Face Challenges Confidently

623 Adams v. Murphy Expl. & Prod. Co.-USA, 497 S.W.3d 510 (Tex. App.—San Antonio 2016, pet. filed)

Monday, June 19th, 2017

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Adams v. Murphy Expl. & Prod. Co.-USA, 497 S.W.3d 510 (Tex. App.—San Antonio 2016, pet. filed) (Offset well clause) held that the commonly understood meaning of “offset well” as used in an oil gas lease offset well clause is “a well used to protect against drainage.” To be entitled to summary judgment, a party claiming that a well is an “offset well” as a matter of law must conclusively prove that the well is protecting the leased tract against drainage from the well on the adjacent tract. The Lease contained an offset well clause that would be triggered if a well was “completed as a producer of oil and/or gas on land adjacent and contiguous to the leased premises, and within 467 feet of the premises covered by the lease.” The offset well clause required that Lessee would have the option to either drill an offset well, pay Lessor royalties equivalent to the amount of production as that of the adjacent well, or release the amount of acreage required for an offset well. A triggering horizontal well was drilled and completed in the Eagle Ford Shale on a tract adjacent to the leased tract. To satisfy the offset well requirement, Lessee drilled its own horizontal Eagle Ford Shale well approximately 2,100 feet from and parallel to the adjacent triggering well (“Lessee’s Well”).

Lessor sued for breach of contract, Lessee counterclaimed for a declaratory judgment, and Lessee’s summary judgment was the subject of the appeal. The issue was whether Lessee’s Well drilled in response to the triggering well was an “offset well” under the Lease. There was no additional definition of “offset well” in the Lease. Lessor argued that an offset well is a well that actually prevents drainage and must be drilled “as close as reasonably possible to the [triggering well] so that it can truly ‘offset’ or ‘counterbalance’ the [triggering well].” Therefore, Lessee breached the lease because Lessee’s Well was not an offset well. Lessee argued that this offset well clause does not require that an offset well be drilled within any particular distance, an offset well is commonly understood in the oil and gas industry to mean any well drilled on an adjacent lease or property, and that the distance is particularly irrelevant here because both wells were drilled into the Eagle Ford Shale formation, where drainage across lease lines has limited application. Accordingly, Lessee’s Well was an offset well as a matter of law.

The court started its analysis by stating that it must give meaning and effect to all of the lease’s words and if the term offset well has a commonly understood meaning in the oil and gas industry, the commonly understood meaning should be applied. In determining the commonly understood meaning, the court reviewed the definition in a treatise and examined how Texas courts have defined an offset well. The court concluded that “the commonly understood meaning of an offset well is a well used to protect against drainage.” In order to conclusively prove that a well is an offset well, Lessee must show that the well is actually protecting the leased tract from drainage from the triggering well.

The court held that the summary judgment evidence offered by Lessee did not conclusively answer whether or not Lessee’s Well was actually protecting the Lease from drainage from the triggering well. Expert testimony offered by Lessee about the Eagle Ford Shale and typical drainage patterns was merely speculative or conclusory and did not conclusively prove that the Lessee’s well was an offset well. Consequently, the court reversed and remanded to the trial court.

The significance of this case is the holding that an offset well drilled and completed in the same formation and parallel to the triggering well may not be an “offset well.” The burden of proof on drainage under the implied covenant to prevent drainage is generally on the lessor. In this case, under this express offset well clause, it appears the burden of proof is shifted to the lessee to prove that the obligation well is actually preventing drainage.