Face Challenges Confidently

343 Cole v. Anadarko Petroleum Corp.

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.
Cole v. Anadarko Petroleum Corp. , 331 S.W.3d 30 (Tex. App.—Eastland 2010, pet. denied), held that the surface lease for the site of a water injection plant terminated for failure to timely pay a $500 annual rental. In 1925, the predecessors to Anadarko Petroleum Corporation (“Anadarko”) obtained a mineral lease covering fifteen sections of land in Ector County on a ranch eventually owned by the Cole family. In 1966, the lessee formed a waterflood unit named GCDU and included part of the Cole Lease in that unit. Buster Cole ratified the unit agreement. As part of the secondary recovery effort, the lessee built a central battery facility on the land where the boundaries of the GCDU and the Cole Lease overlapped. Anadarko built a pipeline to the facility that crossed land within the boundaries of the Cole Lease but outside the boundaries of the GCDU. Anadarko also used this facility to store supplies and parts, wash trucks, and conduct administrative work.
In 1995, Anadarko obtained a surface lease from Buster Cole which covered land within the Cole Lease, but outside the GCDU, to build a water injection plant for a second waterflood. Production resulted from these efforts, and Anadarko remitted resulting royalties to the Coles. In 2000, Buster died and his sons acquired the property. In 2002 and 2003, Anadarko sent the annual $500 rental checks for the surface lease to Buster Cole. On August 7, 2003, the Coles’ attorney notified Anadarko that the sons were the successors to Buster Cole and that they intended to cancel the lease in thirty days for nonpayment of the 2002 and 2003 rentals. The 1995 surface lease provided for annual payments in advance and stated “[t]his agreement may be cancelled for nonpayment of rental only after thirty days written notice of default and such default continuing for such thirty day period.” On August 18, Anadarko asked for probate documents. On August 27, the Coles implied they would send it. On September 12, the Coles notified Anadarko that the lease had terminated. On October 3, the Coles sent some documents. On November 6, Anadarko replied that the documents were insufficient but tendered the payment for 2003. In December, the Coles filed suit for lease termination. In June 2004, Anadarko did get a complete probate. Anadarko never tendered the $500 for 2002. The Coles also claimed that Anadarko breached the terms of the 1925 mineral lease by conducting activities outside the scope of the lease.
The court first determined whether Anadarko’s surface uses exceeded the scope of the 1925 mineral lease. The Coles argued that Anadarko improperly used their land to benefit unit wells outside their land. When a lessee holds a valid unitization agreement, the lessee may use “as much of the surface of the . . . [unit] as [is] reasonably necessary to produce oil or gas from wells located within that unit.” Because Buster ratified the GCDU, “the Coles took their interest subject to this ratification” and Anadarko had the right to use the surface over the Cole Lease that fell within the unit to benefit unit wells.
The court emphasized that the lessee may only use the surface of the unit for activities reasonably necessary to support the unit. Although some of Anadarko’s activities (such as washing trucks at the central battery facility) may not have been necessary for the GCDU, the court found that the Coles failed to show any damages. Traditionally, damages for excessive user are shown by detailing the number of acres used for the non-unit activities. Because Anadarko did not use any acres beyond the facility which had served the unit for over twenty years and the Coles presented no other evidence of damage, summary judgment was proper. The only activity that the court found troublesome was the installation of the pipeline. Because the pipeline was on the Cole Lease but fell outside the boundaries of the GCDU, the court remanded the issue to the trial court to determine whether Anadarko exceeded the scope of the Cole Lease and the unit agreement.

The court then addressed the Coles’ right to cancel the surface lease:

Even though Anadarko may have correctly tendered the 2002 payment to Buster initially, because their check was never cashed and because the Coles’ title was established, Anadarko breached the 1995 Lease when, after receiving the probate documents, it failed to tender the 2002 rental to the Coles or to at least place that money into the registry of the court.

Anadarko argued that the Coles were equitably estopped from terminating the lease because they accepted mineral royalty payments under the 1925 mineral lease resulting from Anadarko’s use of the 1995 surface lease. “Traditionally, the doctrine [of equitable estoppel] has been applied to oil and gas cases when one party accepts the benefits from an agreement and then argues that the agreement is invalid.” The Coles claimed that equitable estoppel did not apply because the royalty payments accrued from the mineral lease, not the surface lease. According to the Coles, their legitimate conduct under the mineral lease could not be used to deny their rights under a distinct and separate surface lease. While “recogniz[ing] the hardball nature of the Coles’ position,” the court ultimately agreed with them. Therefore, the court found that the Coles properly terminated the surface lease.
The significance of the case is the distinction made between the surface estate and the mineral estate in analyzing whether the doctrine of equitable estoppel or quasi-estoppel will apply. The opinion does not set forth the specific interests of the Coles in the two separate estates, but apparently they had some interest under both. The court does not address the concept, but it is generally required that a party seeking equitable relief must do equity to get equity. Given that Anadarko never paid the $500 or tendered the $500 into court, the failure to do equity could have been reason enough to deny equitable relief. The opinion also includes some interesting discussion of the scope and use of concurrent surface rights when a mineral lease overlaps a unit and the lessor ratifies the unit.