The Supreme Court of Texas heard this appeal as a companion to Endeavor Energy Resources, L.P. v. Discovery Operating, Inc.112 This case involved an interpretation dispute regarding a retained-acreage clause in a term assignment. Specifically, whether the language “included within the proration unit for each well… prescribed by field rules” referred to acreage set by the field rules or referred to the acreage assigned by the operator. The Supreme Court of Texas analyzed the instrument in its plain meaning and provided an outline to better address this dispute and those alike.
XOG Operating, LLC and Geronimo Holding Corporations (collectively, “XOG”) assigned to Chesapeake Exploration, LP and Chesapeake Exploration, LLC (“Chesapeake”) their rights as lessees to 1,625.80 acres of land in a term assignment.113 The assignment contained a retainedacreage clause which provided that the assigned interest would revert to XOG after the primary term,
save and except that portion of [the leased acreage] included within a proration or pooled unit of each well drilled under this Assignment and producing or capable of producing oil and/or gas in paying quantities. The term “proration unit” as used herein, shall mean the area within the surface boundaries of the proration unit then established or prescribed by field rules or special order of the appropriate regulatory authority for the reservoir in which each well is completed. In the absence of such field rules or special order, each proration unit shall be deemed to be 320 acres of land in the form of a square as near as practicable surrounding … a well completed as a gas well producing or capable of producing in paying quantities … (emphasis added by Court).114
Chesapeake drilled six gas wells within the primary term of the assignment, five of them were located in the Allison-Britt Field and the sixth was located in the Stiles Ranch Field. The field rules for the Allison-Britt Field prescribe proration units of 320 acres and permit units of larger or smaller size. The Stiles Ranch Field does not have special field rules. Chesapeake filed Form P- 15s assigning 800 total acres to proration units for four of the Allison-Britt wells but did not file Form P-15s for the remaining two wells.
XOG asserted that Chesapeake retained the 800 acres it assigned to the proration units, plus two acres for each of the other two wells (804 acres total), which would result in 821.80 acres reverting to XOG. On the other hand, Chesapeake asserted that its retained acreage was 320 acres for each of the five Allison-Britt wells, plus 320 deemed acres for the Stiles Ranch well, for a total of 1,920 acres, resulting in no acreage reverting to XOG.115 XOG sued Chesapeake after they refused to release or reassign any acreage covered by the assignment. Both sides moved for summary judgment and asked the court to interpret the clause in their favor. The trial court granted Chesapeake’s motion and ordered XOG should receive nothing, the appellate court affirmed the decision, and XOG filed a petition for review to the Supreme Court of Texas.
XOG argued the holding in Endeavor should control the court’s interpretation of the clause in this case. Under Endeavor, the court held that a clause defining the retained tract as being “… those lands and depths located within a governmental proration unit assigned to a well”116 resulted in the lessee only retaining the acreage it assigned to the proration units in its filed Form P-15s. Chesapeake argued that the plain language of the contract results in retained tracts of 320 acres for each well because of the way the term “proration unit” was defined in the clause.
Although the court agreed that both cases involved retained acreage clauses, the court distinguished this case from Endeavor by asserting that “[t]he provision [in this case] equates the acreage ‘included within’ a proration unit with that ‘prescribed’ by field rules,”117 whereas neither the acreage provision nor the field rules in Endeavor referred to a “prescribed” proration unit. Holding in favor of Chesapeake, the court determined that the plain language of the clause defined the retained tracts for the five Allison-Britt wells as the “acreage included within a proration unit … prescribed by field rules” and because the Allison-Britt Field rules expressly prescribe 320 acre units, Chesapeake is entitled to 320 acres for each of the five wells, and 320 deemed acres for the Stiles Ranch well because the Stiles Ranch Field does not have field rules.
In conclusion, the court affirmed the lower courts’ decisions to construe the retained-acreage clause in favor of Chesapeake. As a result, no acreage reverted to XOG under the clause.118 This case underscores the importance of reviewing field rules when leases reference them and reinforces the principle that clearly defined terms will always control in a contract interpretation dispute.
111 XOG Operating, LLC v. Chesapeake Exploration Limited Partnership, No. 15-0935, 2018 WL 1770506, (Tex.
April 13, 2018).
112 No. 15–0155,2018 WL 1770290 (Tex. Apr. 13, 2018).
113 Id. at *1.
114 Id . at *3.
115 Id. at *2.
116 Endeavor at *2.
117 XOG at *3.
118 Id . at *4.