Face Challenges Confidently

178 Stephens v. Finley Res., 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.
Stephens v. Finley Res., Inc., No. 07-05-0023-CV, 2006 WL 768877 (Tex. App.— Amarillo March 27, 2006, no pet.), holds that a saltwater disposal agreement granting lessee authority to dispose of saltwater from off-lease wells on the leased premises did not affect or limit lessee’s implied and express rights under the lease to dispose of saltwater from lease wells on the leased premises. The oil and gas lease was executed in 1945. In 1984, lessor and lessee entered into an agreement to allow a lease well to be used as a disposal point by the lessee for salt water from off-lease wells in exchange for a rental payment to lessor. Lessee later cancelled the agreement, stopped paying the rental, but continued to inject lease water into the well.
The Court relied on existing authority to reject lessor’s claim that the 1984 agreement limited Finley’s rights to dispose of saltwater under the lease. A lessee has an implied right to dispose of salt water produced from lease wells in conjunction with performing its contractual obligations and may do so by injecting it into an oil and gas well on the leased premises, assuming the lease does not expressly provide otherwise. Lessee had the “right to use so much of the land as was reasonably necessary in the production of oil and since the production of oil necessarily involves its separation from salt water, [lessee] would have the right, ordinarily under the implied terms of the lease, to use the land for that purpose. . . .”
Lessor did not challenge the underlying implied or express right granted by the lease, but contended that the 1984 agreement supplemented that right, relying on specific language in the 1984 agreement. The court rejected that argument because the 1984 agreement did not mention the mineral lease, nor did it expressly state that the agreement was intended to negate or limit the rights given to the lessee under the mineral lease. The court did place special emphasis on the lease clause granting lessee water rights, which provided: “Lessee has the right to use water from said land, except water from lessor’s wells, for all operations, . . . including repressuring, pressure maintenance and recycling . . . .”
The court held that once the 1984 agreement terminated, lessee no longer had the right to use the lease well for disposal of off-lease salt water; however, lessee’s right to dispose of salt water from lease wells was still in effect.
Lessors and lessees frequently enter into agreements ancillary to operations on the lease to address matters not covered by the lease, or to clarify, expand or limit rights and obligations related to the lease. This case illustrates the inherent risk that such an agreement may be construed to conflict with express or implied lease terms. This suggests the draftsman should consider when and how to use concepts such as: “In addition to the other terms and conditions of the lease, . . .”; “Except as expressly limited herein, the lease is ratified and confirmed as fully in force and effect . . . .”; “Without limiting the rights granted to lessee under the lease, lessor and lessee agree that lessee will . . .”; or “Notwithstanding paragraph                                                  of the lease . . . .”