Opinion ID: 6110129
Heading Depth: 1
Heading Rank: 2

Heading: Context of Execution of the Leases

Text: In interpreting the Leases, we may consider the circumstances present in August 2009, when they were executed. See Nat'l Union Fire Ins. Co. , 907 S.W.2d at 520 . Those circumstances include the meaning commonly applied by the industry and courts to offset well language prior to and contemporaneously with the execution of the Leases. See Heritage Res., Inc. , 939 S.W.2d at 121-22 . Looking to those circumstances, it is clear that long before and at the time the Leases were executed, the traditional and widespread industry meaning of offset well was a well that protected the leasehold from being drained of its minerals. See, e.g. , Offset Well , BALLENTINE'S LAW DICTIONARY (3d ed. 1969) (defining offset well as [a]n oil well dug for the specific purpose of preventing drainage of oil to adjoining property); RICHARD LEROY BENOIT , CYCLOPEDIA OF OIL AND GAS FORMS §§ 168-70, at 205-07 (1926) (discussing offset well clauses and implying they are related to protection from drainage); DAN S. BOYD , THE STATE OF TEXAS , GOVERNOR'S ENERGY ADVISORY COUNCIL , LEGAL ASPECTS OF STATE-OWNED OIL AND GAS ENERGY RESOURCES 21-22 (1974) (discussing the Relinquishment Act's offset well clause and noting state leases expressly require the drilling of offset wells when drainage from nearby wells is actually occurring); EARL A. BROWN , THE LAW OF OIL AND GAS LEASES § 16.02(5)(D), at 317 (1958) (noting that the implied covenant of the lessee to protect the leased premises against drainage from wells on adjoining premises by drilling offset wells can be superseded by an express clause); GRAYSON CECIL FOX , OIL AND GAS DRILLING FUNDS : A PRIMER FOR ATTORNEYS AND INVESTORS  § 2.22(c), at 15-16 (1983) (observing that leases can provide for express covenants, such as the covenant to offset if a well is brought in on adjacent property); R.L. HANKINSON & R.L. HANKINSON JR. , LANDMAN'S ENCYCLOPEDIA § 119, at 329 (2d ed. 1981) (containing a form of an offset obligation waiver clause, which waives a lessee's express or implied obligations to drill an offset or protection well and waives the lessor's claims or demands for damages occasioned by drainage of the lease premises by an adjacent well); RICHARD W. HEMINGWAY , THE LAW OF OIL AND GAS § 8.6, at 565 (3d ed. 1991) (referring to an express offset clause as a clause relating to the obligation of the lessee to drill offset or protection wells and noting such clauses can supersede the implied covenant); EUGENE O. KUNTZ, THORNTON ON OIL AND GAS: CUMULATIVE SUPPLEMENT § 196, at 149 (1960) (In the absence of an express provision, [there] is an implied duty ... to afford protection against drainage by drilling offset wells.); JOHN S. LOWE, OIL AND GAS LAW 331 (4th ed. 2003) (stating that for a claim for a breach of the implied covenant to protect against drainage, a lessor must show substantial drainage and a probability that an offset well would be profitable); MAURICE H. MERRILL , COVENANTS IMPLIED IN OIL AND GAS LEASES § 94, at 234 (2d ed. 1940) (If producing wells are drilled upon adjoining lands within draining distance of the line, it behooves the owner of the land to counteract their influence by 'offset' wells upon his own premises.); 1 ERNEST E. SMITH & JACQUELINE LANG WEAVER , TEXAS LAW OF OIL AND GAS § 5.3(B)(2), at 267-68 (1989) (noting that offset clauses require the lessee to drill an offset if a well on other land is drilled within a specified maximum distance from the leased premises); SAMUEL S. WYER , U.S. NAT'L MUSEUM, BULLETIN 102, PT. 7, NATURAL GAS: ITS PRODUCTION , SERVICE , AND CONSERVATION 55-56 (1918) (The primary feature to be borne in mind is that the offset well is drilled for purposes of protection, and that this is more important than hard and fast rules regarding exact location.); George A. Bibikos & Jeffrey C. King, A Primer on Oil and Gas Law in the Marcellus Shale States , 4 TEX. J. OIL GAS & ENERGY L. 155, 164 n.36 (2009) (An offset well is defined as 'a well drilled on one tract of land to prevent the drainage of oil or gas to an adjoining tract of land, on which a well is being drilled or is already in production.'  (quoting 1 HOWARD R. WILLIAMS & CHARLES J. MEYERS , OIL AND GAS LAW 684 (2008) ) ); see also JOSEPH SHADE , PRIMER ON THE TEXAS LAW OF OIL AND GAS , app. 10 (rev. 4th ed. 2012) (Offset well. A well drilled on one tract of land to prevent the drainage of oil to an adjoining tract of land, on which a well is being drilled or is already in production.); accord TEX. NAT. RES. CODE § 52.173 (containing a statutory offset well clause with which parties leasing the mineral interests to state land must comply and stating that an offset well shall be drilled to a depth and the means shall be employed which may be necessary to prevent undue drainage of oil or gas from beneath the state land). Additionally, when the Leases were executed in 2009, this Court had for years referenced an offset well as a well located and drilled to protect against drainage. See, e.g. , Coastal Oil & Gas Corp. v. Garza Energy Tr. , 268 S.W.3d 1 , 14 (Tex. 2008) (noting that landowners have recourse for drainage-drilling an offset well to protect against it); Amoco Prod. Co. v. Alexander , 622 S.W.2d 563 , 567 (Tex. 1981) (acknowledging that local drainage can be prevented by drilling offset wells); Shell Oil Co. v. Stansbury , 410 S.W.2d 187 , 188 (Tex. 1966) (holding that an offset well clause required the lessee to drill an offset well in response to drainage);  Commonwealth of Massachusetts v. Davis , 168 S.W.2d 216 , 223 (Tex. 1942) (discussing an offset well clause); Brown v. Humble Oil & Ref. Co. , 83 S.W.2d 935 , 940 (Tex. 1935) (noting that at common law, an adjoining landowner cannot complain if wells are drilled near his boundary line and that the landowner can protect himself by drilling offset wells); Tex. Pac. Coal & Oil Co. v. Barker , 6 S.W.2d 1031 , 1036 (Tex. 1928) (indicating that offset well refers to a well drilled in response to a producing well on an adjacent tract in order to protect against drainage). However, Murphy maintains that in light of the relatively modest drainage, as Murphy's expert described it, occurring in the Eagle Ford Shale, no reasonable person in 2009 would have ascribed the traditional meaning of offset well to this offset well clause. The Court, while acknowledging that we have recognized that drilling an offset well can be a method of protecting against drainage, similarly uses the attributes of the Eagle Ford Shale to buttress its conclusion that Murphy's is the only reasonable interpretation. Ante at 110. I disagree with both the conclusion and the use of the evidence supporting it. First, the Court seems to criticize my using a string cite of authorities that predate the advent of the type of drilling at issue here. Ante at 112. Ordinarily, such cites might be relegated to a footnote. But in this instance, the cites are a substantive reflection of circumstances both preexisting the Leases and at the time the Leases were executed. Further, if a source did not exist at the time of or before execution of the Leases, then it cannot fairly be included in the circumstances surrounding their execution and does not shed any light on the parties' intent. The Court and Murphy effectively take the position that the advent of horizontal drilling has robbed offset well of its long-established meaning. But even a cursory survey of more current sources than those I cite above showing the circumstances at the time the Leases were executed reveals this is not the case. See, e.g. , 55 TEX. JUR. 3D Oil and Gas § 217 (2018) (Offset drilling may be used as a guard against drainage of oil and gas from under one owner's land caused by the withdrawal of oil and gas by an adjoining landowner. An obligation to drill offset wells may rest on the lessee, either by express provision of the lease or by implication.); NORMAN HYNE , DICTIONARY OF PETROLEUM EXPLORATION , DRILLING, & PRODUCTION 352 (2d ed. 2014) (defining offset well as a well drilled on the next adjacent drilling and spacing unit to an existing well to compensate for and/or prevent drainage by that well); R.D. LAGENKAMP , HANDBOOK OF OIL INDUSTRY TERMS & PHRASES 344 (6th ed. 2014) (defining offset well as [a] well drilled on one tract of land to prevent the drainage of oil or gas to an adjoining tract where a well is being drilled or is already producing); LEVONNE LOUIE , MINERAL LAND RIGHTS: WHAT YOU NEED TO KNOW ch. 6 (2014) (The offset well clause provides a mechanism whereby landowners can protect themselves from drainage if a well is drilled on a DSU beside their land (the offset section).); 2 NANCY SAINT-PAUL, SUMMERS OIL AND GAS § 17:7, at 511 (rev. 3d ed. 2016) (stating, in a section titled Express covenant to drill offset wells, that the modern oil and gas lease often contains an express covenant obligating the lessee to protect the leased land from drainage by drilling wells offsetting protective wells on adjacent lands); JOSEPH SHADE & RONNIE BLACKWELL , PRIMER ON THE TEXAS LAW OF OIL & GAS app. A (5th ed. 2014) (defining offset well as a well drilled on one tract of land to prevent the drainage of oil to an adjoining tract of land, on which a well is being drilled or is already in production); 8 Offset Well ,  HOWARD R. WILLIAMS & CHARLES J. MEYERS , OIL AND GAS LAW 684 (LexisNexis Matthew Bender 2017) ([An offset well is a] well drilled on one tract of land to prevent the drainage of oil or gas to an adjoining tract of land, on which a well is being drilled or is already in production.). Recent cases from this Court also demonstrate our understanding of the term by using it without seeing the need to provide any explanation of its meaning. See, e.g. , Hooks v. Samson Lone Star, Ltd. , 457 S.W.3d 52 , 67-68 (Tex. 2015) ; Lesley v. Veterans Land Bd. , 352 S.W.3d 479 , 488 (Tex. 2011). In short, before, at the time of, and even after the Leases were executed, offset well meant and continues to mean a well that protects a lease from the possibility of drainage. Next, Murphy argues that the definition of offset well, which developed in the context of vertical drilling and the implied covenant to protect the lease against drainage, is inapplicable to horizontal drilling operations utilizing hydraulic fracturing techniques in tight formations. Therefore, according to Murphy, any implied covenant cases discussing what an offset well is are unpersuasive. First, that argument does not address the intent of the parties to these Leases, which is the issue. Second, as noted above, even current industry sources do not reflect a change in the traditional definition and understanding of offset in light of new trends in oil and gas production and technology. As the Court discussed in Coastal Oil , the rule of capture and offset well concepts continue to apply in situations where tight formations such as the Eagle Ford are concerned. See Coastal Oil , 268 S.W.3d at 14 . There, the Court applied the rule of capture to drainage caused by fracing across lease lines because, in part, mineral owners and lessors have adequate means of protecting themselves by drilling offset wells: [T]he law already affords the owner who claims drainage full recourse. This is the justification for the rule of capture, and it applies regardless of whether the drainage is due to fracing. If the drained owner has no well, he can drill one to offset drainage from his property. If the minerals are leased and the lessee has not drilled a well, the owner can sue the lessee for violation of the implied covenant in the lease to protect against drainage. Id. ; see also Ryan Consol. Petroleum Corp. v. Pickens , 285 S.W.2d 201 , 235 (Tex. 1955) (Wilson, J., dissenting) ([T]he owner of the adjoining tract from which the oil is migrating can protect himself by drilling offset wells. This equal right to drill has always supported the constitutionality of the rule of capture. Take it away and the reason for the rule fails, leaving a result not only unjust but one inconsistent with the fundamental concept of ownership of oil and gas in place as a part of the realty.). Further, the offset provision took the Herbsts out of the class of mineral lessors who must rely on the implied covenant requiring a mineral lessee to protect the minerals against drainage. To prevail in a suit against a lessee for breaching the implied covenant to protect the lease against drainage, the lessor has the threshold burden to prove that an adjacent well is substantially draining the leasehold. Amoco Prod. Co. , 622 S.W.2d at 568 . As the Court recently explained: [D]etermining the value of oil and gas drained by hydraulic fracturing is the kind of issue the litigation process is least equipped to handle. One difficulty is that the material facts are hidden below miles of rock, making it difficult to ascertain what might have happened.  Such difficulty in proof is one of the justifications for the rule of capture. Coastal Oil , 268 S.W.3d at 16 . But there is more. If a lessor overcomes this hurdle, then without an offset well provision in the lease, the lessor must also prove that a reasonably prudent operator would have drilled a well-an offset well-to protect against drainage by the triggering well on adjacent property, and that the offset well would be profitable. Amoco Prod. Co. , 622 S.W.2d at 572 . As amicus curiae TLMOA points out, it is because of the expense, difficulty, and risk associated with litigating such a suit against a lessee that lessors choose to have offset well provisions in their leases. Offset well provisions developed in the context of lessors having the difficult task of prevailing on a claim for breach of the lessee's implied covenant to protect against drainage. Therefore, we should not discount sources supporting the traditional understanding of what an offset well is simply because they dealt primarily with the implied covenant to protect against drainage. I also would decline the opportunity to consider the Eagle Ford Shale's drainage attributes because the Leases say we should not do so. The Herbsts and Barrett clearly intended the Leases to include a deemed drainage provision because they put one in; the offset well clause provided that the lessee's obligations would be triggered if a producing well was completed within 467 feet of the leasehold: It is hereby specifically agreed and stipulated that in the event a well is completed as a producer of oil and/or gas on land adjacent and contiguous to the leased premises, and within 467 feet of the premises covered by this lease, that Lessee herein is hereby obligated to ... [drill an offset well, pay royalties, or release acreage]. (Emphasis added). The Leases' tying the lessee's obligation solely to the completion of a producing well within a specified distance from the property line but without a requirement that the well be actually draining the property, avoided the Herbsts' having to shoulder the burden of proving the lessee breached the substantial drainage element of the implied covenant to protect the lease in the event a controversy such as this arose. See Bill Kroger & Jason Newman, Understanding Hydrocarbon Trends: Ten Issues that Lawyers Can Help the Energy Industry Solve , 52 HOUS. LAW. 10, 11 (2014) ( [Some] leases create the concept of 'deemed drainage' that force an operator to drill an offset well, release acreage, or pay compensatory royalties if a well is drilled on an adjacent lease within a set distance of the lease line (regardless of whether actual drainage is occurring or not).); That is, the Leases deemed drainage to be occurring if such a producing well was completed. Both the intent of the parties as reflected in the words of the Leases and the effect of the Leases are clear: to short circuit disputes between the Herbsts and their lessee regarding whether a well on adjacent premises and within 467 feet of the Herbsts' land was, might be, or could possibly be, draining minerals from the Herbsts' property. As to any such wells, the Herbsts would not have the burden to prove anything regarding the well's drainage because under the Leases, drainage would be deemed to be taking place. Rather, the lessee would have the obligation to drill an offset well or, in lieu of drilling, pay royalties or release acreage. Under the Leases, Murphy's predecessor and Murphy assumed the risk that a well such as the Lucas might not be draining the Herbsts' land, yet an offset well to protect against drainage was still required because  drainage was deemed to be occurring. See id. at 11 In asking that we consider the drainage characteristics of the Eagle Ford Shale, Murphy invites us to rewrite the Leases and re-institute the burden the Leases relieved the Herbsts of as lessors: in order to obtain relief regarding the Lucas well, the Herbsts would have to prove that the Lucas was or is actually draining minerals from the leased premises. That result would deprive the Herbsts of the benefit of their bargain with Barrett in obviating the need for the Herbsts to prove actual drainage of minerals where the material facts are hidden below miles of rock. See Coastal Oil , 268 S.W.3d at 16 . Although the Court acknowledges there is no dispute that actual drainage was not required to trigger Murphy's obligations under the provision, ante at 109 n.3, the implication is that although the parties agreed upon a deemed drainage provision to protect the Herbsts' minerals from the possibility of drainage from vertical and horizontal wells and to relieve the Herbsts of a proof burden regarding drainage, the Court simply will not honor it because the Court decides in hindsight that it does not make sense in the context of horizontal drilling in tight shale formations. The Court is wrong to abrogate the deal the parties struck because in hindsight a better one might have been struck by Barrett while contracting with the Herbsts. Murphy faults the court of appeals for assuming there was drainage for Murphy to protect against and expecting Murphy to prove either that it was protecting from such drainage or that there was no drainage. Murphy claims that offset well clauses are a tradeoff: The lessor gives up its freeform drainage-protection requirement under the implied covenant in exchange for shedding the onerous burdens of triggering that requirement, and the lessee gives up its insulation from offset well obligations in exchange for exactitude in the nature of those obligations. I agree that the clauses in question have the effect referenced by Murphy. After all, that is the point of including such offset well provisions in leases: obviating a lessor's having to prove substantial drainage where an adjacent well within a prescribed distance is concerned, and concomitantly providing choices for the lessee based on the lessee's evaluation of the economics involved, without requiring the parties to engage in expensive and extensive dispute resolution. Per the Leases' contractual provisions, the court of appeals did no more than the Leases provided for: presume that drainage existed where a well on adjacent land triggered the offset well clause. And if Murphy is correct that drainage cannot occur in the Eagle Ford Shale past 350 feet, it could have renegotiated the Leases to include that distance as the distance in the offset well provision-provided that the Herbsts would have agreed to the change. But such negotiations or change did not take place. Moreover, the offset well clause's offset distance is 467 feet, which reflects the Railroad Commission's unmodified spacing requirements, further undermining Murphy's argument that the parties did not intend the traditional industry definition of an offset well. 16 TEX. ADMIN. CODE § 3.37(a)(1). As support for its argument that in entering into the Leases the Herbsts and Barrett could not have intended the traditional definition of offset well because little to no drainage occurs in the Eagle Ford Shale, Murphy goes outside the Leases for evidence and relies heavily on McBeath's affidavit, which Murphy offered as summary judgment evidence. In his affidavit, McBeath states that the industry understands the term offset well as meaning any well drilled on an adjacent lease or property, suggesting it does not matter  where on the leased acreage it is drilled. McBeath also discusses the reservoir characteristics of the Eagle Ford Shale. He avers that the conventional concept of drainage across lease lines has limited application in the [Eagle Ford Shale]. According to McBeath, this is so because due to the reservoir characteristics of the Eagle Ford Shale, a relatively modest amount of reservoir is drained by each horizontal well. McBeath based this conclusion on (1) the experiences of other operators conducting horizontal drilling activities in the Eagle Ford Shale and (2) the fact that the Railroad Commission has adopted modified spacing rules for the Eagle Ford Shale to reflect this characteristic. But what McBeath does not say is equally important. It is true that in determining whether a contract is ambiguous, courts may use evidence of the circumstances surrounding the contract's execution. Brumitt , 519 S.W.3d at 109-10 . Our primary concern ... is to ascertain the true intentions of the parties as expressed in the instrument. Valence Operating Co. v. Dorsett , 164 S.W.3d 656 , 662 (Tex. 2005). If that is the case, then evidence of the surrounding circumstances is relevant only if the parties at least could have known of such facts at the time of execution; otherwise, it would shed no light on what the parties intended when executing the contracts. McBeath never opines that the Lucas well does not in fact drain minerals from the Herbsts' lands, nor does he say that he reviewed any material or data regarding drainage from the Herbsts' land or by the Lucas well or the Herbst well. Further, no summary judgment evidence shows that at the time the Herbsts and Barrett entered into the Leases in 2009, the parties knew, or even could have known, of the Eagle Ford Shale's drainage characteristics or executed their leases in contemplation of those characteristics. Indeed, as noted above, the Leases specifically referenced both vertical and horizontal wells, but the offset well provision did not differentiate between the two types. McBeath only offers broad generalizations without ever offering any insight as to whether they actually apply to the Leases or whether the Herbsts and Barrett even could have known about them at the time of execution. And McBeath clearly was a stranger to any negotiations between Barrett and the Herbsts about terms of the Leases. I therefore would decline to consider the drainage attributes of the Eagle Ford Shale in determining whether the Leases are ambiguous because they have not been established to have been a part of the circumstances surrounding the execution of the Leases. See Brumitt , 519 S.W.3d at 109-10 . Murphy also contends that any requirement that an offset well be drilled near the lease line is overly simplistic in light of the relatively modest drainage that occurs in the Eagle Ford Shale and that the parties should be able to take advantage of Murphy's expertise, as a professional oil and gas operator, to choose the most productive location on the leased premises to drill a well. Murphy further asserts that by reading offset well to impose an obligation to protect against drainage, the court of appeals and the Herbsts are placing extracontractual obligations into the Leases. However, as discussed above, at the time the Leases were entered into, offset well provisions were unquestionably placed in leases to address potential drainage, and Murphy makes no case that they were not. To the contrary, Murphy concedes as much when it argues that offset well provisions, rather than being meant to ensure protection from drainage, are included in leases to obviate the need to litigate claims for the breach of the implied covenant to protect against drainage.  The Court acknowledges the rule that evidence of the circumstances surrounding a contract's execution cannot be used to add[ ] to, alter [ ], or contradict[ ] the contract's text. Ante at 110 (emphasis added) (quoting URI , 543 S.W.3d at 767 ); see also URI , 543 S.W.3d at 757 ([S]urrounding facts and circumstances cannot be employed to 'make the language say what it unambiguously does not say' or 'to show that the parties probably meant, or could have meant, something other than what their agreement stated.' In other words, extrinsic evidence may only be used to aid the understanding of an unambiguous contract's language, not change it or 'create ambiguity.'  (citations and quotations omitted) ); Brumitt , 519 S.W.3d at 110 ([C]ourts may not rely on evidence of surrounding circumstances to make the language say what it unambiguously does not say.). But in concluding that the parties could not have intended the traditional definition of offset well in light of the surrounding circumstances, the Court uses such evidence to alter the well-established meaning of the term. The principle that allows use of circumstances surrounding a contract's execution to provide context for the words chosen is subject to misunderstanding and even misuse. See URI , 543 S.W.3d at 757 (Despite expounding on this principle from time to time, ... it remains susceptible to confusion and inconsistency when applied to unambiguous contract terms.). As we recently explained, Courts may consider the 'context in which an agreement is made' when determining whether the contract is ambiguous, but the parties may not rely on extrinsic evidence 'to create an ambiguity or to give the contract a meaning different from that which its language imports.'  Brumitt , 519 S.W.3d at 109-10 (quoting Anglo-Dutch Petroleum Int'l, Inc. v. Greenberg Peden, P.C. , 352 S.W.3d 445 , 451 (Tex. 2011) ). Today, the Court finds a new way to use such evidence: it uses the evidence to say that there is no ambiguity and to effectively remove a word from the Leases, not just to determine whether there is an ambiguity. Further, the Court reaches outside of the Leases to support its conclusions. The Court cites an article stating that production in the Eagle Ford Shale did not begin in earnest until the industry began using horizontal drilling and hydraulic fracturing in 2008 to combat the Eagle Ford Shale's drainage characteristics. Ante at 110 n.4 (citing Bret Wells, Please Give Us One More Oil Boom-I Promise Not to Screw It Up this Time: The Broken Promise of Casinghead Gas Flaring in the Eagle Ford Shale , 9 TEX. J. OIL GAS & ENERGY L. 319, 348 (2013-2014) ). This at most demonstrates that the parties could have been aware of the decreased drainage characteristics of the Eagle Ford Shale, not that they actually knew of and took them into consideration in entering into the Leases.