515 Endeavor Energy Resources, L.P. v. Discovery Operating, Inc., 448 S.W.3d 169 (Tex. App.—Eastland 2014, pet. filed)
Tuesday, July 12th, 2016
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Endeavor Energy Resources, L.P. v. Discovery Operating, Inc., 448 S.W.3d 169 (Tex. App.—Eastland 2014, pet. filed) held that a lease terminated as to all acreage not included in a proration unit plat filed with the Texas Railroad Commission (“TRC”). Endeavor, et al., (“Base Lessee”) leased approximately 960 acres in an area subject to Special Field Rules issued by the TRC for the Spraberry (Trend Area) Field. The Special Field Rules provided for proration units of 80 acres or optional 160’s. Base Lessee drilled and completed enough wells to include all of the leased acreage in a proration unit. However, two quarter sections were not included in any proration unit. Discovery, et al., (“Top Lessee”) leased the two quarter sections not included in a proration unit. The Base Leases had already terminated at the end of the continuous development period “save and except those lands and depths located within a government proration unit assigned to a well producing oil . . . and . . . with each such governmental proration unit to contain the number of acres required to comply with the applicable rules . . . of the [TRC] for obtaining the maximum producing allowable for the particular well.” Rule 3 of the Special Field Rules required operators to file certified plats with the TRC that show “all of those things pertinent to the determination of the acreage credit claimed for each well.” The TRC would not act on Base Lessee’s request to expand its proration units to include the two missing quarter sections because of the pending title litigation between Base Lessee and Top Lessee.
The single issue in the case was the interpretation and construction of the automatic termination clause in the Base Leases. The parties and the court agreed that the Base Leases were unambiguous. Top Lessee asserted that the Base Leases automatically terminated as to the lands in the disputed quarter sections because on the date that the continuous development period ended, the lands in the disputed quarter sections were not located in a governmental proration unit “assigned” by Base Lessee to a well. Because the Special Field Rules allow a proration unit to contain 160 acres to obtain the maximum allowable in a well in the Spraberry Field, Base Lessee asserted that each of its producing wells held 160 acres under lease. Base Lessee reasoned that the last clause automatically established the size of the proration units to be 160 acres and that interpreting the automatic termination provision to require it to assign acreage in a certified proration plat ignored and would render meaningless the last clause. Therefore, it was not required to file a proration plat or to take any other action to maintain its leased acreage.
Considering the provision in its entirety, the court ruled that the parties intended in the last clause to define the amount of acres that Base Lessee was to include in the governmental proration units that it assigned in its certified proration plats filed with the TRC. Concluding that the last clause did not relieve Endeavor of its obligation to “assign” acreage to a well in a certified proration plat to maintain the acreage under lease, the court noted that “it is not the failure to designate the larger proration unit that automatically terminates the lease as to the disputed quarter sections; the automatic termination is the result of the lease terms. The failure to designate the additional acreage merely quantifies the amount of acreage as to which the lease provides for automatic termination.”
The significance of the case is the literal reading of the lease and the holding that the failure to include acreage in the plat filed with the TRC was a failure to assign acreage to a proration unit, resulting in lease termination as to all acreage not included in a proration unit.