This is a dispute between Appellant, Apache Deepwater, LLC (hereinafter “Apache”) and Appellee, Double Eagle Development, LLC (hereinafter “Double Eagle”) in a case concerning the interpretation of a habendum clause and retained acreage clause in an oil and gas lease. The issue is whether one operating well on a 160-acre proration unit has the ability to hold the entire 640-acre lease. The court concluded that the entire leasehold was extended.
The predecessors of Apache leased 640 acres of land in 1975. The lease called for a 3-year primary term. The land was divided into four 160-acre units of production. At the end of the primary term each unit contained one producing well within its boundaries.
The habendum clause to the lease directed that the lease’s secondary term would last “as long thereafter as oil, gas or other hydrocarbons or other minerals or leased substances, or either or any of them, are produced from the leased substances…”16
However, in 1999, 2004, and 2008, three of the four wells on the property ceased production. The result was one producing well on the leased premises, located on the southwest 160-acre proration unit.17 The retained acreage clause in the lease stated the following:
“…Lessee covenants to release this lease after the primary term except as to each producing well on said lease, operations for which were commenced prior to or at the end of the primary term and the proration units as may be allocated to said wells…”18
In 2012, the property owner executed leases to Double Eagle for the three units that ceased production (hereinafter “Disputed Tracts”).19
Litigation arose when Double Eagle demanded that Apache release the Disputed Tracts; Apache declined and contended that the well on the southwest proration unit held the entire lease.20 Double Eagle filed suit seeking a declaration of its rights in the Disputed Tracts. The parties agree that this case depends on the construction of the lease entered by Apache’s predecessors. The trial court ruled in favor of Double Eagle, this appeal followed.21
Double Eagle contended that the retained acreage clause in the lease called for “rolling terminations” following the primary term of the lease for any proration unit which should cease production. Apache believed that the retained acreage clause in the lease called for a single “snapshot-in-time” evaluation as of the end of the primary term of the lease. According to Apache, because each of the proration units contained a producing well at the end of the primary term, the retained acreage clause could not terminate any portion of the lease.22
Apache contended that the habendum clause in the lease permitted a single operating well anywhere on the leased premises to continue the entirety of the lease past the primary term and the term “leased premises” was defined in the lease as the entire 640 acres. This was consistent with the “drilling operations” section as well, which affirmed that a single well would prevent termination of the leased premises.23
Double Eagle responded by pointing to the retained acreage clause, which began with the phrase “notwithstanding anything to the contrary,” asserting that the retained acreage clause modified the habendum and drilling clauses.24
The court held that the retained acreage clause operated once and only once – at the end of the primary term. Despite Double Eagle’s “notwithstanding” argument, there was no clear intent in the lease to negate the habendum clause. While the court did recognize Double Eagle’s argument that the lease could be interpreted to negate the habendum clause, unless there is clear and unequivocal language intending to negate the habendum clause, traditional contract interpretation principals apply and the court must attempt to give meaning to all portions of the lease.
Accordingly, because the retained acreage clause could be read in a manner consistent with the habendum clause—that the retained acreage clause only acts to terminate a portion of the leased premises at the end of the primary term—, it is the court’s duty to uphold such an interpretation.
The court notes that the parties could have included express language in the lease which provided for a “rolling termination” similar to the following:
[P]roduction or operations would maintain this lease only with regard to proration unit with producing wells or wells under development and the lease shall terminate as to such part or parts of the leased land lying outside,25 or
The lessee will release any proration unit that has neither an operating well, nor well in development at any time after the end of the primary term.26
Because of the absence of such clear language to the contrary, the retained acreage clause in this case does not negate the habendum clause. This case illustrates the importance of precise drafting in oil and gas leases. It is important to know the difference between a “rolling termination” and a “snap-shot approach” as seen here, and to clearly show an intent to use one or the other.
15 Apache Deepwater, LLC v. Double Eagle Development, LLC, No. 08-16-00038-CV, 2017 WL 3614298 (Tex. App.—El Paso [8th Dist.] Aug. 23, 2017, no pet. h.).
16 Id. at 1.
17 Id. at 2.
18 Id. at 3.
19 Id. at 1-2.
20 Id. at 2.
21 Id. at 3.
23 Id. at 4.
24 Id. at 5.
25 Parten v. Cannon, 829 S.W.2d 327, 329 (Tex. App.–Waco 1992, writ denied).
26 Apache at *5