Opinion ID: 2419928
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Heading: Pooling and the Duty to Protect

Text: Certain covenants are implied in most oil and gas leases. The standard of care in measuring a lessee's performance of these implied covenants is that of a reasonably prudent operator carrying out the purposes of the lease under the same or similar circumstances. See Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 567-68 (Tex.1981). One of these covenants imposes a duty to protect the leasehold from local and field-wide drainage. See HECI Exploration Co. v. Neel, 982 S.W.2d 881, 889 (Tex.1998). In order to recover for breach of the duty to protect from drainage, a lessor must present proof (1) of substantial drainage of the lessor's land, and (2) that a reasonably prudent operator would have acted to prevent the drainage. See Amoco Prod. Co., 622 S.W.2d at 568. A lessor may employ various methods to satisfy its duty to protect the leasehold from drainage, depending upon the circumstances. See id. A common protective measure is for the lessee to exercise its contractual pooling authority and combine tracts from two or more leases into a single unit around an existing well. Formation of such a unit is called pooling. See London v. Merriman, 756 S.W.2d 736, 739 n. 1 (Tex.App.Corpus Christi 1988, writ denied). A lessee has no power to pool without the lessor's express authorization, which is usually contained in the lease's pooling clause. See Jones v. Killingsworth, 403 S.W.2d 325, 327 (Tex.1965). For pooling to be valid, it must be done in accordance with the method and purposes specified in the lease. See id. at 327-28. A lessee's pooling decision will be upheld unless the lessee pools in bad faith. See Circle Dot Ranch, Inc. v. Sidwell Oil & Gas, Inc., 891 S.W.2d 342, 346 (Tex.App. Amarillo 1995, writ denied); Elliott v. Davis, 553 S.W.2d 223, 226-27 (Tex.Civ. App.Amarillo 1977, writ ref'd n.r.e.). The primary legal consequence of pooling is that production and operations anywhere on the pooled unit are treated as if they have taken place on each tract within the unit. See Southland Royalty Co. v. Humble Oil & Ref. Co., 151 Tex. 324, 249 S.W.2d 914, 916 (1952); 1 ERNEST E. SMITH & JACQUELINE LANG WEAVER, TEXAS LAW OF OIL AND GAS § 4.8, at 225-26 (1996) (stating that production from the unit well is deemed to have taken place on all leases pooled into the unit ...). If the lessee pools in good faith, the lessee is relieved of the obligation to reasonably develop each tract separately, or to drill off-set wells on other tracts included in the unit to prevent drainage by a well on one or more of such tracts. See Southland, 249 S.W.2d at 916. In other words, there can no longer be drainage of the individual leases by a unit well, only drainage of the unit by wells located outside the unit. See id. Conversely, if the unit is not pooled in good faith, production will be considered to take place only on the actual tract upon which it occurs, and production from a unit well will not maintain off-site leases. See Killingsworth, 403 S.W.2d at 328; SMITH & WEAVER, supra, at 228. In the present case, Southeastern had several options to protect the northern leases from drainage, including: (1) dropping the leases so that another operator could develop them, which the lessors preferred; (2) drilling off-set wells on the leases, as proposed by the lessors' experts; and (3) pooling with one or more producing wells on other tracts, which Southeastern did. The jury found that Southeastern did not pool the Leveridge No. 5 Unit in bad faith, thus validating Southeastern's pooling choice. While we agree with the court of appeals that the jury's validation of the pooled unit did not exonerate Southeastern from liability for failing to protect the lessors' lands from drainage, we do not agree that Southeastern's pooled unit, once validated, could be ignored in favor of the lessors' own pooling preferences. Rather, the lessors were required to segregate their claims between pre-pooling drainage from the leases and post-pooling drainage from the unit.