acres, including the 56 acres in Tract 17, and the Unit Designation specifically listed the 56 leases included in the Unit. However, the Lone Oak lease was not listed among the 56 leases included in the Streater Unit Designation. Chieftain sued Gastar for royalties owed on its NPRI that burdened the Lone Oak lease, claiming that the lease was included in the Unit.

“Oil and gas leases in general, and pooling clauses in particular, are a matter of contract.” To pool a lease, a lessee needs the lessor’s consent, and must follow the method agreed upon. Here, the pooling clause in the lease required the leased premises to comprise at least 50 percent of the unit. The Lone Oak lease covered only 56 acres in the Streater Gas Unit, which consisted of over 700 acres. Accordingly, the lease could not be pooled into the unit based on the terms of the lease. “Had it been pooled, the pooling agreement, in this case the Unit Designation, would have been invalid and unenforceable.” Further, “the [l]ease was not listed as being one of the 56 leases included within [the Unit].”

Chieftain also argued the Unit Designation pooled lands as well as leases, relying upon Wagner & Brown, Ltd. v. Sheppard and Ladd Petroleum Corp. v. Eagle Oil & Gas Co. “In both Wagner and Ladd, the courts determined that because of language included in the leases and in the pooling agreements, the pooled units at issue did not terminate when a lease pooled in the unit expired or was released.” The courts reasoned that the lands described in the leases were pooled. However, the Lone Oak lease was never pooled, so the court determined the fact situation was different here. Further, the court found that while the lease permitted pooling the leases with lands, the Unit Designation provided that the “[l]eases, insofar and only insofar as the leases cover the lands described and delineated on Exhibits ‘B’ and ‘C’ attached . . ., are hereby combined, unitized, and/or pooled into a single, consolidated pooled unit.” “The ‘in so far as’ language acts to limit the portion of the leases included in the Unit.” Thus, the lands the pooled leases covered were not pooled, only the leases. The Lone Oak Lease was not listed and not pooled.

The court expressly did not address the duty the executive owner could owe to Chieftain, nor did it address who might share in the royalties attributable to the unpooled 56 acres included in the unit area.

The significance of this case is that lease pooling clauses and unit designations are enforced strictly in accordance with their terms. Here, the language used in the pooling provisions of the Lone Oak lease and the Unit Designation resulted in neither lease nor lands being pooled.