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XOG Operating, LLC v. Chesapeake Expl. Ltd. P’ship, 554 S.W.3d 607 (Tex. 2018), held that a retained acreage clause that turned on the size of a proration unit as prescribed by the Railroad Commission was controlled by the Special Field Rules regardless of the acreage assigned by the operator to a proration unit.  The parties aligned as Assignor and Assignee under a term assignment (“Assignment”).  Assignor conveyed to Assignee four leases covering 1,625.8 acres for a primary term of two years.  A retained-acreage provision in the Assignment provided that after the primary term, the leases would revert back to Assignor save and except the following:

[T]hat portion of [the leased acreage] included within the proration or pooled unit of each well drilled . . . .  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. . . .

During the primary term, Assignee completed six wells.  Five of the six wells were in the same field and Special Field Rule 2 provided: 

[T]he acreage assigned to the individual gas well for the purpose of allocating allowable gas production thereto shall be known as the prescribed proration unit. . . .  For allowable assignment purposes, the prescribed proration unit shall be a [320] acre unit. 

The field rule also provided that a proration unit of less than 320 acres is a “fractional proration unit.”  The sixth well drilled by Assignee had no applicable field rules.  In its regulatory filings with the Railroad Commission of Texas (“TRC”), Assignee assigned 800 total acres to proration units for four of its six wells.

When the primary term of the Assignment expired, Assignor asserted that the retained-acreage provision held 804 acres (the assigned 800 acres for four wells, and two acres for each of the two remaining wells).  Assignor demanded the reassignment of the remaining 821.8 acres (being 1,625.8 acres less 804 acres) to Assignor.  Assignee refused and asserted that the retained-acreage provision applied to 1,920 acres (being 320 prescribed acres for each of the six wells).  The main issue was whether Assignee retained all of the acreage under the retained-acreage provision.

The Court reviewed the plain language of the retained-acreage provision and keyed in on the word “prescribed.”  The provision provides that the “proration unit” will be retained, and proration unit is further defined in the provision as “the area within the surface boundaries of the proration unit then . . . prescribed by field rules. . . .  In the absence of such field rules . . . each proration unit shall be . . . 320 acres.”  The Court found that because five of the six wells have field rules which prescribe 320 acres to a unit (and anything smaller is a fractional unit), and because the sole remaining well has no field rules, the six wells in total held more acreage than the acreage originally assigned, as Assignee argued.

Assignor contended the text of the provision limited itself by stating the retained-acreage is that which is “included within” the proration unit, and that only an operator can include acreage in a unit, not the TRC.  However, the Court disagreed, citing the express usage of the word “prescribed” in the provision as being controlling.

Assignor further argued that this retained-acreage provision should apply the same as the provision in the companion case Endeavor Energy Res., LP v. Discovery Operating, Inc., 554 S.W.3d 586 (Tex. 2018), which allowed an operator to retain only the land it included in its regulatory filings.  However, in the Endeavor Energy case, the retained-acreage provision referred to “assigned” units, and here the units are “prescribed.”  In Jones v. Killingsworth, 403 S.W.2d 325 (Tex. 1965), the Court found the TRC may prescribe proration units and at the same time permit operators to assign units of other sizes, so the terms are not mutually exclusive.  Ultimately the distinguishing factor between the Endeavor Energy case and this case was that in Endeavor Energy the term “prescribed proration unit” was not included in the retained-acreage provision or the field rules, but in the present case, the term is in both places.

Assignor offered a number of other arguments, including that the field rules only provided a maximum proration unit, the field rules were not created for the purpose of determining the meaning of retained-acreage provisions, and a result different than Endeavor Energy would create confusion.  However, the Court found that the field rules were clear about the 320-acre units.  Additionally, parties are free to include language from field rules into their contract, and the Court reiterated the Endeavor Energy case is different than this case.  The Court held that Assignee retained all of the acreage in the leases assigned in the Assignment.

This is a contract construction case, and the Court has been consistent on insisting that agreements be construed so as to give words their plain meaning.  Parties defining property rights by reference to regulatory matters are on notice that, as to proration units, there is a meaningful difference between acres prescribed and acres assigned.


Author

Jeffery A. McCarn

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