Face Challenges Confidently

112 Southeastern Pipeline Co., Inc. v. Tichacek

Wednesday, September 2nd, 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.
Southeastern Pipeline Company, Inc. v. Tichacek, 997 S.W.2d 166 (Tex. 1999), examines a lessee’s obligations in regard to pooled properties. Lessee (Southeastern Pipe Line Company) held leases from mineral interest owners Leveridge and Tichacek. Southeastern drilled three successful wells on the Leveridge tract. The Tichacek tract was located immediately to the north of the Leveridge tract. Four days before the Tichacek lease was to expire for nonproduction, Southeastern extended it by pooling the lease with one of the producing wells from the Leveridge tract to form a unit. Half of the acreage came from the Leveridge tract, and the other half came from the Tichacek tract. Lessor Tichacek, believing that Southeastern had pooled in bad faith, notified Southeastern that the lease had expired. Southeastern filed suit to declare the Tichacek lease valid. Tichacek counterclaimed for bad faith pooling and for breach of the implied covenant to protect against drainage. The jury found that Southeastern had pooled in good faith, but it also found Southeastern liable for drainage damages. Southeastern argued that because the jury found that it had pooled in good faith, it could not be liable to Lessor Tichacek for drainage from his tract.
The Court recognized the principle that a lessee is obligated under the implied covenant to protect against drainage and that good faith pooling is one way to accomplish that goal. If a lessee pools oil and gas leases in good faith, lessor may not sue for breach of the covenant to protect against drainage, if the lease in the pooled unit is being drained by a unit well located off the individual lease. Instead, a lessor may only sue if drainage of the unit occurs by wells located outside the unit. If a unit is pooled in bad faith, production is only from the tract upon which the well is situated, and a unit well pooled in bad faith will not maintain off-site leases. The Court ruled that if a lessee exercises its pooling authority in good faith, which is what occurred in this case, a lessor cannot ignore the validly pooled unit for the lessor’s own pooling preferences. The Court stated that the jury should have been asked to find pre-pooling lease drainage damages for that period of time before the unit was formed, but not after the unit was formed.
The significance of this case is that a claim for breach of the covenant to protect against drainage may only extend to the date that the lease was pooled if a jury finds that a lessee pooled in good faith.  A unit well cannot drain oil and gas from a unit lease pooled in good faith.