Face Challenges Confidently

182 El Paso Prod. Oil & Gas v. Tex. State Bank

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.
El Paso Production Oil & Gas  v.  Texas  State  Bank,  No. 04-05-00673-CV,  2007 WL 752209 (Tex. App.—San Antonio 2007, pet. denied), refuses to imply a horizontal severance into a continuous development clause, after considering the relationship between the continuous development clause, the Pugh clause, and other lease clauses. Under two identical leases, lessee formed four separate pooled units for gas. Each of the pooled gas units were depth-limited by references to specified top and bottom depth limits. It was not disputed that the leases were in effect as to the depths set out in the four designated gas units. The dispute was centered upon whether the leases expired as to those depths lying within the surface boundaries of the gas units, but not included within the specified depths.
Lease paragraph 15 was an addendum to the printed form which contained a continuous development clause, and within the continuous development clause, a Pugh-type clause. In summary, paragraph 15 provided that upon cessation of continuous operations, the leases would terminate:

. . . except as to lands covered by this lease which are then allocated to a production unit or included in a pooled unit for a well capable of producing oil and/or gas in paying quantities (which lands herein shall be referred to as developed acreage). For the purposes of this paragraph, a production unit is defined as an area consisting only of lands covered by this lease and allocated or dedicated to a well in accordance with the Rules and Regulations of the Railroad Commission of the State of Texas and shall contain only such number of acres as permitted herein for pooled oil units or pooled gas units.

This lease shall remain in effect as to all depths as to all developed acreage so long as there is production of oil and/or gas in paying quantities from said developed acreage (emphasis by the court).
The parties agreed that the Pugh-type clause within paragraph 15 did not by itself effect a horizontal severance. However, the lessor contended that after the lessee created the gas units through the unit declarations, production from those units had to come from the depths set forth in lease paragraph 13. Lease paragraph 13 was a variety of a relatively common lease clause that limits acreage that can be pooled for gas, so that the permitted size of the unit varies by depth. This specific clause provided for units of 160 acres from the surface to 6000′ below the surface, 320 acres from 6,000′ below the surface to 10,000′ below the surface, and 640 acres below 10,000′ below the surface. Therefore, lessor argued that there can be no well on the 640-acre unit capable of producing from horizons shallower than 10,000 feet below the surface.
The court found Friedrich v. Amoco Prod. Co. to be the only Texas case on point.  In Friedrich,  the  lessee  pooled  from  the  surface  to  a  depth  of  1,298 feet,  and  lessor  sued  to terminate the lease as to the deep rights, arguing that the Pugh-type clause in his lease effected both a vertical and horizontal severance of the leasehold estate. The court in Friedrich refused to imply a horizontal severance, reasoning that the pooling clause preserved the lease as to the “land” included in the pooled unit, and that the word “land” was used throughout the lease to refer to surface acreage.
The court in El Paso followed the reasoning of the court in Friedrich and reached the same result. Paragraph 15 of the leases excluded from the operation of the Pugh-type clause the “lands” in a pooled unit. The leases used the term “land” or “said lands” in the granting clause, the habendum clause, the pooling clause, the delay rental clause, and in other paragraphs in the lease – in each instance referring to surface acreage. The court held that a term is ordinarily considered to have been used in the same sense in different parts of the same instrument, and that the phrase “all depths,” as used in lease paragraph 15, would have been unnecessary if “developed acreage” was intended to be limited to the gas unit as designated by lessee.
The significance of the case is that it illustrates the possible result of the interaction between the pooling clause and a Pugh clause. It is common for leases to have some provision which loosely provides that the pooling clause trumps the Pugh clause. This is generally driven by the need to harmonize different lease forms and lease provisions in the event the leases are pooled. From the lessor’s perspective, harmony may not be a desired goal, particularly if the pooling does not cross property lines so as to include other owners with divided interests within the pooled unit.