Court Opinion

ID: 2825962
Source: CourtListenerOpinion
Date Created: 2015-08-11 06:40:21.877573+00
Date Added: 2024-06-11T11:31:20.565092
License: Public Domain

Fourth Court of Appeals
                                     San Antonio, Texas
                                 MEMORANDUM OPINION
                                        No. 04-15-00066-CV

                                 CONOCOPHILLIPS COMPANY,
                                        Appellant

                                         v.
                            VAQUILLAS UNPROVEN MINERALS,
                          VAQUILLAS UNPROVEN MINERALS, LTD.,
                                       Appellee

                     From the 406th Judicial District Court, Webb County, Texas
                               Trial Court No. 2014CVQ000438-D4
                            Honorable Oscar J. Hale, Jr., Judge Presiding

Opinion by:       Sandee Bryan Marion, Chief Justice

Sitting:          Sandee Bryan Marion, Chief Justice
                  Rebeca C. Martinez, Justice
                  Luz Elena D. Chapa, Justice

Delivered and Filed: August 5, 2015

AFFIRMED

           This is a permissive, interlocutory appeal of a trial court’s order on cross-motions for

summary judgment. The trial court’s order denies the motion for summary judgment filed by

appellant, ConocoPhillips Company, and grants the cross-motion for partial summary judgment

filed by appellee, Vaquillas Unproven Minerals, Ltd.         The trial court’s order declares that

ConocoPhillips breached two oil and gas leases by failing to release all acreage in excess of 40

acres for each producing and shut-in natural gas well capable of producing in paying quantities.

The sole issue presented on appeal is whether the trial court correctly concluded that the leases
                                                                                       04-15-00066-CV

only allowed ConocoPhillips to retain 40 acres per well, as opposed to the 640 acres per well that

ConocoPhillips believes it was entitled to retain.

                                      FACTUAL BACKGROUND

         ConocoPhillips and Vaquillas are parties to two oil and gas leases. One of the leases relates

to a 26,622.79-acre tract of land, and the other lease relates to a 6,740-acre tract of land. Both of

the leases contain a “retained acreage” clause which sets forth the number of acres around each

producing or shut-in gas well that ConocoPhillips was entitled to retain after its continuous drilling

program ended. It is undisputed that ConocoPhillips’s continuous drilling program ended on June

21, 2012.

         With regard to the number of acres ConocoPhillips was entitled to retain, the retained

acreage clause in each lease provided that after ConocoPhillips’s continuous drilling program

ended:

                  . . ., Lessee covenants and agrees to execute and deliver to Lessor a written
         release of any and all portions of this lease which have not been drilled to a density
         of at least 40 acres for each producing oil well and 640 acres for each producing or
         shut-in gas well, except that in case any rule adopted by the Railroad Commission
         of Texas or other regulating authority for any field on this lease provides for a
         spacing or proration establishing different units of acreage per well, then such
         established different units shall be held under this lease by such production, in lieu
         of the 40 and 640-acre units above mentioned . . . .

The parties dispute arises over whether the Railroad Commission of Texas adopted a field rule that

provided for spacing establishing different units of acreage per well. The trial court concluded

that such a rule had been adopted, and the rule controlled the number of acres ConocoPhillips was

entitled to retain around each gas well. Under the trial court’s construction of the retained acreage

clause, ConocoPhillips was entitled to retain only 40 acres for each producing gas well or shut-in

gas well capable of producing in paying quantities. As a result, ConocoPhillips was required to

release an additional 15,351 acres to Vaquillas.

                                                  -2-
                                                                                     04-15-00066-CV

                                     STANDARD OF REVIEW

       We review a summary judgment de novo. Provident Life & Acc. Ins. Co. v. Knott, 128
S.W.3d 211, 215 (Tex. 2003). We consider all the evidence in the light most favorable to the

respondent, indulging all reasonable inferences in favor of the respondent, and determine whether

the movant proved that there were no genuine issues of material fact and that it was entitled to

judgment as a matter of law. Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548-49 (Tex. 1985).

“When both sides move for summary judgment and the trial court grants one motion and denies

the other, we review the summary judgment evidence presented by both sides and determine all

questions presented.” Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844,

848 (Tex. 2009). In such a case, “we render the judgment [that] the trial court should have

rendered.” Id.

       Neither party contends the oil and gas leases are ambiguous. Construing an unambiguous

contract is a question of law that we review de novo. Willis v. Donnelly, 199 S.W.3d 262, 275

(Tex. 2006); Coker v. Coker, 650 S.W.3d 391, 393-94 (Tex. 1983); BP Am. Prod. Co. v. Zaffirini,

419 S.W.3d 485, 495 (Tex. App.—San Antonio 2013, pet. denied).                 “‘In construing an

unambiguous oil and gas lease our task is to ascertain the parties’ intentions as expressed in the

lease.’” BP Am. Prod. Co., 419 S.W.3d at 497 (quoting Heritage Res., Inc. v. NationsBank, 939
S.W.2d 118, 121 (Tex. 1996)). “We examine the plain language of the entire lease agreement,

consider the interaction between each of its provisions, and seek ‘to harmonize and give effect to

all the [lease] provisions.’” Id. (quoting Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662

(Tex. 2005)).

                                 RETAINED ACREAGE CLAUSES

       A retained acreage clause in an oil and gas lease authorizes the lessee to retain acreage

around a producing well in the event of a forfeiture of the lease. See 8 Patrick H. Martin and Bruce
                                                -3-
                                                                                      04-15-00066-CV

M. Kramer, Williams & Meyers, MANUAL OF OIL AND GAS TERMS 902.1 (2014); Scott C. Petry,

Drafting the Retained Acreage Clause: The Effect of Governmental Authority on Retained

Acreage, State Bar of Tex. Prof. Dev. Program, 27TH ANNUAL ADVANCED OIL, GAS AND ENERGY

RESOURCES LAW COURSE 1 (2009). The retained acreage clause serves two purposes. First, it can

“replace the lessor’s need to utilize the implied covenant of reasonable development as the sole

means to see that its acreage is fully developed.” Bruce M. Kramer, Oil and Gas Leases and

Pooling: A Look Back and A Peek Ahead, 45 TEX. TECH L. REV. 877, 881 (2013). The clause

fulfills this purpose by requiring the lessee to release all acreage under a lease, at the end of the

primary term or a continuous drilling program, other than specific acreage surrounding a producing

well. Id. at 881 n. 28. Second, the retained acreage clause protects the lessee “from losing those

portions of a lease that had productive wells located thereon if the rest of the lease terminated.”

Id.

       Generally, the retained acreage clause states the specific number of acres that can be

retained surrounding each producing well. See Sutton v. SM Energy Co., 421 S.W.3d 153, 159

(Tex. App.—San Antonio 2013, no pet.); H. Philip Whitworth & D. Davin McGinnis, Square

Pegs, Round Holes: The Application and Evolution of Traditional Legal and Regulatory Concepts

for Horizontal Wells, 7 TEX. J. OIL GAS & ENERGY L. 177, 209 (2012). However, “[t]he clause

may provide for a change in this basic size if the Railroad Commission adopts field rules providing

for spacing or proration units of a different size.” 1 Ernest E. Smith and Jacqueline Lang Weaver,

TEXAS LAW OF OIL AND GAS § 5.2[B][3], 5-26 (2014). “In this event the acreage held by a well

may be either greater or smaller than the default acreage.” Id.; see also Scott C. Petry, Drafting

the Retained Acreage Clause: The Effect of Governmental Authority on Retained Acreage, State

Bar of Tex. Prof. Dev. Program, 27TH ANNUAL ADVANCED OIL, GAS AND ENERGY RESOURCES

                                                -4-
                                                                                                      04-15-00066-CV

LAW COURSE 3 (2009) (noting when a lease ties the retained acreage clause to governmental

authority, the parties may not “fully anticipate the consequences of doing so”).

         In this case, the retained acreage clause initially refers to a specific number of acres that

ConocoPhillips was entitled to retain when its continuous drilling program ended, namely 40 acres

for each producing oil well and 640 acres for each producing or shut-in gas well. The clause then,

however, contains an exception in the event field rules are adopted “provid[ing] for a spacing or

proration establishing different units of acreage per well.”

                              ADOPTION AND APPLICATION OF FIELD RULES

         “To regulate oil and gas production, the Railroad Commission of Texas has adopted

general rules applicable throughout the State,” called statewide rules. Railroad Comm’n of Tex. v.

WBD Oil & Gas Co., 104 S.W.3d 69, 70 (Tex. 2003). “[B]ecause these general rules cannot

adequately address the widely varying conditions found in the thousands of oil and gas reservoirs

in Texas, the Commission [also] may issue orders with detailed regulations for a specific field,

which the Commission calls field rules.” Id.

         ConocoPhillips does not dispute that the Railroad Commission adopted field rules

applicable to the fields included in the oil and gas leases. 1 In this case, the applicable field rules

provide:

                 Rule 2. No well shall hereafter be drilled nearer than FOUR HUNDRED
         SIXTY SEVEN (467) feet to any property line, lease line or subdivision line and
         no well shall be drilled nearer than ONE THOUSAND TWO HUNDRED (1,200)
         feet to any applied for, permitted or completed well in the same reservoir on the
         same lease, pooled unit or unitized tract. ….

                The aforementioned distances in the above rule are minimum distances to
         allow an operator flexibility in locating a well, and the above spacing rule and the

1
  Field rules are distinct from statewide rules, and only a specially adopted field rule, as opposed to statewide rules,
triggers the exception in the retained acreage clause. See ConocoPhillips Co. v. Ramirez, No. 04-05-00488-CV, 2006
WL 1748584, at *2 (Tex. App.—San Antonio June 28, 2006, no pet.).

                                                         -5-
                                                                                                     04-15-00066-CV

         other rules to follow are for the purpose of permitting only one well to each drilling
         and proration unit.

         Although ConocoPhillips agrees that Rule 2 contains a spacing requirement,

ConocoPhillips contends this spacing requirement does not establish “different units of acreage

per well.” Vaquillas responds that Rule 2 was only required to provide for a spacing that itself

established different units of acreage per well. 2

         Although the spacing requirement in Rule 2 does not expressly set forth a number of acres

per well, Rule 38 of the statewide rules contains the standard drilling unit for a gas field “wherein

only spacing rules, either special, country regular, or statewide, are applicable.” 16 TEX. ADMIN.

CODE § 3.38(b)(2)(A). The rule then contains a chart providing that if the spacing rule is 467-

1200, like the one here, the acreage requirement is 40 acres per well for both oil and gas wells. Id.

It is important to note that Rule 38 expressly applies to “special” spacing rules, which is a reference

to spacing rules adopted in field rules for a specific field. Id.; see also Scott C. Petry, Drafting the

Retained Acreage Clause: The Effect of Governmental Authority on Retained Acreage, State Bar

of Tex. Prof. Dev. Program, 27TH ANNUAL ADVANCED OIL, GAS AND ENERGY RESOURCES LAW

COURSE 2 (2009) (noting Railroad Commission has three types of rules: statewide rules, country

regular rules, and special field rules). Therefore, Rule 38 establishes the standard acreage for a

well when a field rule only provides for spacing. Because this standard acreage is “different” from

the initial acreage set forth in the retained acreage clause, the standard acreage controls the number

of acres ConocoPhillips was entitled to retain under the leases. See Wade Caldwell, Ten Oil and

Gas Lease Clauses You Want, MINERAL RIGHTS FORUM (Sept. 3, 2012, 2:30 p.m.),

2
  Vaquillas argues that ConocoPhillips’s interpretation would require this court to ignore certain language in the
retained acreage clause. As currently written, the exception applies when the field rule “provides for a spacing or
proration establishing different units of acreage per well.” Under ConocoPhillips’s interpretation, Vaquillas argues
this court would be required to ignore the phrase “provides for a spacing or proration,” so that the clause would apply
the exception when the field rule “establish[es] different units of acreage.”

                                                         -6-
                                                                                      04-15-00066-CV

http://www.mineralrightsforum.com/profiles/blogs/ten-oil-gas-lease-clauses-recommended           (“A

well-drafted retained acreage clause should limit the acreage being retained by the existing well to

a set number of acres, or the minimum size required by the Texas Railroad Commission, whichever

is less.”).

        In its reply brief, ConocoPhillips argues that the field rule did not establish a maximum

number of acres that could be assigned to a well, and Rule 38 establishes only the minimum

number of acres required to drill a well. The retained acreage clause, however, did not limit the

exception to field rules that established a maximum number of acres per well or a maximum

number of acres that could be retained once the continuous drilling program ended. Instead, the

retained acreage clause contained an exception applicable if field rules are adopted “provid[ing]

for a spacing or proration establishing different units of acreage per well.” In this case, the field

rules did provide for spacing and that spacing establishes “different” units of acreage per well.

Although ConocoPhillips may not have “fully anticipated the consequences” of tying the retained

acreage clause to a field rule that provided for spacing that established different units of acreage

per well, this court is not allowed to rewrite the parties’ lease. See Am. Mfrs. Mut. Ins. Co. v.

Schaefer, 124 S.W.3d 154, 162 (Tex. 2003); see also Scott C. Petry, Drafting the Retained Acreage

Clause: The Effect of Governmental Authority on Retained Acreage, State Bar of Tex. Prof. Dev.

Program, 27TH ANNUAL ADVANCED OIL, GAS AND ENERGY RESOURCES LAW COURSE 3 (2009)

(noting when a lease ties the retained acreage clause to governmental authority, the parties may

not “fully anticipate the consequences of doing so”).

        ConocoPhillips also contends that if the trial court’s construction of the retained acreage

clause stands, the exception would swallow the general rule. ConocoPhillips argues that if the

minimum required acreage under Rule 38 is applied, the general rule for retaining 640 acres for a

gas well would never apply. This argument ignores, however, that the exception applies only if a
                                                -7-
                                                                                       04-15-00066-CV

field rule is adopted that provides for spacing or proration. If no such rule is adopted, then the

general rule still prevails.

        In other words, the exception is conditioned on the adoption of a field rule. If that condition

is met, the exception, as worded, should apply. If that condition is not met, the general rule would

continue to apply. See ConocoPhillips Co., 2006 WL 1748584, at *3 (applying general rule where

no field rules adopted).

        ConocoPhillips further argues that the trial court’s construction of the retained acreage

clause would adversely affect the provision in the lease allowing for pooling. This argument,

however, only establishes that parties must be careful in drafting oil and gas leases to avoid

conflicts. As one commentator has noted:

                Conflicts between the number of acres authorized for retention under the
        retained acreage clause and the number of acres authorized for pooling under the
        pooling clause can lead to unintended and problematic results for the lessee. If a
        retained acreage clause does not allow the lessee to retain all of the acreage included
        in a validly pooled unit, the lease could potentially terminate as to a portion of the
        pooled unit, thereby having the unintended effect of reducing the lessor’s
        participation in unit production. For example, the typical lease form may give 640-
        acre pooling authority for gas, but there may be a typewritten addendum providing
        that the lease terminates at the end of the continuous development term as to all
        acreage save and except the acreage included within a producing well’s proration
        unit. If the lessee has formed a 320-acre proration unit, the lessee, despite having
        formed a valid 640-acre pooled unit, may be required to release half of this pooled
        unit to comply with the retained acreage clause. Such a result obviously would
        have been unintended by either the lessee or the lessor, and care should be used to
        avoid such unintended consequences when drafting a lease.

H. Philip Whitworth & D. Davin McGinnis, Square Pegs, Round Holes: The Application and

Evolution of Traditional Legal and Regulatory Concepts for Horizontal Wells, 7 TEX. J. OIL GAS

& ENERGY L 177, 209 (2012). Although the retained acreage clause may have unintended

consequences on the leases’ pooling provision, this court is not allowed to rewrite the parties’

contract. See Am. Mfrs. Mut. Ins. Co., 124 S.W.3d at 162.

                                                 -8-
                                                                                      04-15-00066-CV

       ConocoPhillips’s next argument relies on a sentence in the retained acreage clause that

provides: “Each retained unit shall contain at least one (1) well producing or capable of producing

oil or gas in paying quantities.” ConocoPhillips contends limiting the retained acreage to 40 acres

per well would render the “at least” language superfluous because ConocoPhillips would be

precluded from obtaining a permit for drilling a second well on the retained acreage, and, as a

result, there would never be more than one well on the retained acreage.

       Vaquillas’s brief lists several possibilities under which a retained unit could have more

than one well. For example, Vaquillas notes the Railroad Commission could never have adopted

a field rule for the fields in the lease, and under that circumstance, more than one gas well could

exist on the 640 acres that would be retained around each gas well under the general rule. Similar

to ConocoPhillips’s contention that the exception could swallow the general rule, the exception

only applies if a field rule is adopted. See ConocoPhillips Co., 2006 WL 1748584, at *3 (applying

general rule where no field rules adopted). In this case, if no field rule was adopted, more than

one well could exist on the retained unit.

       ConocoPhillips further argues that under the general rule, the number of acres retained for

an oil well (40) is different than for a gas well (640); however, under the trial court’s construction

of the exception, there is no difference in the number of acres retained for each type of well.

Although this statement is true, ConocoPhillips agreed to the inclusion of the exception in the

leases. Because the leases did not apply the exception only when field rules provided for different

spacing requirements for different types of wells, the language in the leases controls. See Scott C.

Petry, Drafting the Retained Acreage Clause: The Effect of Governmental Authority on Retained

Acreage, State Bar of Tex. Prof. Dev. Program, 27TH ANNUAL ADVANCED OIL, GAS AND ENERGY

RESOURCES LAW COURSE 2 (2009) (“Under Statewide Rules of ‘467/1200’, one should be aware

that density for a GAS WELL is also forty (40) acres!”).
                                                 -9-
                                                                                     04-15-00066-CV

        Finally, ConocoPhillips contends that this court should not interpret the retained acreage

clause to impose a limitation on the grant unless the language is clear. See Anadarko Petroleum

Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002) (“[W]e will not hold the lease’s language to

impose a special limitation on the grant unless the language is so clear, precise, and unequivocal

that we can reasonably give it no other meaning.”). In this case, it is undisputed that the lease or

grant ended with regard to the acres ConocoPhillips was not entitled to retain when

ConocoPhillips’s continuous drilling program ended. The retained acreage clause is clear, precise,

and unequivocal in that regard. Therefore, it is undisputed that the retained acreage clause imposed

a special limitation on the grant. The only dispute relates to the number of acres ConocoPhillips

is entitled to retain.

        Based on all the foregoing, we hold the trial court properly construed the retained acreage

clause. Accordingly, the trial court properly granted the summary judgment in favor of Vaquillas.

                                               CONCLUSION

        The trial court’s order is affirmed.

                                                     Sandee Bryan Marion, Chief Justice

                                                  - 10 -