CHAPTER 3 AMENDING AND REVISING LEASES FOR HORIZONTAL DEVELOPMENT
| Jurisdiction | United States |
(Nov 2012)
AMENDING AND REVISING LEASES FOR HORIZONTAL DEVELOPMENT
SNR Denton US LLP
Dallas, TX
H. MARTIN GIBSON, SNR Denton, Dallas, Texas, is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization. In 2002, he was chair of the Energy Section of the Dallas Bar and, until July of 2004, was a member of the Council of the Oil, Gas and Energy Section of the Texas Bar and Editor of the Section's newsletter. He is a member of the American Association of Petroleum Landmen, the ADAM Energy Forum, and several industry associations. He is currently a member of the Texas Title Standards Joint Editorial Board of the State Bar of Texas. Mr. Gibson joined SNR Denton US LLP in 2011, and is a partner in the firm's Dallas office. He concentrates his practice in energy law with a particular focus on exploration and production activities of independent oil and gas companies and individuals, both domestically and internationally, including equity and debt financing of oil and gas related entities. He is a graduate of the University of Texas School of Law School, LL.B., 1967, and Stanford University, A.B., 1964.
TABLE OF CONTENTS
Oil & Gas Leases
1. Date
2. Granting Clause
3. Habendum Clause
4. Royalty
5. Pooling
6. Ancillary Rights
7. "Confusion of Goods."
8. Effective Date of the Unit
I am delighted to acknowledge the able and professional assistance of Mr. Austin Henley at SNR Denton US LLP in the preparation of this paper.
Martin Gibson
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Amending and Revising Leases for Horizontal Development
Oil & Gas Leases.
1. Date.
The date of the lease determines the end date of the primary term. Generally, operations that have commenced off of a lease tract do not preserve the lease past the primary term and a horizontal wellbore that is intended to penetrate the lease will not preserve the un-penetrated lease.
However, the United States District Court for New Mexico reached a different result in a 2001 case.1 As an oil and gas lease was approaching the end of its primary term, the lessee, Chesapeake, was informed that a drilling zoning variance would not be granted for drilling on the leased tract due to its location near a residential neighborhood.2 Chesapeake purchased a three-acre parcel adjoining the leased tract to directionally drill a well from the surface of the purchased parcel to a producing formation within the leased tract.3 The proposed well was spudded on July 27, 1998 on the three-acre purchased parcel.4 The stated primary term of the lease expired on August 3, 1998.5 On August 12, 1998, the drill bit penetrated the subsurface of the leased tract.6
The court focused on two lease provisions in finding that the lease was extended by the commencement of operations off the leased premises:
Paragraph five of the Lease provides, in pertinent part, that Defendant, the lessee, is "granted the right . . . to pool or combine this lease, the land covered by it or any part or horizon thereof with any other land, leases, mineral estates or parts thereof for the production of oil or gas." Paragraph five also contains the following language, to wit:
Drilling operations on or production from any part of any such unit shall be considered for all purposes, except the payment of royalty, as operations conducted upon or production from the land described in this lease. (Emphasis supplied.)
Paragraph six of the Lease provides, in pertinent part, that "[i]f at the expiration of the primary term there is no well upon said land capable of producing oil or gas, but lessee has
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commenced operations for drilling or reworking thereon this lease shall remain in force so long as operations are prosecuted with no cessation of more than 60 consecutive days . . . ."7
It was undisputed that the defendant timely began "drilling operations" on the tract adjacent to the lease.8 The court went a step further and found that the operations on the off-lease property should be included as "drilling operations" for the purpose of continuing the lease:
The intent of the parties as manifested in the totality of the Lease provisions and in the actions of the parties would permit the drilling of the horizontal well and would allow for the extension of the Lease under the circumstances here presented. Plaintiffs argue that paragraph 6 of the Lease requires that any drilling actually be on the lands covered by Lease. I do not agree. To so hold would substantially negate the provisions of paragraph 5 of the Lease. See Owens, 105 N.M. at 157, 730 P.2d 458 (oil and gas leases must be construed to give effect to all of their provisions so far as possible). Here the Plaintiffs entered into an agreement which allowed the horizontal well to be drilled and later, on the strained rationale that the well had to be solely on the Leased land, they would work a forfeiture on Defendant. Lease provisions providing for forfeiture by the lessee will be strictly construed in lessee's favor. Stamm v. Buchanan, 55 N.M. 127, 227 P.2d 633 (1951) (forfeitures are not favored by the Court). Thus, I find that adjacent property and the Lease property were "pooled" or "combined" in such a way as to make the provisions of paragraph five of the Lease applicable "for all purposes" including the provisions of paragraph six of the lease which provided for an extension of time where drilling operation had begun.9
The decision essentially implied "pooling" or a "combination" of the off-lease acreage and the leasehold acreage without any actual exercise of the pooling authority in the lease. However, the result might be justified by certain language in the lease. "Lessee has commenced operations for drilling or reworking thereon, this lease shall remain in force so long as operations are prosecuted with no cessation of more than 60 consecutive days . . ." can be interpreted in two ways. The first is that the operations must have been commenced on the lease. The second is that the operations for drilling or reworking on the lease must have been commenced. The question is whether "on the lease" pertains to "commenced operations" or "drilling or
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reworking." Under the "last antecedent" principal of contract interpretation, the argument is that it pertains to "drilling or reworking."10 Under that interpretation the "commencing of operations" does not necessarily have to be on the leased premises; they simply need to be for drilling on the leased premises. The regulatory approvals would indicate that the operations were to be conducted on the lease through horizontal drilling and could be enough to hold the lease.
The Manzano case is an expansion of the traditional rule which can be stated as follows: If a lease has been pooled, then operations on one pooled tract will be considered operations on other pooled tracts; therefore, horizontal drilling will extend the lease on a tract that has not yet been penetrated.11
2. Granting Clause.
A grant of a lease on specific lands does not grant the lessee the right to use the surface to drill a well onto an adjoining tract unless the drillsite tract is or will be pooled with the adjoining tract. Likewise there is no grant in the typical lease to use the leased tract for the benefit of adjoining tracts; however, transportation of production through the wellbore from an adjoining tract through the leased tract to the tract on the other side will be fine if the tracts have been pooled. If the drillsite tract will not be included in the pooled unit, then permission from the surface owner of the drillsite must be secured. Normally, the mineral lessee of the drillsite tract cannot prohibit use of the drillsite as a drilling location unless such lessee can show that the use interferes with such lessee's operations.12 Each tract traversed by the horizontal wellbore is a drillsite tract, and each production point on the wellbore is a drillsite.13
The following general grant has been suggested by Mr. Russell L. Schetroma 14 and these are discussion-debate drafts being used with an eastern mineral law foundation working group to create a more standard "eastern" oil and gas lease:
Horizontal Wells. Lessor acknowledges and agrees that optimal production from certain formations may best be obtained through the use of a horizontal well. Decisions as to when, if ever, a horizontal well may be appropriate for production from any formation is and shall at all times remain
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within the sole and absolute discretion of the Lessee, its successors and assigns. If and when a decision may be made to use a horizontal well to achieve production from any formation under the leased premises, Lessor does hereby consent and agree to the use of a horizontal well on and under the leased premises and Lessor specifically: a) grants to Lessee the right, in Lessee's sole and absolute discretion, to use the leased premises as the site of the vertical bore for such horizontal well, whether or not that bore intersects the target formation upon the leased premises; b) grants to Lessee the right, in Lessee's sole and absolute discretion, to horizontally drill through the leased premises whether or not that bore intersects the target formation upon the leased premises, whether or not any completion or stimulation is performed upon the leased premises and whether or not production is obtained or maintained upon the leased premises, grants to the Lessee the right to perform such completions and simulations in and from any horizontal bore as Lessee may, in Lessee's sole and absolute discretion determine. Any vertical or horizontal bore made upon the leased premises as part of a horizontal well the vertical bore of which is on the leased premises or any other premises shall be and shall be deemed to be a well drilled upon the leased premises for all purposes of this lease.
...Any and all horizontal wells affecting
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