Face Challenges Confidently

356 PEC Minerals LP v. Chevron USA Inc.

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.
PEC Minerals LP v. Chevron USA Inc., 737 F. Supp. 2d 643 (E.D. Tex. 2010), held that production anywhere on a lease continued the lease in force and effect as to all of the leased premises, notwithstanding that delay rentals were payable on a tract-by-tract basis. The case was between parties situated as successors in interest to Lessor and Lessee under an oil and gas lease executed in 1944 which covered over 29,000 acres in Panola County. When the parties executed the final extension of the primary term, Lessee agreed to release any “units” not producing when the primary term expired. The parties also listed eighty units which Lessee did not release (“Retained Units”). In October 2008, some of the Retained Units were not producing (“Disputed Units”). Lessor contended that units which were no longer producing were no longer subject to the lease. Lessee contended the lease continued as to all the Retained Units, including the Disputed Units, if at least one unit continued to produce.
The habendum clause in the lease was a common form, and it was undisputed that under this type of habendum clause, unless modified, production of mineral or gas anywhere on the lease would extend the lease as to all the leased premises. However, the habendum clause may be modified or limited by other lease provisions if the language used is “‘so clear, precise, and unequivocal that [it] can reasonably [be given] no other meaning.’”
Paragraph 5(f) of the lease contained three sentences. The first very lengthy sentence generally provided that Lessee agreed to pay delay rentals during the primary term at the rate of one dollar per acre per year for each acre in undeveloped units. Lessor claimed the last two sentences of Paragraph 5(f) of the lease were sufficiently clear, precise, and unequivocal to modify the habendum clause so that it applied on a unit-by-unit basis. Lessee argued that the last two sentences of Paragraph 5(f) related to the payment of delay rentals only and, thus, did not modify the habendum clause.  The last two sentences of Paragraph 5(f) provided:

But the commencement by Lessee of drilling operations on any such undeveloped drilling or spacing unit shall relieve Lessee from the payment of such rental thereon, and if paying production should result from such operations this lease shall continue in force as to the drilling or spacing unit on which such production is had for as long as such production continues. It is agreed that the provisions of this sub-paragraph (f) hereof shall be separable and shall be considered and applied as a separate agreement as respects each such undeveloped drilling or spacing unit.

Lessor argued that the language in sentence two divided the leasehold into tracts and that the tracts should be treated separately for all purposes. The court stated that the Lessor’s analysis overlooked the first half of sentence two, which recited that if Lessee began drilling operations on an undeveloped unit, delay rentals were unnecessary as to that unit. The second sentence simply clarified the circumstances under which delay rentals were no longer necessary during the primary term.  That is, delay rentals were unnecessary for any producing units.
Lessor also argued that the third and final sentence of Paragraph 5(f) modified the duration of the habendum clause because the provision stated “that the provisions of Paragraph 5(f) shall be treated as separate agreements as to each unit.” The court disagreed. “Because a lease will be considered as two leases for certain purposes, it does not follow that a single lease will be considered as two leases for all purposes.” Accordingly, the court held that production anywhere on the leased property extended the lease as to all the Retained Units; thus, the lease remained in effect as to the Disputed Units.
The opinion follows well-established precedents that the habendum clause will almost always be construed to operate on a lease basis, and the language of Paragraph 5(f) was simply not strong enough to overcome this general proposition.