By: Martin Gibson
While all eyes are on the Texas Supreme Court’s decision on September 1 to reinstate the Petitions for Review in the Endeavor Energy Resources v. Discovery Operating and in the XOG Operating et al. v Chesapeake Exploration et al. cases (two, arguably contradictory, decisions on how to interpret the retained acreage clause), lower courts continue to face pooling issues. In ConocoPhillips Company v. Vaquillas Unproven Minerals, the pooling language in a lease setting different units of acreage per well if any rule adopted by the RRC did so, was construed to limit the lessee’s units to 40 acres in the absence of field rules setting different sizes, that did not provide for the size of proration units, by cross referencing to Rule 38, the state-wide spacing rule. This case has since been settled and the Court of Appeals judgment set aside.
In a case decided on August 30, 2017, the Waco Court of Appeals, in Chieftan Exploration Company v. Gastar Exploration (Tex. App. – Waco 2017), Cause No. 10-15-00037-CV addressed the effect of leaving out a lease description from the unit designation.
The minerals under tract 17, consisting of 56 acres, was owned, in equal parts, by two parties. An undivided 1/4 NPRI was carved out to Donelson, who later conveyed it to Chieftan, by one of the two undivided interest owners (Live Oak). Each co-owner signed a separate lease. A 702 acre unit (the Streater Unit) was formed and production established. Chieftan did not get paid and sued. The unit designation did not describe the lease from Live Oak.
In response to cross motions for summary judgment, the court concluded as follows:
Since pooling clauses are a matter of contract, the failure of the designation to include a description of the Live Oak lease combined with a lease limitation of unit size to 640 acres and a failure to meet the requirement that the tract constitute 50% of the unit, the lease was not validly pooled. The court added that had the lease been included in the described leases in the unit designation, it still would not have been validly pooled due to exceeding the unit size limitation and failing to meet the ”50% of the unit” requirement.
Chieftan argued that, under the Sheppard case and the Ladd case, the lands could be pooled without pooling the lease and since the lands covered by tract 17 were included in the unit, the lands were pooled even if the lease was not mentioned. Distinguishing those cases, the court held that the unit designation for the Streater Unit combined only the leases to the extent they covered lands in the unit and, therefore, did not unitize the lands irrespective of the leases.
Since Donelson, the owner of the 1/4 NPRI before Chieftan, had ratified the Streater Unit Designation, Chieftan argued that the ratification put the Live Oak lease into the unit. Not so, said the court because the ratification was conditioned on the lessee exercising the pooling authority which, per ¶1 above, was not done. Nor did Donelson’s successful ratification of the other 1/2 interest in tract 17 (the McBeth lease) apply since Chieftan had no 1/4 NPRI in the McBeth lease and, therefore, the NPRI holder could not successfully ratify the Live Oak lease.
This case illustrates two points:
Great care should be taken in preparing the unit designation; omitting one lease description was sufficient to keep that lease from being pooled even though the lands covered by that lease were included in the designation.
Texas courts have a tendency to construe the grant of pooling authority in a lease when it includes the right to pool the lease and the leased premises as applying not only to what was leased but to the lessor’s reversionary interest so that when the lease expires, the mineral owner is still in the unit and liable for costs of drilling, completing, etc. What you may have thought was “boiler plate” turns out to really mean something and, often, not at all what your client intended.