This case dealt with a contract dispute over an off-set well provision in an oil and gas lease. More particularly, the court was tasked with interpreting what constitutes an off-set well in the context of shale drilling. The court looked to the express language of the lease as well as the realities of horizontal drilling in tight shale formations in its interpretation.80
Shirley Mae Herbst Adams and William Albert Herbst (“the Herbsts”) separately entered into identical oil and gas leases with Murphy Exploration and Production Company’s (“Murphy”) predecessor-in-interest.81 The leases contained an off-set well provision, which provided that the operator was required to drill an off-set well if a well was drilled on an adjacent or contiguous tract within 467 feet of lease boundary lines. The provision specifically provided that the operator must commence drilling operations “on the leased acreage” to a depth sufficient to test the same formation targeted on the adjacent tract, pay the lessor royalties as if the adjacent well was producing on the leased tract, or release a portion of the leased acreage.82 A producing horizontal well, known as the Lucas Well, was completed by Comstock Oil & Gas, LP on land adjacent to the leased premises and within 350 feet of the lease boundary, thus triggering the off-set provision. Murphy acknowledged the off-set provision had been triggered and opted to commence drilling operations in satisfaction. Within the prescribed 120-day period, Murphy drilled a producing horizontal well named the Herbst Well to a depth adequate to test the same formation as the adjacent Lucas Well. The Herbst Well was situated 1,800 feet from the pertinent lease line and ran parallel to the lease line.83
In May 2013, the Herbsts sued Murphy for breach of contract, complaining that Murphy failed to comply with the lease’s off-set well provision. Murphy counter-claimed, and sought declaratory relief from the court that it fulfilled its obligations under the lease. The parties filed cross-motions for summary judgment, and the trial court granted Murphy’s motion, denied the Herbsts’, and rendered final judgment for Murphy. The Herbsts appealed, and the appellate court reversed the trial court’s decision on the basis that Murphy did not prove they complied with the lease and were therefore not entitled to summary judgment.84 The Supreme Court of Texas granted Murphy’s petition for review, and the following suit ensued.
On review, the court noted Murphy’s contention that they complied with the express terms of the lease regarding off-set wells. Murphy complied with the requirement to drill a well within 120 days to a depth adequate to test the same formation as the adjacent well.85 The Herbsts argued that the off-set well was insufficient due to its uncommonly long distance from the lease line. The appellate court held that Murphy needed to prove they were protecting the tract from drainage in accordance with the commonly understood meaning of the term “off-set well.”86
The court agreed with Murphy that they complied with the express requirements of the lease in light of the horizontal-drilling context in which the leases were executed. The court found that the realities of horizontal shale drilling are different from the realities of vertical well drilling. The implied covenant to protect from drainage and express lease provisions that stemmed from vertical wells do not apply to horizontal drilling in tight shale formations. Instead of draining entire reservoirs, horizontal drilling and hydraulic fracturing do not involve shared reservoirs and drain only as far as the shale is fractured. The location of the vertical portion of a horizontal well and the nonperforated portions are irrelevant for production purposes. Further, the court noted, commentators believe that little or no drainage occurs between two adjacent tracts on a horizontal drilling shale play.87
With the horizontal-drilling context applied, the court found that the only reasonable construction of the lease was that the parties intended to require accelerated drilling when production from a well on an adjacent tract evidenced that the leased tract was also capable of production. Rather than a protection from drainage, the provision provided a counterbalance to production on an adjacent tract.88 In holding this outcome as the only reasonable construction of the lease language, the court limited the holding to the specific circumstances of unconventional production in tight shale formations.89
Based on the court’s analysis, an off-set well in the context of horizontal drilling in tight shale may be drilled according to the express language of the off-set well provision, and proximity to the triggering well is irrelevant. This case will be an important reference for attorneys and landmen when drafting off-set well provisions.
79 Murphy Expl. & Prod. Co.-USA v. Adams , No. 16-0505, 2018 WL 2449313, (Tex. June 1, 2018).
80 Id. at *10.
81 Id. at *1.
83 Id. at *2.
85 Id. at *4.
86 Id. at *3.
88 Id. at *5.
89 Id. at *6.