Face Challenges Confidently

469 Springer Ranch, Ltd. v. Jones

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.
Springer Ranch, Ltd. v. Jones, 421 S.W.3d 273 (Tex. App.—San Antonio 2013, no pet.) held that royalties from present and future horizontal wells must be allocated based on the productive portions of the well underlying the properties of parties to a royalty sharing agreement.  In 1956, Alice Burkholder executed a lease on 8,545 acres of land in La Salle and Webb Counties (“Lease”).  After the deaths of Alice and her husband, the land was divided into three tracts.  In 1993, each of the three tracts had two vertical wells with production units that included acreage from the other tracts.  There was an issue as to how to account for royalties.  All successors-in-interest to Alice Burkholder executed a royalty sharing contract in 1993 stating in part:
all royalties payable under the [Lease] from any well or wells on said 8,545.02 acre tract, shall be paid to the owner of the surface estate on which such well or wells are situated, without reference to any production unit on which such well or wells are located . . . .
Nearly two decades later, the Springer Ranch No. 2 horizontal well (“SR2 Well”) was drilled.  At that time, Tract A was owned by the Springer Ranch, Tract B was owned by Rosalie Sullivan, and miscellaneous parties owned a third tract.  The SR2 Well began on Springer Ranch’s Tract A and terminated on Sullivan’s Tract B.  The court used the following graphic to illustrate the facts:
The court reviewed the definitions of several terms in the 1993 agreement, beginning with “well.”  Because the agreement required royalties to be paid to the owner of the surface estate on which the well was situated, Owner A argued “well” was limited to “only the topmost portion of the hole on the surface where hydrocarbons exit the earth . . . .” and Owner B argued “well” meant “‘the entire underground orifice from which oil and gas are produced,’”  Finding that Owner A had conflated the term “well” with that of “wellhead,” the court relied on the Texas Supreme Court’s definition and definitions found in several dictionaries to hold that “well” means “‘a shaft or hole bored or sunk in the earth through which the presence of mineral may be detected and their production obtained.’”  The court then noted that the word “on” could mean “in contact with the top surface of a thing” or it could mean “within the limits or bounds of something,” so that the preposition “on” was so versatile that it did not support either party’s argument concerning its construction.
The court then turned to the meaning of “surface estate” as used in the 1993 agreement.  Stating that the term does not refer to “land” in a physical sense, but to a “‘legal unit of ownership in the physical land’” the court defined “surface estate” to mean “the portions of the earth, over which the surface estate owner holds dominion after a severance of the mineral estate.”  Tracking general oil and gas law principles, the court noted that the surface owner’s interest extends to the surface and everything in the lands except the oil and gas deposits covered by the lease, and the mineral owner’s interest does not extend to specific oil and gas beneath the property or the subsurface mass, but only the right to exploit minerals.  The court rejected Owner A’s argument that treating the SR2 Well as “situated on the surface estate conflates surface estate and mineral estate,” because the two estates are intertwined, therefore “[s]ome conflation is unavoidable.”
Reading the definitions of “well,” “on,” and “surface estate” together, the court held that the SR2 Well was situated on more than one surface estate and the royalties should be allocated.  The court found further support for its holding because the intent of the parties to the 1993 agreement was “to bar claims for royalties based on ‘production units,’ not to allow one party to directly produce hydrocarbons from within the bounds of another’s property.”  If the court adopted Owner A’s construction, it stated it would be possible that one party could receive all of the royalties from a well that obtained all of its production from a different tract simply because the wellhead was on its property, which would not be “a utilitarian construction.”
Owner A contended that the court could not allocate royalties because the 1993 agreement barred division of royalties based on the location of wells on production units and the parties advocated for different meanings for “production unit.”  Dismissing this argument and refusing to define production unit, the court stated “the allocation of royalties on the basis that a well is situated on two surface estates does not contravene this provision and does carry out the intent of the earlier provision.”
The court reasoned that production was not obtained from the entire length of the well but merely from the part of the well draining the reservoir.  Referring back to the graphic, the court approved an allocation based on the parties’ interests in Distance C, as opposed to the distance between point A (the wellhead) and point B (the terminus).  The court stated it was not rewriting the contract due to changes in technology as it had not altered the meanings of pertinent terms in the 1993 agreement.  Rather, the court stated it merely integrated horizontal-well concepts into its construction of the agreement.
This case is significant because it uses the productive drainhole length in allocating royalties from horizontal wells that cross multiple tracts of land.  Further, it provides definitions of the terms “well,” “on,” and “surface estate” and holds that a well may be located on more than one “surface estate,” even if the wellhead is only located on one tract.  Although this case is based on a specific contract, there are general principles expressed which are likely to be cited in a more universal context.