CHAPTER 8 WELLBORE ASSIGNMENTS IN TITLE EXAMINATION
| Jurisdiction | United States |
(Jan 2014)
WELLBORE ASSIGNMENTS IN TITLE EXAMINATION
Timothy C. Dowd
Elias, Books, Brown & Nelson
Oklahoma City
[Page 8-1]
FRANK HINTON is an associate with Elias, Books, Brown & Nelson in Oklahoma City and practices primarily in the area of oil and gas law and oil and gas title examination. Mr. Hinton is a member of the Oklahoma City Mineral Lawyers Society, the Oklahoma City Association of Petroleum Landmen, and the Energy and Natural Resources Law and Real Property Law Sections of the Oklahoma Bar Association. Mr. Hinton earned his J.D. with Distinction at the University of Oklahoma College of Law, where he earned the George J. Fagin Municipal Law Award for best municipal law paper on the subject of public finance, and also earned academic achievement awards in Torts and International Business Transactions, and studied abroad in the United Kingdom through the College of Law Oxford Program. Mr. Hinton earned his Bachelor of Arts, magna cum laude, in Political Science and English from Oklahoma Baptist University.
TIMOTHY C. DOWD is an attorney with Elias, Books, Brown & Nelson, in Oklahoma City, Oklahoma. His primary area of practice is oil and gas law, including the rendering of title opinions and drafting of industry contracts. Mr. Dowd is a past President of the Oklahoma City Mineral Lawyers Society and former Chairperson of the Oklahoma Bar Association Mineral Law Section. Mr. Dowd is a member of the Legal Committee of the Interstate Oil and Gas Compact Commission and the Advisory Council to the Marginal Well Commission of Oklahoma. Mr. Dowd is also the author of the chapter on Oil and Gas Titles in West Publishing Company's Oklahoma Real Estate Forms and Practice. He is the author of many articles, including "Clearing Title of Long-Lost Mineral Owners," 54 Rocky Mountain Mineral Law Institute 30-1 (2008) and "Preferential Rights to Purchase in Oil and Gas Transactions," 49 Rocky Mountain Mineral Law Institute 5-1 (2003).
I. Introduction
Wellbore assignments present a unique challenge to the title examiner. As has been frequently noted, there is a dearth of case law interpreting wellbore assignments,1 although that is beginning to change as the cases presented in this paper demonstrate. Wellbore assignments are frequently ambiguous. Drafters are often not relying on a form, not relying on a good form, or not thinking long term and anticipating future operations. The third situation is frequently the case with older assignments drafted prior to the frequency of horizontal drilling. This paper will discuss in turn the principals of contract interpretation necessary to interpret an assignment that is limited to less than the entire leasehold estate. Then the paper takes a look at the current state of case law regarding wellbore assignments. Finally, the paper offers tips for drafting an unambiguous assignment.
II. Principles of Contract Interpretation
Conveyances of interests in oil and gas leases are subject to the same general rules of interpretation as contracts.2 The primary goal in construing an assignment or any conveyance is to determine the intent of the parties as expressed in the conveyance.3 Often referred to as the "four corners" doctrine, a court will look at the conveyance in its entirety,4 with effect given to every part of the conveyance.5 Generally, if an instrument is clear and unambiguous on its face, then extrinsic evidence will not be admitted to determine the intent of the parties.6 Whether a contract or a conveyance is ambiguous is a question of law, and thus for the court to decide.7
[Page 8-2]
There are two basic approaches to contract interpretation that have been called the traditional view and the modern view. In jurisdictions that follow the traditional rule, contract interpretation is treated as a question of law for the court to decide based on the four corners of the instrument by applying rules of construction. Only after a court determines that the intent of the parties cannot be determined from the document itself (i.e. that it is ambiguous) will a court allow extrinsic evidence to determine the intent of the parties.8
According to the modern view, as contract interpretation seeks to determine what the parties actually intended, the fact that the parties dispute intent makes the conveyance ambiguous.9 A conveyance is ambiguous if it is "reasonably and fairly susceptible of different constructions"10 or contains "an intrinsic uncertainty."11
In specifically eschewing the four corners rule, New Mexico allows extrinsic evidence in order to determine whether a conveyance is ambiguous, even though it treats the question of whether a contract is ambiguous as a question of law.12 It is also a rule of construction that a conveyance will be construed most strongly against the grantor.13
In theory, a title examiner would apply the same rules of contract interpretation that a court would, especially in a situation where there is no extrinsic evidence of intent of the parties. In practice, a title attorney would consider outside factors in construing an instrument regardless of whether the instrument seems unambiguous. Frequently, two parties will argue that an instrument unambiguously supports each party's claim, only to have a court decide that the instrument is ambiguous.14 Thus, it is difficult for a title examiner to determine what a court would decide is ambiguous. Further, a title examiner may be advised that a client claims a certain interest as a result of a conveyance. Whether or not the conveyance is ambiguous, the title examiner will likely credit his or her client with the interest claimed, subject to a title requirement to obtain some sort of stipulation or other curative. Thus, the cautious approach for a title examiner is to err on the side of finding ambiguity, consider all available evidence as to the intent of the parties, and draft an appropriate requirement.
Given that construing wellbore assignments is so heavily fact-based, and that courts have interpreted cases in some surprising ways, it is instructive to look at some cases in further detail.
[Page 8-3]
III. Case Law
A. Petro Pro, Ltd. v. Upland Resources, Inc.15
Petro Pro, Ltd. v. Upland Resources, Inc. is probably the seminal case construing a wellbore-only assignment. The King "F" No. 2 Well was completed on a tract that was later pooled to create a 704-acre gas unit, producing from the Cleveland Formation between 6,500 and 6,600 feet, but also including the Brown Dolomite Formation between 3,400 and 3,600 feet. KCS Medallion Resources ("KCS") and MB Operating Co., Inc. ("MB") were the owners of this unit. In November 1998, KCS and MB conveyed to L&R Energy ("L&R"):
All of Seller's right, title and interest in and to the oil and gas leases described in Exhibit "A" attached hereto and made a part hereof ("Subject Leases") insofar and only insofar as said leases cover rights in the wellbore of the King "F" No. 2 Well.16
Beginning in May 2003, Upland Resources ("Upland"), pursuant to a farmout agreement with KCS, drilled three wells in the Brown Dolomite Formation: the Skeeterbee No. 1 and Skeeterbee No. 2 Wells, both horizontal wells, and the Skeeterbee No. 3, a vertical well.
In April 2004, L & R assigned its interest in the King "F" No. 2 Well to Petro Pro, Ltd. ("Petro Pro"). Upon inquiry, Petro Pro determined that KCS and Upland were treating the interest of Petro Pro as a wellbore-only interest in the King "F" No. 2 Well.
In September 2004, Petro Pro filed suit seeking to quiet title to the entire 704-acre pooled unit, from the surface to a depth of 6,800 feet. Several royalty owners intervened, seeking damages for alleged breach of implied covenants and for tortious interference with existing contracts. The royalty owners argued that Petro Pro's lawsuit and claims of ownership prevented Upland from fully developing the lease from drainage from adjacent wells.
In cross motions for summary judgment, Upland contended that Petro Pro's interest was limited to production and enhancement of production from the Cleveland Formation from the confines of the King "F" No. 2 Well. The royalty owners contended that Petro Pro had the right to produce from any formation, subject to governmental regulations limiting Petro Pro's horizontal rights to forty acres surrounding the King "F" No. 2 wellbore. Petro Pro contended they were the exclusive owners of any portion of the leasehold estate that could reasonably be reached and produced through the King "F" No. 2 wellbore. At trial, the court found the assignment unambiguous and granted Upland's motion for summary judgment.
[Page 8-4]
The court of appeals found that the judgment entered by the trial court failed to resolve the rights conveyed by the assignment. The court of appeals construed the limitation to "rights in the wellbore" as limiting the assignment to production from the wellbore of the King "F" No. 2 Well at the depth it existed at the time of the conveyance. This meant that Petro Pro's rights included the right to produce from shallower formations, including the Brown Dolomite, but not the right to extend the wellbore vertically or horizontally, and not the right to share in production from any other well that may be drilled on the lease.
Important points in this case are that the court relies on Texas' ownership-in-place theory to support its finding that the assignment was unambiguously limited to the gas that may be produced from the wellbore of the King "F" No. 2 Well. Thus, the court effectively gave some guidance on how to interpret an assignment limited to a wellbore absent greater definition. The only geographical area conveyed and owned by Petro Pro was that required to operate and produce the King "F" No. 2 Well, and the depths conveyed to Petro Pro are the depths (both horizontally and vertically) penetrated by the existing wellbore...
To continue reading
Request your trial