176 ConocoPhillips Co. v. Ramirez
Wednesday, September 2nd, 2015
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
ConocoPhillips Co. v. Ramirez, No. 04-05-00488-CV, 2006 WL 1748584 (Tex. App.San Antonio Jun. 28, 2006, no pet.), distinguishes between statewide rules and field rules in the context of construing the application of a Pugh-type clause. The specific lease clause in this case provided:
At the end of five years after the expiration of the primary term hereof, Lessee covenants and agrees to execute and deliver to Lessor a written release of any and all portions of this lease which have not been drilled to a density of at least forty (40) acres for each producing oil well and three hundred and twenty (320) acres for each producing or shut-in gas well from depths above 5,000 feet from the surface of the ground and 640 acres for each producing or shut-in gas well from depths below 5,000 feet from the surface of the ground except that in case any rule adopted by the Railroad Commission of Texas or other regulating authority for any field on this lease provides for a spacing or proration establishing different units of acreage per well, then such established different units shall be held under this lease by such production, in lieu of the units above mentioned ….
The lessor argued that the Texas Railroad Commission adopted two rules -statewide Rules 37 and 38. In other words, lessor argued that the well in question held only 40 acres, rather than 640 acres. Many leases have similar clauses, so the ruling in this case is very significant.
The court held that statewide Rules 37 and 38 apply to the field in which the gas well was drilled, but those rules were not “adopted” “for” this field. Therefore ConocoPhillips was entitled to hold 640 acres surrounding the gas well. The court principally relied upon the procedural differences in establishing statewide and field rules as a basis for its holding.
However, a more compelling reason is that to rule otherwise would make the clause meaningless. Statewide rules existed at the time the lease was executed, and if they were to apply, the statewide rules would always trump the larger units specified in the lease, rendering that part of the clause meaningless.