Face Challenges Confidently

170 EOG Res., Inc. v. Wagner & Brown, Ltd.

Tuesday, September 1st, 2015

Richard F. Brown

EOG Res., Inc. v. Wagner & Brown, Ltd., 202 S.W. 3d 338 (Tex. App.—Corpus Christi 2006, pet. filed), construes the meaning of a farmout agreement depth limitation expressed as “the deepest producing interval as obtained in the test well”. Farmor retained the deep rights under a provision in the farmout agreement which provided:

The Assignment provided for above shall be limited in depth to 100 feet below the deepest producing interval as obtained in the test well, shall be without warranty either express or implied and shall reserve to Longhorn all rights below the assigned depths, together with such rights as are necessary to Longhorn’s full enjoyment of the reserved deeper rights. (Emphasis added)

It was undisputed that the test well (Well #1) produced at depths between 9,679 feet and 9,729 feet, which was in the geologic formation known as the Morris Sand. The dispute arose when Well #2 produced from the Morris Sand at depths between 10,230 feet and 10,266 feet. Farmor contended that it held the deep rights below 9,829 feet; farmee contended that its interest followed the formation to the deepest part, plus 100 feet.
Farmee effectively claimed that the “producing interval” was the Morris Sand. The court disagreed and held that the qualifying language “deepest producing interval as obtained in the test well” [emphasis in opinion] made it clear that the depth limitation was fixed, not a variable depth. The court noted that if the parties had intended to include the entire Morris Sand as found under the property, the parties could have referred to other readily available terms, such as formation, horizon, field, reservoir, or stratigraphic layer.
The case highlights the significant property rights that may turn on a few words used to express a depth limitation. A more common clause in use today reserving the deep rights would reserve “all rights 100 feet below the base of the Morris Sand formation as encountered at 9,729 feet beneath the surface in the wellbore of the [Well].”