Face Challenges Confidently

534 Albert v. Dunlap Exploration, Inc.

Tuesday, December 8th, 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.

Albert v. Dunlap Exploration, Inc. held that a horizontal Pugh clause in a lease did not apply to gas wells drilled on a pooled unit pooled as to all depths and ratified by lessor. The lease provided that it would terminate at the end of the primary term “as to all depths below the deepest depth drilled theretofore established in a well located on lands covered by this lease.” Lessor executed the Declaration of Pooled Unit during the primary term. The Declaration pooled all gas “produced under and by virtue of said leases, from the lands covered by said leases, and as to all depths covered by said leases,” and provided that “Lessors hereby expressly consent to the formation of the pooled unit herein described, and do hereby adopt, ratify, and confirm the same.” The issue was whether the Pugh clause was ever triggered.

The court held that Lessor agreed to the terms of the pooling agreement and its resulting modification of the lease by the execution of the pooling agreement. It was executed during the primary term when all depths continued to be covered by the lease. The pooling agreement was made effective as of the date of first production, which occurred before the expiration of the primary term. Therefore, the Pugh clause was never triggered. Apparently there was another provision in the lease which required the Lessor’s written consent to any pooling. There is nothing in the opinion as to Lessor’s subjective intent, but it is easy to envision circumstances in which the Lessor could intend to consent to a pooling without otherwise modifying the terms of Lessor’s lease. There is also no analysis in the opinion as to whether the lease may have terminated as to the deep rights, but the reversionary interest could still be subject to the pooling.

There was another document executed by Lessor after the execution of the Designation of Pooled Unit. By a Ratification, Renewal, and Extension of Oil, Gas and Mineral Lease, Lessor ratified the lease under the same terms set forth in the lease, but there was also an Exhibit “A” attached to that ratification. Exhibit A expressly provided that its provisions superseded any lease provisions. Exhibit A then set forth detailed provisions for the number of acres which could be allocated to proration units at different depths. The depths on the schedule included depths below the deepest depth that would be permitted under the horizontal Pugh clause in the lease. The court concluded “that the ratification agreement also negated the horizontal Pugh clause.”

The significance of the case is the holding that the ratification of a pooled unit may have the effect of deleting a horizontal Pugh clause from a pooled lease.