487 Unit Petroleum Co. v. David Pond Well Service, Inc.

Richard F. Brown

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

Unit Petroleum Co. v. David Pond Well Service, Inc., held that the owner of a wellbore leasehold had no right to designate a proration unit outside the wellbore. In 1984, the Tarbox #1 well was drilled in the southwest corner of Section 539. Texas Railroad Commission (“TRC”) records show an undated plat on the letterhead of the original operator (“Vance Plat”) outlining a box in the southwest quarter labeled “80 ac. Cleveland proration unit.” BP America Production Company (“BP”) eventually acquired the lease, production ceased, and the lease terminated in 2003.

In 2005, the mineral owner (“Tarbox”) granted a new lease (“Unit Lease”) on the S/2 of Section 539 containing 320 acres, which was promptly acquired by Unit Petroleum Company (“Unit”). Although nothing was being produced from the Tarbox #1 well, the Unit Lease included the following reservation:

RESERVATION OF WELLBORE OF TARBOX UNIT #1: LESSOR reserves the wellbore of the Tabox (sic) Unit #1 well located on the leased premises, to be produced by LESSOR or his assigns and lessees. This reservation only applies to the wellbore as it currently exists and production only from the Cleveland formation, defined herein as between the depths of 7,930 feet subsurface to 7,990 feet subsurface, in which the wellbore is currently completed.

Six days later, Tarbox granted to David Pond Well Services, Inc. (“Pond”) a Wellbore Oil and Gas Lease (“Wellbore Lease”), which also covered the S/2 of Section 539, but:

. . . limited to the Cleveland zone wellbore of the Tarbox #1 well, said Cleveland zone defined herein as between the depths of 7,930 feet subsurface to 7,990 feet subsurface, and such land is hereinafter referred to as the “Leased Premises.”
Notwithstanding anything herein to the contrary, LESSEE’s rights of exploring, drilling and operating for and producing oil and/or gas from the Leased Premises shall be confined to the existing borehole of the Tarbox #1 well, located 467 feet from the South line and 457 feet from the West line of Section 539, Block 43, H.& T.C. RR. Co. Survey, Lipscomb County, Texas, and any exploration, drilling, or production operations conducted by LESSEE at any other location upon the Leased Premises shall be considered a trespass for any and all purposes. By execution of this lease, the LESSOR assigns to LESSEE any and all right that LESSOR has in any of the equipment above the ground or in the wellbore of the Tarbox #1 well.

On August 2, 2005 the Wellbore Lease was recorded, and the TRC records showed that BP and Pond filed a form P-4 in August changing the operator of the Tarbox #1 Well to Pond. On September 14, 2005 the Unit Lease was recorded.

In 2008 and 2010, Unit drilled three horizontal wells in Section 539, including parts of the S/2 of Section 539. Pond contended Unit’s wells were drilled in violation of Pond’s proration unit as designated at the TRC in the old Vance Plat. Unit sued in Trespass to Try Title and for declaratory judgment to determine the ownership and rights of the parties in the S/2 of Section 539. The parties and the court agreed that the leases were unambiguous.

Pond stipulated during trial and on appeal that the interest Pond acquired under the Wellbore Lease was a leasehold estate limited to the Cleveland zone in the wellbore. Because of that stipulation, the court did not consider the vertical and horizontal limits of the Wellbore Lease, an issue which it did analyze under a different document in Petro Pro Ltd. v. Upland Res., Inc., which is the only other Texas wellbore case.

In this case, Pond contended that the Wellbore Lease granted to Pond an appurtenant contractual right to dictate the size and configuration of a proration unit of sufficient acreage necessary to allow the Tarbox #1 well to produce under appropriate governmental regulations. Unit contended that Unit was granted the exclusive executive right to establish a proration unit as to any part of its leasehold, which was all of the S/2, except the Cleveland zone in the wellbore. The court agreed with Unit that the executive right to make decisions concerning the development and production of the mineral estate is a title right that follows ownership of the minerals. Tarbox did not reserve to Tarbox in the Unit Lease the executive right to assign property outside the wellbore to a proration unit for purposes of a production allowable for the wellbore. The two leases covered two separate tracts and each lessee acquired the exclusive right to develop its tract and to establish proration units on its tract. It did not matter which lease was recorded first or whether Pond acted first at the TRC, because Pond owned nothing outside the Cleveland zone in the wellbore.

However, the “acreage” in the wellbore obviously would not be sufficient to provide a full allowable under any TRC rules. Because the reservation to Tarbox in the Unit Lease included the wellbore of the Tarbox #1 well “to be produced by LESSOR or his assigns and lessees,” the court found that Unit was subject to an implied duty to designate a sufficient proration unit out of the acreage covered by the Unit Lease to allow the Tarbox #1 well to produce. The court held:

While we find that Unit has the exclusive executive right to establish a proration unit encompassing any part of its leasehold estate, . . . we find that right to be encumbered with an implied duty owed to the owner of the reserved wellbore to designate a sufficient amount of acreage to permit the Tarboxes, their assignees and lessees, to-wit: Pond, “to produce” oil, gas and other minerals from the Tarbox #1 wellbore. In other words, Unit must designate sufficient acreage to satisfy the minimum proration unit necessary to obtain a Railroad Commission allowable for the Tarbox #1, thereby permitting Pond to produce from that wellbore.

The opinion is silent as to how the duty implied in the Unit Lease as owed by Unit to Tarbox was assigned by Tarbox to Pond. The only document in the case that the court could have relied upon was the Wellbore Lease itself. The Wellbore Lease covers only the wellbore and expressly reserves to Tarbox all rights to explore, drill or produce at any other location on the S/2.

The court expressly held that Unit’s title to its leasehold estate was not limited or defined by a P-4 form filed at the TRC. The court was careful to note that it was not dictating the size or configuration of the proration unit to be designated by Unit, nor what the TRC should or should not do with respect to allowables. The court was only determining the title of the parties, and, as between Unit and Pond, who held the right to designate proration units in the S/2 of Section 539.

The significance of the case is the holding that the right to designate proration units at the TRC is part of the executive right that follows the mineral estate. It follows that the owner of a wellbore leasehold has no right to designate acreage outside the wellbore. The finding of an implied duty to designate in this case was presumably driven by specific lease language in the reservation clause in the Unit Lease. If it is to be implied into every wellbore assignment, then the owner of every marginal well in the State will have increased protection and an advantage over the owners of nearby wells. The court in this case also may have been influenced to find such a duty because it was possible to configure all of the proration units so that all of the wells could produce, which Unit had repeatedly offered to do.

Unit v. Pond

Facts:

1. 1984 – Tarbox leased to Vance, Vance drilled Tarbox #1, and Vance designated an 80-acre proration unit in the SW/4 of Section 539.
2. 2003 – Vance assigned to BP, production ceased, Vance lease terminated.
3. 2005 – Tarbox leased S/2 of Section 539 to Unit, reserving the wellbore of the Tarbox #1 and the right “to produce” the well.
4. 2005 – Six days later, Tarbox leased the wellbore to Pond, Pond recorded his lease, and BP and Pond filed a P-4 change of operator at TRC.
5. 2005 – Unit then recorded its lease.
6. 2008 – Unit drilled three horizontal wells on Section 539, including parts of the S/2.
7. Two of Unit’s wells were drilled within the boundaries of the old Vance 80-acre proration unit.
8. Trial court held Pond had an “appurtenant contractual right” to designate the 80-acre proration unit, which he did by filing the P-4.

Issue:

As between Unit and Pond, who has the right to designate proration units?

Holdings:

1. The right to designate a proration unit is a part of the executive right that follows the mineral estate, and it is conveyed to the lessee under an oil and gas lease.
2. The leases covered two separate tracts, and it did not matter which lease was recorded first.
3. Unit acquired the right as to the S/2, except the wellbore. Pond acquired the right as to the wellbore only.
4. However, because the reservation to the lessor Tarbox in the Unit Lease reserved the well “to be produced” by Tarbox and assigns, the lease included an implied duty on Unit to designate enough acreage for Pond to produce the well.

Significance:

The significance of the case is the holding that the right to designate proration units at the TRC is part of the executive right that follows the mineral estate. It follows that the owner of a wellbore leasehold has no right to designate acreage outside the wellbore. The finding of an implied duty to designate in this case was presumably driven by specific lease language in the reservation clause in the Unit Lease. If it is to be implied into every wellbore assignment, then the owner of every marginal well in the State will have increased protection and an advantage over the owners of nearby wells. The court in this case also may have been influenced to find such a duty because it was possible to configure all of the proration units so that all of the wells could produce, which Unit had repeatedly offered to do.