In this case, the Supreme Court of Texas interpreted a retained-acreage clause to determine the ownership of mineral rights covered by two competing oil and gas leases.
Endeavor Energy Resources, L.P. and Endeavor Petroleum, L.L.C. (collectively, “Endeavor”), acquired oil and gas leases for two adjoining 640-acre tracts of land (Section 4 and Section 9). Endeavor drilled four wells, two in the southeast quarter of Section 4 and two in the northeast quarter of Section 9 in the Spraberry (Trend Area) Field. Prior to the expiration of the primary terms, Endeavor filed certified proration unit plats designating units that comprised the entire southeast quarter of Section 4 and northeast quarter of Section 9, but no acreage in the southwest quarter of Section 4 or the northwest quarter of Section 9.
After the primary terms of the two leases expired, Discovery Operating, Inc. (“Discovery”) acquired an oil and gas lease covering the northwest quarter of Section 9 and southwest quarter of Section 4, being lands outside of the certified proration units. Discovery completed two wells in each quarter section. Upon learning of the four wells drilled by Discovery, Endeavor objected to Discovery’s assertion that it owned any leasehold interest in either quarter. Endeavor asserted that, based on the retained-acreage clauses, its leases remained in effect as to the entire south half of Section 4 and north half of Section 9; therefore, Discovery’s leases were invalid. Endeavor then filed new proration plats assigning 160 acres to each well, including the acreage described in Discovery’s leases. As a result, Discovery filed a trespass-to-try-title action against Endeavor. Both parties filed summary-judgment motions. The trial court granted Discovery’s motion and denied Endeavor’s. On appeal, the appellate court affirmed the trial court’s judgment siding with Discovery’s interpretation of the retained-acreage clause. The Supreme Court of Texas granted Endeavor’s petition for review.
The retained-acreage clause in Endeavor’s leases provided that upon expiration of the primary term or upon the cessation of continuous development… whichever is later, the
lease shall automatically terminate as to all lands and depths covered herein, save and except those lands and depths located within a governmental proration unit assigned to a well producing oil or gas in paying quantities and the depths down to and including one hundred feet (100′) below the deepest productive perforation(s), with each such governmental proration unit to contain the number of acres required to comply with the applicable rules and regulations of the Railroad Commission of Texas for obtaining the maximum producing allowable for the particular well (emphasis added by court).53
The parties did not dispute whether the retained acreage clause was effective. Instead, the dispute arose from the parties’ differing interpretations of the phrases “proration unit assigned to a well” and “maximum producing allowable for the particular well.”54 Endeavor argued that the term “assigned to” was ambiguous because it did not identify whose assignment controlled. For instance, was it Endeavor’s original assignment of 81 acres, or does it refer to the Railroad Commission’s (“RRC”) designation of acreage after special field rules were applied?55 The court rejected this interpretation and held “the clause unambiguously refers to Endeavor’s assignments because the RRC’s rules required Endeavor, as operator, to assign acreage to its proration units.”56 The court concluded that the lessee is the party who assigns the proration acreage through its regulatory filings with the RRC. Moreover, the RRC’s role is to merely quantify the amount of acreage the lessee assigns and confirm it meets the qualifications of the RRC’s special field rules. More specifically, the RRC only reviews whether the proposed acreage conflicts with the prohibitions against double-assignment, over-assignment or under-assignment.57 Ultimately, the RRC’s purpose for this review process is to prevent waste and conserve mineral resources, not designate the size of individual proration units.58 Therefore, the court concluded that the retainedacreage clause in Endeavor’s lease only applied to the acreage assigned in their regulatory filings as they existed when the retained-acreage clause took effect.
Next, the court addressed the second disputed phrase “maximum allowable for the particular well.” The Spraberry (Trend Area) Field rules provide that a proration unit should consist of a minimum of 80 acres with a maximum of 160. Endeavor argued this part of the retained-acre clause means that the retained tract will “automatically” equal the maximum acreage the RRC’s rules would permit,59 resulting in 160-acre retained tracts. Discovery argued that the retained-acreage clause required the operator to file a plat that assigned only the amount of acreage necessary to obtain the maximum producing allowable and that this clause was intended “to define the amount of acres that Endeavor was to include in the governmental proration units that it assigned in its certified proration plats filed with the [RRC].”60 The court concluded that Discovery’s interpretation was correct and that Endeavor, having met the threshold requirement for compliance with field rules, retained exactly what it assigned.61
In conclusion, the court affirmed the trial and appellate decisions, holding that Endeavor’s leases had terminated as to all acreage outside of the certified proration unit plats it had filed prior to the expiration of the leases’ primary terms, and that Discovery’s leases were valid.
The takeaway from this holding is that an operator should ensure harmony between the retained acreage clause in a lease and any proration unit plat prior to filing the plat with the RRC. The RRC does not unilaterally assign acreage, but rather reviews the submissions made by the operator and authorizes the acreage if it aligns with the field rules. The operator is responsible for assigning the necessary acreage to achieve the maximum allowable for the given well while abiding by the RRC field rules put in place to prevent waste and conserve minerals for production.
52 Endeavor Energy Res., L.P. v. Discovery Operating, Inc., No. 15–0155, 2018 WL 1770290 (Tex. Apr. 13, 2018).
53 Id . at *10.
54 Id .
55 Id .
56 Id . at *9.
57 16 TEX. ADMIN. CODE.
58 Id . at *4.
59 Id . at *11.
60 Id .
61 Id . at *12.