Texas Court Rules on a Retained Acreage Clause

Gray Reed
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Gray Reed

Sometimes writing too many alternatives into an oil and gas lease invites confusion … which provokes litigation … which results in disappointment for somebody … or everybody.

For example, the central issue in Vermillion FC, LP v. 1776 Energy Partners, LLC was the effect of a well-tract designation pursuant to a retained acreage provision. The parties entered into an oil and gas lease covering approximately 1100 acres in Zavala County Lessee 1776 Energy commenced drilling a horizontal oil well, the Byrd Ranch No. 1H, and began production, designated a 320-acre well tract, and notified Vermillion.

The parties spent the next three years fighting over whether 1776 Energy breached the lease by, among other things, retaining excess acreage in the well tract and untimely releasing non-retained acreage.

Vermillion sued for breach of contract and other claims. Both parties moved for partial summary judgment. Vermillion argued that the 1776 Energy’s 320-acre well tract should have been 40 acres and that the lease terminated as to all other acreage. Specifically, Vermillion argued that the retained acreage clause required the well tract to have as few acres as possible for actual production.

The trial court granted Vermillion’s motion and denied 1776 Energy’s.

The clause (we are paraphrasing) defined the well tract as the “minimum number of acres” “producing in paying quantities”, but was qualified by

  • … which pursuant to the applicable field rules provides or permits for creation of an allowable sufficient to cover actual production;
  • … but was expressly limited of 80 acres plus the length of the horizontal well bore plus 330 feet on either side thereof; and
  • … notwithstanding the above, to the extent the Railroad Commission’s field rules provided for additional acreage, the rules would control.

After examining the field rules and the express language of the lease, the court of appeals concluded that 1776 Energy was entitled to retain 280 acres with respect to the well—not 40 acres as Vermillion argued or the 320 acres 1776 Energy wanted. The court distinguished this case from Endeavor Energy Resources v. Discovery Operating and XOG Operating v. Chesapeake Exploration by emphasizing the Supreme Court’s holdings that a retained acreage clause must be construed on its own language under governing principles of contract interpretation. Also, Endeavor and XOG involved vertical wells, not horizontals.

Concluding that the Byrd Ranch No. 1H Well retained 280 acres rather than 320, the court reversed and remanded. The additional 40 acres automatically terminated at the end of the primary term. 1776 Energy breached the lease by failing to release the 40 acres.

Your musical interlude.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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