118 JVA Operating Co. v. Kaiser-Francis Oil Co.

CASE NOTE

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
JVA Operating Co. v. Kaiser-Francis Oil Co., 11 S.W. 3d 504 (Tex. App. — Eastland 2000, pet. denied) concerns the reservation of a production payment in a conveyance of leasehold interests. In March 1969, the predecessors in interest to Kaiser-Francis Oil Company (“Kaiser-Francis”) unitized their leasehold interests in ten tracts of land with four other tracts for the production of oil and gas limited to the Canyon Sands formation. In May 1969, the predecessors in interest to Kaiser- Francis executed a conveyance to the predecessors in interest to JVA Operating Company, Inc., and other leasehold interest owners (collectively, referred to as “JVA”) conveying their leasehold interests in the ten tracts, but reserving a production payment of $3,900,000.00. In 1992, JVA drilled a well and obtained production from the Ellenberger formation, which was below the depth of the Canyon Sands formation. The issue was whether the production payment was payable out of production from the Ellenberger or whether it was payable only on unitized production from the Canyon Sands.
 
The reservation clause read as follows:
 

EXPRESSLY EXCEPTING AND EXCLUDING, HOWEVER, from this assignment and retaining and reserving unto Assignors [Kaiser- Francis], in proportion to their respective ownership, for themselves and for their several and respective heirs, personal representatives, successors and assigns, as a production payment, the hereinafter shown percentages of Net Barrels of Oil and Gas produced, saved, sold and allocated to the Subject Interests, hereinafter referred to as “Reserved Percentage of the Hydrocarbons,” from and after the Effective Date and throughout the period hereinafter specified. (Emphasis added)

 
The granting clause conveyed “The leasehold estates, described in Exhibit “A” which is attached hereto and made a part hereof (hereinafter called “Subject Interests”).” (Emphasis added) Exhibit “A” made it clear that the “Subject Interests” were the assignor’s interests in oil, gas and mineral leases relating to the ten tracts of land. The term “Net Barrels of Oil and Gas” was defined in the conveyance as follows:
 

(iv) The term “Net Barrels of Oil” as used herein, shall mean the quantity of oil produced, saved and allocated as provided in the Unit Agreement (as hereinafter described). . . . The term “Net Cubic Feet of Gas,” as used herein, shall mean the quantity of gas produced, saved, sold and allocated as provided in the Unit Agreement . . . . (Emphasis added)

 
The Court of Appeals determined that the production payment was to be paid from hydrocarbons produced only from the Canyon Sands formation. The Court of Appeals noted that there was no reason for the drafter of the Conveyance to refer to oil or gas “produced, saved and allocated as provided in the Unit Agreement” unless the drafter intended to limit production to the unitized Canyon Sands formation in the Unit Agreement. To adopt Kaiser-Francis’ position would have required the court to ignore that “Net Barrels of Oil” was a defined term in the conveyance. Because the conveyance expressly provided that the terms “Net Barrels of Oil” and “Net Cubic Feet of Gas” meant the quantity of oil and gas “produced, saved, sold and allocated as provided in the Unit Agreement,” the Court of Appeals held that the production payment was limited to oil and gas produced as provided in the Unit Agreement, which concerned production only from the Canyon Sands formation.
 
The conveyance was obviously drafted by parties familiar with oil and gas transactions, and in many ways it is a precise instrument. Nevertheless, in stacking terms and definitions, the parties overlooked a fundamental issue the conveyance should have addressed in very simple terms. The conveyance could easily have recited that the reserved production payment “was payable from production from the Canyon Sands formation only,” or that the reserved production payment “was payable from all production at all depths from the Subject Interests.” Defined terms (e.g. “Net Barrels of Oil”) are sometimes dangerous, because they can be tedious to analyze and may have unintended consequences. The risk is heightened if the fundamental terms of the instrument are not plainly and simply set forth.