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

Heading: Language of the Leases

Text: As with any contract, the Leases must be read according to the language the parties used, without adding to or taking away from it. Heritage Res., Inc. , 939 S.W.2d at 121 (We presume that the parties to a contract intend every clause to have some effect. We give terms their plain, ordinary, and generally accepted meaning unless the instrument shows that the parties used them in a technical or difference sense. (citations omitted) ). The Leases were executed in 2009, and Murphy-an entity that does not claim to have been part of or have had any connection with the lease negotiations-argued in the lower courts and continues to argue here that the offset well provision was drafted with horizontal wells in mind. Without further explication, the Court slips past the lack of evidence of that position by saying that the Herbsts [do] not dispute that [the Leases] were drafted with horizontal shale drilling in mind. Ante at 110. The  Court recognizes the proximity requirement associated with the traditional definition of offset well and states, without respect to the fact that the Leases must be construed as intended by the Herbsts and Barrett, who negotiated them, that [t]his is a reasonable premise in the context of vertical drilling, where placement of an offset well is an important factor in minimizing the amount of oil or gas being drained. But the same principle does not apply in the context of horizontal drilling and hydraulic fracturing in the Eagle Ford Shale. Ante at 112 (citation omitted). There are two problems with the Court's position. First, the Court simply decides-without any indication in the Leases-that the Leases must have been based on what the Court decides would have been a reasonable premise or principle, without regard to what the Herbsts and Barrett actually intended when they entered into the Leases. Second, the Court badly shortchanges the Herbsts' position. The Herbsts point out that the Leases expressly contemplate both vertical and horizontal drilling, impose the offset well obligation regardless of the type of well involved, and authorize no special treatment with respect to either type of well. That is unquestionably the situation. For example, paragraph 23.) of the Leases has two subparagraphs. One is entitled and references Vertical Wells, while the other is entitled and references Horizontal Wells. Thus, the offset well provision must be interpreted in light of the parties' intent, as expressed in the Leases, that the Leases encompass and address all types of wells, not just horizontal wells. Moreover, as amicus curiae Texas Land and Mineral Owners Association (TLMOA) observes and the Court fails to acknowledge, the Leases grant Murphy the right to produce all minerals under the Herbsts' land, not just those found in the Eagle Ford Shale. According to the affidavit of Murphy's expert John C. McBeath, the Eagle Ford Shale lies directly below the Austin Chalk formation and has long been recognized as the hydrocarbon source rock for the Austin Chalk, and lies directly above the Buda Limestone formation. The Leases thus entitle Murphy to produce from either of those two formations if they lie under the Herbsts' land, which has not been established either way. Although the Court expressly limits its holding to shale plays and hydraulic fracturing from horizontal wellbores, Ante at 113, the Court's reasoning implies that had the Lucas been a vertical well drilled into the Austin Chalk, for example, and had Anadarko drilled a vertical well into the same formation and location as the Herbst well, then the Herbst would not be an offset well under the offset clause. Ante at 109-10. But the offset clause makes no distinction between wells drilled into any particular formation, nor does it treat vertical or horizontal wells in a disparate manner. There is no indication in the Leases that the Herbsts and Barrett, who negotiated them, intended the clause to mean one thing for vertical wells and another for horizontal wells. The Court similarly errs in considering the proximity factor of an offset well in the context of horizontal drilling and hydraulic fracturing. The Court suggests that in horizontal drilling, the only locations that matter are the locations of the perforated and fractured portions of the horizontal wellbore. Ante at 112. According to the Court, horizontal wells only drain from the perforated portions, so although a horizontal well's surface location may be within the offset distance, its perforations may not be. Ante at 112. The Court provides a hypothetical in which a horizontal well runs perpendicular to the lease line, not parallel to it, meaning protecting against drainage caused by the well would be a  logical impossibility. Ante at 112. The Court thus concludes that if the parties intended protection against drainage, the provision would have included requirements regarding the direction and placement of the perforated portions of the horizontal wellbore. Ante at 112. This may have perhaps been a better way to draft the offset well requirement, but it is not what the parties to the Leases agreed. If the Herbsts and Barrett had been experts in drilling wells and the various aspects of horizontal wells, as Murphy apparently is, they may have drafted the Leases differently. But there is no evidence in the record about Barrett, even if the Court would consider it, and the only evidence about the Herbsts is in their depositions, which the Court avoids considering by interpreting the Leases as a matter of law. So the Court's entire discussion is neither linked to language of the Leases, nor any evidence in this record-even if the Court could consider evidence, given its position that the Leases must be construed as a matter of law. Beyond that, its hypothetical brings into this case information that the record does not show was a consideration for either the Herbsts or Barrett in their negotiating and executing the Leases. This case is about what the parties agreed to, not what a court can suggest in hindsight that they should or could have agreed to. The Herbsts and Barrett included the term offset well in relation to any and all wells covered by the Leases-both vertical and horizontal wells drilled into the Eagle Ford Shale or any other formation. The Leases must be read without adding to or taking away from their language absent some necessity to do so to avoid an irreconcilable conflict. See Heritage Res., Inc. , 939 S.W.2d at 121 ; see also U.S. Metals, Inc. v. Liberty Mut. Grp., Inc. , 490 S.W.3d 20 , 23-24 (Tex. 2015) (An interpretation that gives each word meaning is preferable to one that renders one surplusage.). The Court states, While the leases do not provide a formal definition of the term 'offset well,' the phrase is nevertheless internally defined by the leases' description of where and to what depth the offset well must be drilled. And these requirements qualify such a well as one that 'serves to counterbalance or to compensate for' a triggering well on the adjacent property. Ante at 113 (footnote omitted) (citing Offset , WEBSTER'S THIRD INT'L DICTIONARY 1567 (2002) ). But that interpretation reads the word offset out of the Leases even though offset and its generally accepted meaning in the industry when the Leases were executed does not conflict with any other part of the Leases, much less irreconcilably conflict. Under the Court's interpretation, what the parties and the Court refer to as an offset provision imposes no more obligations on the lessee than would the same Leases without the word offset: 25.) 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, within 120 days after the completion date of the well or wells on the adjacent acreage, as follows: (1) to commence drilling operations on the leased acreage and thereafter continue the drilling of such off-set well or wells with due diligence to a depth adequate to test the same formation from which the well or wells are producing from on the adjacent acreage; or (2) pay the Lessor royalties as provided for in this lease as if an equivalent  amount of production of oil and/or gas were being obtained from the off-set location on these leased premises as that which is being produced from the adjacent well or wells; or (3) release an amount of acreage sufficient to constitute a spacing unit equivalent in size to the spacing unit that would be allocated under this lease to such well or wells on the adjacent lands, as to the zones or strata producing in such adjacent well. Omitting the word offset makes the Leases read as Murphy contends they do, and as the Court decides they do: if the offset provision is triggered, Murphy simply had to drill a well anywhere on the Leases to the appropriate depth. Murphy argues that paragraph 25.)(1) would have said direct offset if the parties intended it to require wells to be drilled close to wells completed on adjacent lands. But the Leases make perfect sense as they are written without, in hindsight and in the context of litigation, adding the word direct. Thus, offset as used in paragraph 25.), and which appears nowhere else in the Leases, unquestionably was intended to mean something. The Court's treatment of the word offset in the Leases ignores the consistent, longstanding industry use of the word in regard to wells, as is noted below. See URI, Inc. v. Kleberg County , 543 S.W.3d 755 , 768 (Tex. 2018) ([T]rade usage can illuminate the meaning of contract language because 'the meaning to which a certain term or phrase is most reasonably susceptible is the one which [is] so regularly observed in place, vocation, trade or industry so  as to justify an expectation that it will be observed with respect to a particular agreement . '  (emphasis added) (quoting Nat'l Union Fire Ins. Co. , 907 S.W.2d at 521 n.6 ) ). Nor does the Court's treatment of the phrase offset well as an internally defined term that does not import any of the phrase's well-established meaning in the industry account for the term's use by these parties. Similarly, Murphy's calling paragraph 25.) a free well clause and treating offset as only a meaningless label does not account for the use of the word in the context of the oil and gas industry and the world of mineral leases. Under the interpretations of paragraph 25.) advanced by both the Herbsts and Murphy, the Herbsts were entitled to have a well drilled on the Herbsts' land. The question is where. To answer this question, the court of appeals turned to the industry meaning of offset well in addition to looking to case law. It concluded that the Leases unambiguously imposed an obligation on Murphy to protect the Herbsts' land from drainage, and because Murphy failed to prove conclusively it had done so, the court of appeals reversed the trial court's judgment. Murphy argues that both the Herbsts' and the court of appeals' positions render other language in the Leases surplusage. That is, if offset well means a well drilled within a reasonable distance from the triggering well on adjacent land as a counterbalance to the triggering well and its drainage, then there was no need to specify in the lease that the offset well was to be drilled with due diligence to a depth adequate to test the same formation [as the triggering well]. But as amicus curiae TLMOA points out, the language Murphy calls surplusage actually is not. It serves to re-incorporate a portion of the reasonably prudent operator standard of the implied covenant to protect the lease by protecting from drainage in light of the express offset well requirement in the Leases. See Magnolia Petroleum Co. v. Page , 141 S.W.2d 691 , 693 (Tex. Civ. App.-San Antonio 1940, writ ref'd). Murphy's response to TLMOA's argument is that if the term offset well imposes an obligation to protect against drainage  (as the court of appeals held and the Herbsts imply), it would be facially absurd if a well shoddily drilled in a different formation could satisfy the lessee's obligations. However, Murphy also argues that an express offset well provision supersedes and supplants the implied covenant to protect against drainage, which includes the reasonably prudent operator standard. I do not completely disagree. But if an express clause supersedes the reasonably prudent operator standard, then it would necessitate lessors specifying how an offset well must be drilled, which is a subject separate and apart from what an offset well is. If lessors failed to do so, there would be nothing (i.e., the reasonably prudent operator standard) to prevent facially absurd results. But expressly incorporating the entire reasonably prudent operator standard anywhere in the clause could have brought with it the elements of a cause of action for the breach of the implied covenant. See Mzyk v. Murphy Expl. & Prod. Co.-USA , No. 04-15-00677-CV, 2017 WL 2797479 , at  (Tex. App.-San Antonio June 28, 2017, no pet.) (holding that an offset clause that included a deemed drainage provision but also later incorporated the reasonably prudent operator standard required the lessor to prove the triggering well was causing drainage). So, as TLMOA points out, the Leases instead include only portions of the implied covenant. Furthermore, even if Murphy were correct that courts would not allow facially absurd results, it was not unreasonable for the Herbsts to hedge their bets by including the language in the Leases to avoid the potential for litigation regarding the adequacy of the manner in which the offset well was drilled. Murphy's argument thus ignores the reason for the offset well provision. The Court also fails to account for another portion of the offset well clause supporting the notion that use of the word offset imposes a proximity requirement. When the clause was triggered, Murphy had three options, one of which was to pay the Lessor royalties as provided for in this lease as if an equivalent amount of production of oil and/or gas were being obtained from the off-set location on these leased premises as that which is being produced from the adjacent well or wells. (Emphasis added). That the clause references the off-set location suggests that the parties did not intend for an offset well to be drilled in a random location. Instead, the parties appear to have contemplated a particular location. Given the commonly understood meaning of offset well as discussed below, that location was certainly not where Murphy drilled the Herbst well, which was almost as far from the triggering well as possible. The question remains, Where? And the answer must be, In a location that a reasonably prudent operator would consider sufficient to protect from potential drainage. Otherwise, the word offset in the provision has no meaning. And while the lease requirement that the offset well be drilled to a depth adequate to test the formation from which the triggering well is producing might seem to be surplusage under that interpretation, if the choice regarding interpreting these Leases is between jettisoning decades of the industry's usage as to what offset well means, or accepting the requirement of drilling to a depth adequate to test the formation being produced by the triggering well as being surplusage, the better choice by far is the latter. Murphy argues, and the Court apparently agrees, that by reading offset to impose an obligation to protect against drainage, the Hersbsts and the court of  appeals are augmenting the Leases by adding to them. Ante at 111 ([W]here the lease 'expressly defines the duty, we will not impose a more stringent obligation unless it is clear that the parties intended to [do so].'  (quoting Exxon Corp. v. Emerald Oil & Gas Co. , 348 S.W.3d 194 , 215 (Tex. 2011) ) ). Accepting Murphy's argument, the Court concludes that the clause's only requirements for an offset well are that it be drilled on the lease acreage and to a depth adequate to test the same formation from which the triggering well was producing. Ante at 110. According to the Court, the clause is silent with respect to any duty to protect against drainage or a proximity requirement; thus, the imposition of any such obligations would be altering the terms of the Leases. I disagree. But as discussed elsewhere, courts as well as the oil and gas industry have long understood the term offset well to mean a well that protects from either actual or potential drainage. And we would not be adding language to the Leases by treating the term as meaning what it so plainly meant in 2009, when the Leases were executed, and had meant long before then in the context of oil and gas leases. Thus, Murphy's interpretation either reads words out of the Leases, renders provisions surplusage, or adds to their language; the Herbsts' does not, except for the possibility noted just above. I would reject Murphy's interpretation as unreasonable. See U.S. Metals, Inc. , 490 S.W.3d at 23-24 (An interpretation that gives each word meaning is preferable to one that renders one surplusage.); J.M. Davidson, Inc. v. Webster , 128 S.W.3d 223 , 229 (Tex. 2003) ([In determining whether a contract is ambiguous,] we must examine and consider the entire writing in an effort to harmonize and give effect to all of the provisions of the contract so that none will be rendered meaningless.); Am. Mfrs. Mut. Ins. Co. v. Schaefer , 124 S.W.3d 154 , 157 (Tex. 2003) ([W]e must give effect to all contractual provisions so that none will be rendered meaningless.).