Drilling on Non-Contiguous Acreage Found to Trigger Offset Well Provision

December 29, 2020 In Martin v. Rosetta Res. Operating, LP, 2020 Tex. App. LEXIS 7952, 2020 WL 5887566, the Texas Thirteenth Court of Appeals held that a lessee’s obligation to protect undrilled acreage from drainage and to spud an offset well were triggered by the plain terms of the lease. The Martin court construed an “unambiguous” mineral lease as a matter of law, and noted that it must enforce the intention of the parties as expressed in the four corners of the lease. In its written decision, the court challenged the parties’ construction of a lessee’s obligations in a pooled unit and enforced what it considered to be the plain language of the lease terms.

The Martins are landowners in Live Oak County, Texas and entered into mineral leases (the “Martin Leases”) with Mesquite Production, Inc. (“Mesquite”) in 2001 and 2006. The leases each contained the following “Addendum 18”:

Notwithstanding anything contained herein to the contrary, it is further agreed that in the event a well is drilled on or in a unit containing part of this acreage or is drilled on acreage adjoining this Lease, the Lessor [sic], or its agent(s) shall protect the Lessee’s [sic] undrilled acreage from drainage and in the opinions of reasonable and prudent operations, drainage is occurring on the un-drilled acreage, even though the draining well is located over three hundred thirty (330) feet from the undrilled acreage, the Lessee shall spud an offset well on said un drilled acreage or on a unit containing said acreage within twelve (12) months from the date the drainage began or release the acreage which is un-drilled or is not a part of a unit which is held by production (emphasis added).

Mesquite then assigned the Martin Leases to Rosetta Resources Operating, LP (“Rosetta”). In 2008, Rosetta, Newfield Exploration Co. and Dynamic Production, Inc. (collectively “Newfield”) established a pooled unit (the “Martin Unit”) which included some of the Martin Leases, among other leases. That same year, Newfield drilled the GU-1 Well in an area of the Martin Unit which is also covered by the Martin Leases. In 2009, Newfield established another pooled unit called the Simmons Unit, which is separated from the Martin Leases by two twenty-acre tracts. Newfield drilled the Simmons-1 Well on the Simmons Unit, 1.5 miles away from the GU-1 Well.

In 2014, the Martins filed suit against Rosetta and Newfield, alleging that the defendants breached their contractual duties under Addendum 18 of the leases to protect the Martin Leases from drainage by the Simmons-1 Well. Newfield filed a motion for summary judgment, arguing that the duty prescribed in Addendum 18 was not triggered by the drilling of the Simmons-1 Well because the well was not located on the Martin Leases, on a unit including the leases, or on land adjoining the leases. The trial court granted the motion and the court of appeals affirmed.  The court of appeals also concluded that the duty to prevent drainage and to spud an offset well was not triggered by drilling on the Simmons Unit because the Simmons Unit does not “adjoin” the Martin Leases. Rosetta then moved for summary judgment on the same basis as Newfield, and the Martins subsequently filed a second amended petition, asserting that Rosetta’s contractual duty under Addendum 18 of the Martin Leases was triggered not by the drilling on the Simmons Unit, but rather, by the drilling of the GU-1 Well on the Martin Unit. The trial court ultimately granted Rosetta’s motion for summary judgment, and the Martins appealed.

The court began its analysis with stating the well-established principle that if a mineral lease is unambiguous, then the court will construe it as a matter of law and seek to enforce the intention of the parties as expressed in the lease. The court’s main issue with Addendum 18 was its lack of accuracy and clarity. First, the provision misidentifies which party owes the conditional “duty to protect” undrilled acreage from drainage, imposing the duty on the “Lessor, or its agent(s),” with the Martins being the lessors. However, Rosetta conceded that it was a scrivener’s error and should have imposed the conditional duty on the “Lessee.” Rosetta did not raise this issue at the trial court stage, and therefore the court of appeals could not affirm summary judgment on this basis. Second, Addendum 18 appears to be “out of order or incomplete” in its description of the lessee’s obligation to “spud an offset well.” Rosetta argued that its obligation to “spud an offset well” is conditional and is triggered only when two events occur: (1) a well is drilled on or in a unit containing the lease or on adjoining lands; and (2) “draining is occurring” on the undrilled acreage as determined by “the opinions of reasonable and prudent operations.” The court’s issue with this intended meaning is that language of Addendum 18 “does not limit the duty to spud an offset well to situations where ‘drainage is occurring’ because there is no conditional language—such as ‘if’ or ‘in the event’—directly pertaining to that clause.” However, the parties agreed that Addendum 18 imposes duties on Rosetta only in the event that both of the enumerated circumstances are present, and the court therefore addressed whether those circumstances triggered Rosetta’s obligations.

Addendum 18’s first requirement for the obligation to “spud an offset well” to be triggered is that a well is drilled on or in a unit containing the lease or on adjoining lands. The court of appeals had previously concluded that the drilling of the Simmons-1 Well did not satisfy this condition because it did not adjoin the Martin Leases. However, the GU-1 Well is, in fact, located “on or in a unit containing part of” the Martin Leases and therefore triggers the obligation to protect the Martins’ undrilled acreage from drainage. Rosetta argued that the GU-1 Well did not cause any drainage on the Martins’ undrilled acreage, but the court noted that was immaterial. The language of Addendum 18 imposes “a general duty to protect the undrilled land against all drainage whenever a well is drilled on that land or any adjoining property, without regard to which drilling activity was causing the drainage.” The second condition on Rosetta’s obligation to “spud an offset well” is that “in the opinions of reasonable and prudent operations, drainage is occurring on the un-drilled acreage, even though the draining well is located over three hundred-thirty (330) feet from the undrilled acreage.” The court noted that there was no dispute that drainage was occurring on the undrilled portions of the Martin Leases, and therefore the second condition was met. It did not matter that the drainage was caused by the Simmons-1 Well rather than the GU-1 Well, the obligations as provided by Addendum 19 were still triggered as a result of any drainage. Thus, the trial court’s judgment was reversed and remanded.

When executing leases, it is easy to skim over the boilerplate language and assume all of the important leasing scenarios are covered. However, lessors and lessees alike should be forward-thinking in their leasing strategies and ensure the lease provisions precisely identify potential situations and the obligations imposed on each party should the occasion arise. As this case shows, pooling leased lands can create a host of unique issues, and an imprecise and unclear lease only exacerbates those issues.

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