XOG Operating, LLC and Geronimo Holding Corporation v. Chesapeake Exploration Limited Partnership and Chesapeake Exploration, LLC , 480 S.W.3d 22 ( 2015 )

In The
Court of Appeals
Seventh District of Texas at Amarillo
________________________
No. 07-13-00439-CV
________________________
XOG OPERATING, LLC AND
GERONIMO HOLDING CORPORATION, APPELLANTS
V.
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP AND
CHESAPEAKE EXPLORATION, LLC, APPELLEES
On Appeal from the 31st District Court
Wheeler County, Texas
Trial Court No. 12,375; Honorable Steven R. Emmert, Presiding
September 2, 2015
OPINION
Before QUINN, C.J., and CAMPBELL and PIRTLE, JJ.
This is an oil and gas “retained acreage” dispute concerning the amount of
acreage, if any, reverting to the assignors upon the expiration of the primary term of an
assignment of four oil and gas leases. Appellants, XOG Operating, LLC and Geronimo
Holding Corporation (collectively “XOG”), brought this trespass to try title suit against
Appellees, Chesapeake Exploration Limited Partnership and Chesapeake Exploration,
LLC, seeking an interpretation of the retained acreage clause contained in an
assignment of lease interests, entered into between Xeric Oil & Gas Corporation and
Geronimo Holding Corporation, as assignors, and Chesapeake‟s predecessor-in-title,
EOG Resources, Inc., as assignee, concerning 1,625 acres of land in Wheeler County.
Both sides moved for summary judgment on this dispositive issue. The trial court
granted Chesapeake‟s motion, denied XOG‟s motion, and rendered a final judgment
that XOG take nothing. We affirm the judgment of the trial court.
BACKGROUND
The record reflects that, effective June 1, 2003, Xeric Oil & Gas Corporation and
Geronimo Holding Corporation assigned their interest in four oil and gas leases,
containing 1,625 acres, more or less, in three sections in Wheeler County, Texas,1 to
EOG Resources, Inc. The habendum clause of the assignment agreement provided for
a primary term of two years and “as long thereafter as operations . . . are conducted
upon [the leased premises] with no cessation for more than sixty (60) consecutive
days.” The assignment further provided that “[a]fter the expiration of the Primary Term,
. . . all rights under this [assignment agreement] . . . shall terminate, and said lease shall
revert to Assignor, except as expressly provided in Article IX.” In pertinent part, Article
IX states:
Upon expiration of the Primary Term of this Assignment . . . this Assignment
and all rights created hereunder shall terminate as to all lands and depths
covered hereby. Said lease shall revert to Assignor, save and except that
portion of said lease included within the proration or pooled unit of each well
1
Specifically, Sections 6 and 7, Block E, GW Jacobs Survey, Wheeler County, Texas, and
Section 6, Block 1, B&B Survey, Wheeler County, Texas.
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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
surroundings [sic] a well completed as a gas well producing or capable of
production in paying quantities . . . . Upon termination or partial termination of
this Assignment and the rights created hereunder, Assignee shall promptly
provide Assignor with a fully executed and recordable release of this
Assignment . . . .
(Emphasis added).
During the primary term of that agreement, EOG and its successors drilled six
gas wells—two in each of the three sections.2 Five of the six wells were placed in the
Allison-Britt Field, and the remaining well was contained in the Stiles Ranch (Granite
Wash) Field. According to Rule 2 of the field rules applicable to the Allison-Britt Field,
for purposes of an allowable assignment, the maximum area of a “prescribed proration
unit” was 320 acres. That rule further provides that because a standard proration unit
consists of 320 acres, any unit containing less than 320 acres is, by definition, a
“fractional proration unit.” There were no field rules or special orders applicable to the
Stiles Ranch (Granite Wash) Field.
The parties agree that there were no pooled units formed under this agreement
and that the six wells completed by Chesapeake were each “producing or capable of
producing oil and/or gas in paying quantities.” Therefore, the resolution of this appeal
2
While all six wells were spudded during the primary term, two wells were actually completed
after the primary term. XOG does not contest the question of whether the actual drilling operations at the
expiration of the primary term sufficiently invoked the retained acreage provisions of the assignment
agreement.
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turns squarely upon the interpretation and construction of the save and except provision
of Article IX, quoted hereinabove. Specifically, it turns on how the parties intended to
define a “proration unit” with respect to each well.
XOG contends the operation of the retained-acreage clause is tied to the
regulatory framework of the Texas Railroad Commission. Specifically, it contends the
parties intended to retain, with respect to each well, that amount of acreage designated
by the operator when it filed a Statement of Productivity of Acreage Assigned to
Proration Units (customarily referred to as a Form P-15) with the Texas Railroad
Commission. A Form P-15 is the means by which an operator designates the
configuration, size, and location of acreage attributable to a given well for purposes of
obtaining a production allowable from the Railroad Commission. In accordance with
that procedure, in order to obtain regulatory permission to produce from a given well, an
operator is required to file a certified plat which distinctly sets out the size and location
of the acreage constituting a prescribed proration unit, or fractional proration unit,
assigned to that well. Once accepted, the Railroad Commission publishes the size of
the specific unit on its proration schedules and issues an allowable authorizing
production.
In this case, for purposes of obtaining its production allowables, Chesapeake
chose not to designate a full proration unit but instead designated fractional proration
units as to each well. On its Form P-15 filings, as to the six wells drilled on the leased
acreage in question, Chesapeake assigned production acreage totaling 802 acres. The
Form P-15 filed for each well included a certified plat as required by the rules and a
designation of the approximate boundaries of each fractional proration unit. In
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accordance with its practice, the Railroad Commission published a schedule showing
the acreage designated by Chesapeake. XOG contends the Form P-15 filings limit the
acreage retained to those 802 acres.
On the other hand, Chesapeake contends it was the clear intent of the parties to
retain the amount of acreage prescribed by the applicable field rules or, in the absence
of any field rules, 320 acres per well. According to its argument, Chesapeake is entitled
to retain the full 1,625 acres under lease because, under the facts of this case, its right
to retain exceeded the acreage under lease. Specifically, Chesapeake contends the
clear and unambiguous language of the agreement defines retained acreage as the
area within the surface boundaries of a “proration unit,” while further expressly defining
a “proration unit” to be “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” or, in the absence of such
field rules or special order, “each proration unit shall be deemed to be 320 acres.”
Because the field rules applicable to five wells establish a proration unit to be 320 acres
and the proration unit of the sixth well was 320 acres by express agreement of the
parties, Chesapeake contends it was entitled to retain up to 1,920 acres (6 wells x 320
acres per well).
CONTRACT CONSTRUCTION
An oil and gas lease is a contract conveying an interest in real property, as is the
assignment of all or a portion thereof. Petro Pro, Ltd. v. Upland Res., Inc., 279 S.W.3d
743, 750 (Tex. App.—Amarillo 2007, pet. denied) (citing Cherokee Water Co. v.
Forderhause, 641 S.W.2d 522, 525 (Tex. 1982)). As such, the assignment of an oil and
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gas lease must be construed and interpreted under the same rules of construction as
any other contract. See Tittizer v. Union Gas Corp., 171 S.W.3d 857, 860 (Tex. 2005);
Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002).
In construing any written contract, the primary concern is to ascertain and give
effect to the parties‟ intentions as expressed within the four corners of that document.
See Frost Nat’l Bank v. L & F Distribs., Ltd., 165 S.W.3d 310, 311-12 (Tex. 2005) (per
curiam). In determining the parties‟ intent, we consider the entire writing and attempt to
harmonize and give effect to all of the contract‟s provisions. Id. at 312. We construe
contracts “from a utilitarian standpoint bearing in mind the particular business activity
sought to be served” and, when it is appropriate and proper, avoiding any “construction
which is unreasonable, inequitable, and oppressive.” Id. (quoting Reilly v. Rangers
Mgmt., Inc., 727 S.W.2d 527, 530 (Tex. 1987)). Furthermore, the language in a
contract is to be given its plain, ordinary, and generally accepted meaning unless doing
so would clearly defeat the parties‟ intent. Petro Pro, Ltd., 279 S.W.3d at 749 n.3;
Anadarko Petroleum Corp., 94 S.W.3d at 554.
If, after such rules are applied, the meaning of the contract remains uncertain or
is susceptible to more than one reasonable interpretation, it is ambiguous. Nat’l Union
Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1990). However, if after the
pertinent rules of construction are applied, the contract can be given a definite or certain
legal meaning and it is otherwise unambiguous, then we construe it as a matter of law.
Frost Nat’l Bank, 165 S.W.3d at 312. Whether a contract is ambiguous is a question of
law to be determined “by looking at the contract as a whole in light of the circumstances
present when the contract was entered,” and extrinsic evidence of intent is inadmissible
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unless the contract is ambiguous on its face. See Friendswood Dev. Co. v. McDade &
Co., 926 S.W.2d 280, 283 (Tex. 1996). On appeal, we review the trial court‟s
construction of an unambiguous oil and gas lease according to a de novo standard of
review. Anadarko Petroleum Corp., 94 S.W.3d at 554.
ANALYSIS
By three issues, all shades and phases of the same argument, XOG contends
the trial court misconstrued the intent of the parties concerning what constitutes a
“proration unit” for purposes of their agreement. It maintains that under the plain
language of this agreement, each drilled well maintained that acreage, and only that
acreage, described in the P-15 forms filed with the Railroad Commission. Specifically,
XOG contends that, because the trial court did not accept the Railroad Commission
filings as being determinative of the intent of the parties, the trial court erred when it
granted Chesapeake‟s motion for summary judgment and denied XOG‟s motion for
summary judgment.
On the other hand, Chesapeake maintains that the plain language of the
assignment provides that each well would retain that number of acres prescribed by the
Railroad Commission in its special field rules for obtaining the maximum production
allowable for a well in that particular field, or that in the absence of any field rules, a
deemed acreage of 320 acres. Chesapeake asserts that, because the field rules
allowed a proration unit of up to 320 acres for each well in the Allison-Britt field, its five
wells in that field were sufficient to retain up to 1,600 acres (5 x 320) encompassed by
the assignment. Chesapeake further asserts that, because there are no field rules or
special orders applicable to the Stiles Ranch (Granite Wash) Field, its single well in that
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field was sufficient to hold an additional 320 acres. Because the total potential acreage
retained exceeds the actual acreage under lease, Chesapeake maintains the full 1,625
acres covered by the assignment were retained. Accordingly, Chesapeake contends
the trial court did not err because it interpreted the intent of the parties in accordance
with the plain and ordinary meaning of the precise words and phrases used in the
assignment agreement.
We have reviewed the assignment agreement at issue and agree with the
parties‟ stipulation that the retained acreage clause is unambiguous, i.e., that the
assignment agreement can be given a definite or certain legal meaning and is otherwise
clear and unequivocal. Specifically, we find the parties intended that the acreage
excepted from reversion would be that acreage described by the “proration . . . unit of
each well.” As to the question of what the parties intended when they used that
particular phrase, we must ascertain and give effect to the parties‟ intentions as
expressed in four corners of their agreement.
Generally, absent an express contractual agreement providing otherwise, a
proration unit is defined as “the acreage assigned to a well for the purpose of assigning
allowables and allocating allowable production to the well” for regulatory purposes. 16
TEX. ADMIN. CODE § 3.38(a)(3) (West 2013). For purposes of the Texas Railroad
Commission, any unit less than 320 acres is a “fractional proration unit.” In this case,
the parties specifically agreed to define a proration unit to mean the area within the
boundaries of a proration unit “established or prescribed by field rules” or, in the
absence of such field rules, 320 acres.
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In construing an unambiguous oil and gas lease or an assignment thereof, such
as the assignment at issue in this case, it is our primary duty to ascertain the objective
intent of the parties as expressed words used within the four corners of the lease
agreement. Anadarko Petroleum Corp., 94 S.W.3d at 554. In our analysis, we give the
language used its plain and grammatical meaning unless doing so would clearly defeat
the intentions of the parties. Id. In evaluating the intent of the parties, we must examine
the entire lease and attempt to harmonize all its parts, even if different parts of the
agreement appear contradictory or inconsistent. Id. In doing so, we presume the
parties to the lease intended every clause to have a purpose, and therefore, we
endeavor to give effect to all provisions of the lease so that no provision will be
rendered meaningless. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983).
The “save and except” language contained in the assignment agreement at issue
constitutes a limitation of the reversion provisions of that agreement.3 See Petro Pro,
Ltd., 279 S.W.3d at 750. As such, the retainage-clause “retains” the acreage excluded
from the automatic termination and reversion provisions of the agreement. In this case,
the amount of acreage retained is, by agreement of the parties, the “proration unit” of
each well. Where a special limitation or condition provides that an agreement, here an
assignment of leases, terminates on the occurrence of that limitation or condition, the
agreement automatically terminates upon the happening of the agreed upon limitation
or condition. Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 (Tex. 1989). Here, the
termination of the assignment was automatically triggered by the termination of the
3
The retained-acreage clause at issue in this case is one of many different types used in the oil
and gas industry. Here, the provision for retention of acreage “included within” the proration or pooled
unit of each well stands in contrast to clauses that simply specify that the amount of acreage contained in
a Form P-15 filing.
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primary term on May 30, 2005. The retained acreage provisions of Article IX were then
put into immediate effect. At that time, according to the express terms of the
agreement, all right, title, and interest in the leases reverted to XOG, “save and except
that portion of said lease[s] included within the proration or pooled unit of each well
drilled.”
XOG argues that the “common” practice in the oil and gas industry is to tie the
retained acreage clause to the regulatory framework of the Railroad Commission. This
argument, however, is of no consequence to the interpretation of an unambiguous
agreement. In applying the rules of contract construction, we are not bound by what
XOG may perceive to be the industry practice but are instead bound by the actual intent
of the parties as expressed by the precise terms of their agreement.
XOG further contends that because the Railroad Commission does not designate
the amount of acres or configuration of a proration unit, the definition of proration unit
contained in Article IX must refer to the operator‟s Form P-15 filing since that definition
specifically states that the term “proration unit” means “the area within the surface
boundaries of the proration unit then established or prescribed by field rules or special
order of the [Railroad Commission].” This argument also fails because the field rules do
not prescribe the area or boundaries of a proration unit; they merely set limits on the
units designated by producers. Accordingly, the reference to “area” and “boundaries” in
the definition of a proration unit does not render meaningless the words used as it
pertains to a proration unit prescribed by the applicable field rules. Furthermore, it can
be argued that Chesapeake‟s Form P-15 filings do not define a proration unit for
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purposes of Article IX because they only designate “fractional proration units,” not
“proration units.”
XOG next argues that Chesapeake‟s construction of the assignment agreement
attributes no meaning or significance to the “included within” language of the retainage
clause. Again, this argument ignores the clear and specific agreement of the parties
defining a “proration unit” as the area within the surface boundaries of the unit
prescribed by the applicable field rules. To give effect to XOG‟s argument would mean
that we would have to read into the agreement of the parties the intent to “include
within” the retained acreage that acreage “designated in the Form P-15 filing as to each
well.” This we cannot do. The plain language of the agreement defines a “proration
unit” (and concomitantly the retained acreage) as the area prescribed by the applicable
field rules, or in the absence of field rules, 320 acres—nothing more, nothing less.
Therefore, because the parties expressly agreed that the assignee would retain
that portion of a given lease included within a “proration unit” for the Allison-Britt field,
the acreage retained by a given well within that field was the standard proration acreage
of 320 acres—irrespective of what the operator may have designated in a Form P-15
filing for purposes of obtaining a production allowable for a fractional proration unit.
Furthermore, because there were no field rules or special orders applicable to the Stiles
Ranch (Granite Wash) Field, by contractual definition, the acreage retained by a given
well within that field was 320 acres. Therefore, for purposes of Article IX, given the
facts of this case and the agreement of the parties, a “proration unit” was 320 acres.
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Because we conclude the parties agreed that Chesapeake would retain 320
acres for each well drilled that was producing or capable of producing gas in paying
quantities, we disagree with XOG‟s construction of the assignment agreement. We
conclude that Article IX “retains” or, more correctly, excludes from the automatic
termination provisions of the assignment agreement, 320 acres for each well drilled.
Because the trial court correctly construed the retained acreage provisions of Article IX
of the assignment agreement, it did not err in either granting Chesapeake‟s motion for
summary judgment or denying XOG‟s motion. Issues one, two, and three are overruled.
CONCLUSION
The trial court‟s judgment is affirmed.
Patrick A. Pirtle
Justice
Campbell, J., dissenting.
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