Opinion
No. 04-05-00673-CV
Delivered and Filed: March 14, 2007.
Appeal from the 381st Judicial District Court, Starr County, Texas, Trial Court No. DC-03-117, Honorable John A. Pope, III, Judge Presiding.
Sitting: SANDEE BRYAN MARION, Justice PHYLIS J. SPEEDLIN, Justice REBECCA SIMMONS, Justice.
MEMORANDUM OPINION
This appeal arises from an oil and gas case in which the trial court granted a partial summary judgment in favor of Texas State Bank, Trustee of the Guerra Mineral Trusts; Dorchester Minerals, L.P.; James W. Collins, Trustee of the Carvan, Vanco and Vannie Cook Trusts; Cow Creek Corporation and Will Carter (collectively referred to as the "Guerras") and against El Paso Production Oil and Gas, U.S.A., L.P. and EEX EP Company, L.P. (collectively "El Paso"). Following a jury trial on the remaining issues, judgment was entered denying the Guerras' claims of trespass, theft and fraud. Both parties appealed the trial court's judgment. We reverse the judgment of the trial court granting the partial summary judgment in favor of the Guerras and render judgment in favor of El Paso.
Background
In 1988, the parties or their predecessors entered into two identical oil and gas leases covering an undivided mineral interest in 1,707.272 acres of land in Starr County, Texas (collectively the "Lease"). Over time, portions of the Lease were included in four pooled units, known as the A, B, C, and D units (collectively the "Gas Units"). Each of the Gas Units was limited in depth according to the unit declarations that specified top and bottom depth limits.
For example, the A Unit Declaration provides for a pool of "said lands from the depth of 8,251 feet beneath the surface of the ground of said lands to a depth of 13,100 feet beneath the surface of the ground of said lands."
In 1992, El Paso released approximately 400 acres covered under the Lease, leaving about 1,307 acres remaining within the surface boundaries of El Paso's four pooled Gas Units. There is no dispute that the Lease remained in effect as to the depths set out in the four Gas Unit declarations. The dispute is whether the Lease also expired as to depths lying within the surface boundaries of the Gas Units but outside the specified depths. Both parties filed motions for summary judgment to construe the Lease. The trial court resolved this issue by a partial summary judgment in favor of the Guerras that was incorporated into the final judgment, holding that the "Leases terminated as to all depths in the Leases other than the pooled depth intervals as described in the Unit Declarations for the Guerra A, B, C, and D Gas Units."
Analysis
We begin our analysis of this complicated case by examining the Lease. The construction of the Lease is a threshold issue and dispositive of the Guerras' claims for damages, all of which depend on an initial determination of whether the Lease terminated as to the depths outside the Gas Units. El Paso asserts that the trial court erred in granting summary judgment because the Lease remained in effect as to all depths included within the surface boundaries of the four Gas Units as a matter of law. El Paso characterizes the issue before the court as whether the Pugh clause in the Lease provides for both vertical and horizontal severances so that production only holds the pooled Gas Units, or whether the pooled units hold all the acreage included within the surface boundaries of the units, including the depths lying above and below the pooled intervals. The Guerras respond that the trial court correctly held that the Lease terminated except as to the subsurface horizons that were included in El Paso's pooled Gas Units.
Standard of Review
The party moving for summary judgment carries the burden of establishing that no material fact issue exists and that it is entitled to judgment as a matter of law. Rhone-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 222 (Tex. 1999). When competing motions for summary judgment are filed, and one is granted and the other denied, the reviewing court must review the summary judgment evidence presented by both sides and determine all questions presented. Comm'rs Court of Titus County v. Agan, 940 S.W.2d 77, 81 (Tex. 1997).
Lease Construction
As we review the pertinent portions of the Lease, we bear in mind the primary concern of the court, which is to ascertain and give effect to the intentions of the parties. When interpreting a lease, just as in interpreting a contract, the intent of the parties is to be determined from the express language found within the four corners of the document. Luckel v. White, 819 S.W.2d 459, 461-63 (Tex. 1991); Walker v. Foss, 930 S.W.2d 701, 704 (Tex.App.-San Antonio 1996, no writ). All parts of the Lease are to be harmonized, construing the instrument to give effect to all of its provisions. Luckel, 819 S.W.2d at 462; Walker, 930 S.W.2d at 704. Construction of an unambiguous lease is a question of law to be resolved by the court. Luckel, 819 SW.2d at 461; Walker, 930 S.W.2d at 704.
Pertinent Lease Provisions
Paragraph 1 of the Lease is a granting clause that describes the land covered by the Lease as follows: "The land covered hereby, herein called "said land" is located in the County of Starr, State of Texas, and is described on Exhibit "A" attached hereto and made a part hereof." Exhibit A is a metes and bounds description of the surface boundaries of the acreage covered by the Lease.
Paragraph 2 is the habendum clause, which provides that the Lease remains in force so long as operations are conducted on "said land":
Unless sooner terminated or longer kept in force under other provisions hereof, this lease shall remain in force for a term of three years from the date hereof, hereinafter called "primary term" and as long thereafter as operations, as hereinafter defined, are conducted upon said land and with no cessation of more than 45 consecutive days.
Paragraph 4 is a pooling clause, and it grants the lessee the right to pool or unitize any land covered by the Lease with any other land:
Lessee is hereby granted the right, at its option, to pool or unitize any land covered by this lease with any other land covered by this lease, and/or with any other land, lease or leases as to any or all minerals or horizons, so as to establish units containing not more than 80 surface acres plus 10% acreage tolerance; provided however, units may be established as to any one or more horizons or existing units may be enlarged as to any one or more horizons so as to contain not more than 640 surface acres plus 10% acreage tolerance, if limited to one or more of the following
Paragraph 4 further provides that "any operations conducted on any part of such unitized land shall be considered for all purposes, except the payment of royalty, operations conducted on said land under this lease."
Paragraph 13 of the Lease is included in a typewritten addendum to the Lease that further addresses the size of pooled units based on the depth of the wells within the unit:
Attachment To Oil and Gas Lease dated March 19, 1988. We note that the provisions in the addendum are typewritten and thus, in the case of a conflict, the typewritten matter is given effect over the printed matter. Friedrich v. Amoco Prod. Co., 698 S.W.2d 748, 751 (Tex.App.-Corpus Christi 1985, writ ref'd n.r.e.).
Anything contained herein to the contrary notwithstanding, units pooled for gas hereunder shall not exceed in area 160 acres plus an acreage tolerance of 10% for gas produced from a depth of or above 6,000' below the surface of the ground; 320 acres plus an acreage tolerance of 10% for gas produced from a depth of more than 6,000' but less than 10,000' below the surface of the ground; and 640 acres plus an acreage tolerance of 10% for gas produced from a depth at or below 10,000' below the surface of the ground. All provisions of paragraph 4 herein, except as specifically amended in this paragraph shall remain as written.
Also contained in the typed addendum is Paragraph 15 of the Lease which sets out continuous development requirements and includes a Pugh clause. Once the three-year primary term ends, Paragraph 15 requires the lessee to drill a new well every 100 days in order to hold the entire leased acreage by operations. The parties disagree regarding the effect of the Pugh clause once continuous drilling stops. The relevant portion of Paragraph 15 provides:
The name of the clause comes from the Louisiana lawyer, Pugh, mentioned in the case of Fremaux v. Buie, 212 So.2d 148,149 (La. 1968).
If Lessee fails to continue to develop the leased premises as above provided, this lease shall terminate (a) on the expiration of the primary term of this lease, or (b) on the 100th day after the completion of operations being conducted at the end of the primary term of this lease, or (c) on the 100th day after the completion of the last well drilled on the leased premises or on lands pooled herewith; except as to lands covered by this lease which are then allocated to a production unit or included in a pooled unit for a well capable of producing oil and/or gas in paying quantities (which lands herein shall be referred to as developed acreage). For the purposes of this paragraph, a production unit is defined as an area consisting only of lands covered by this lease and allocated or dedicated to a well in accordance with the Rules and Regulations of the Railroad Commission of the State of Texas and shall contain only such number of acres as permitted herein for pooled oil units or pooled gas units.
This lease shall remain in effect as to all depths as to all developed acreage so long as there is production of oil and/or gas in paying quantities from said developed acreage. (emphasis added)
Lease Analysis
The Parties' Contentions
El Paso contends that the Pugh clause does not operate to horizontally sever the leasehold estate but vertically severs and terminates the Lease as to acreage outside the pooled units' surface boundaries. It relies on general rules of contract construction and the Friedrich case to support its argument. See Friedrich v. Amoco Prod. Co., 698 S.W.2d 748, 754 (Tex.App.-Corpus Christi 1985, writ ref'd n.r.e).
El Paso argues that the terms of the Lease do not distinguish between depths when defining how the Lease terminates. The term "developed acreage" is defined in Paragraph 15 as "lands included in a pooled unit." The Lease contains no other definition of "lands" other than that referenced in the initial granting clause that defines "said land" as a surface metes and bounds description of land covered by the Lease.
The Guerras agree that the Pugh clause does not effect a horizontal severance. They argue that the horizontal severance occurred when the lessee voluntarily created pooled units as authorized by Paragraph 13 of the Lease. Once those units were created through the unit declarations, the production from those units had to come from the depths set forth in Paragraph 13. Consequently, there can be no well in the 640 acre unit capable of producing from horizons shallower than 10,000 feet. When the third paragraph of Article 15 states: "this lease shall remain in effect as to all depths as to all developed acreage so long as there is production of oil and/or gas in paying quantities from said developed acreage," the terminology "developed acreage" can only refer to the specified subsurface horizons that are included in the Gas Units for wells capable of producing paying quantities. The Guerras argue that the typed provisions of Paragraphs 13 and 15 changed the meaning of the parties in their use of the word "lands" when it granted the lessee the ability to create pooled units.
Pooling and Pugh Clauses
The Lease reflects a conveyance to the lessee of 1707.272 acres of land. The parties agree that this conveyance was for all depths. The grant is for a primary term of three years and for as long thereafter as "operations" are conducted on the land without cessation of more than 45 days. This grants to lessee a fee simple determinable estate in the minerals as to all lands covered by the Lease. Tex. Oil Gas Corp. v. Ostrom, 638 S.W.2d 231, 234 (Tex.App.-Tyler 1982, writ ref'd n.r.e.).
Generally, production or operations from anywhere on a lease maintains the entire lease so long as operations continue. Shown v. Getty Oil Co., 645 S.W.2d 555, 560 (Tex.App.-San Antonio1982, writ ref'd). For purposes of a pooled unit, it means that if only a portion of a lease is pooled, production from any part of the pooled unit maintains the lease in effect as to all lands covered by the lease, both within and outside the unit, unless the lease expressly provides otherwise. Scott v. Pure Oil Co., 194 F.2d 393, 395 (5th Cir. 1952); Texaco, Inc. v. Letterman, 343 S.W.2d 726, 733 (Tex.Civ.App.-Amarillo 1961, writ ref'd n.r.e.). Paragraph 4 of the Lease conforms with the general rule in that operations anywhere within the pooled unit are deemed operations on "said land" held by the Lease. Paragraph 4 also grants the lessee the right to pool or unitize any land covered by the Lease with any other land or lease as to any or all minerals or horizons so as to enlarge or establish units containing not more than 640 surface acres plus 10% tolerance if limited to gas production. Paragraph 4 is amended, in part, by Paragraph 13 of the addendum that reduces the maximum size of the surface acreage of the pooled units according to the depth of the unit. All other provisions of Paragraph 4 still apply, including the provision that operations conducted on any part of unitized land are considered operations on "said land" under the Lease. Contrary to the Guerras' contention, Paragraph 13 does not attempt to sever the leasehold interest by depth. Thus, if "said lands" is the leasehold interest, then operations conducted within the pooled Gas Units serve to maintain the entire Lease from the surface to the core.
"Pooling" or a pooled unit describes the joining together of small tracts or portions of tracts for the purpose of having sufficient acreage to receive a well drilling permit under the relevant state or local spacing laws and regulations, and for the purpose of sharing production by interest owners in such a pooled unit. Bruce M. Kramer Patrick H. Martin, The Law of Pooling and Unitization 1-3 (3d ed. 2006). "Unitization" or unit operations refer to the consolidation of mineral or leasehold interests covering all or part of a common source of supply. Id. at 1-4.
Key to the parties' dispute is Paragraph 15 of the Lease which controls the termination of the Lease after cessation of continuous drilling. The Pugh clause was created to protect the lessor from the concern of having the entire leasehold held by production from a very small pooled area. Shown, 645 S.W.2d at 560. The Lease's Pugh clause provides for the termination of the Lease except as to "developed acreage." Thus, key to our analysis is a determination of "developed acreage" and whether it is limited to specific depth horizons.
Few cases have examined whether in the absence of specific language to the contrary, Pugh clauses effect a horizontal as well as vertical segregation of the lease. In two cases dealing with the same Pugh clause, the 10th Circuit concluded that the Pugh clause had a horizontal component so that the pooling of some depths would not maintain the lease as to the non-pooled depths, Rogers v. Westhoma Oil Co., 291 F.2d 726 (10th Cir. 1961), while the Oklahoma Supreme Court reached the opposite result and did not find that the unproduced depths were terminated by the Pugh clause. Rist v. Westhoma Oil Co., 385 P.2d 791 (Okla. 1963). In Friedrich, the Corpus Christi court followed the approach in Rist. Friedrich, 698 S.W.2d at 754. El Paso argues that the Friedrich case is directly on point and mandates a holding that the pooled units were held from the surface through all depths.
The parties agree the Pugh clause in the lease did not effect a horizontal severance. For an example of a horizontal Pugh clause see Sandefer Oil Gas, Inc. v. Duhon, 961 F.2d 1207, 1209 (5th Cir. 1992).
In Friedrich, the lessor executed a lease which granted the lessee the right and power to pool all or any part of the leased premises but the units for gas could not exceed 640 acres in area. The lease also contained a Pugh clause that provided for the reversion of land not included in any pool or unit. The lessee pooled from the surface to a depth of 1,298 feet. As here, the lessor sued to cancel the oil and gas Lease as to unpooled depths. The lessor argued that the Pugh clause in his lease effected both a vertical and horizontal severance of the leasehold estate, such that the lease terminated as to depths not included within the unit, or those below 1,298 feet. Friedrich, 698 S.W.2d at 751. The Pugh clause in Friedrich provided:
In the event a portion or portions of the land herein leased is pooled or unitized with other land so as to form a pooled unit or units, operations on, completion of a well upon, or production from such unit or units will not maintain this lease in force as to the land not included in such unit or units.
Id. at 750. The court in Friedrich held that the language was unambiguous and that the term "land" was intended to mean surface acreage and not just the unitized strata or depths under the surface acreage of the land included in the unit. Id. at 754. The same rationale should apply in this case. Under Paragraph 15, the Lease is maintained as to "lands covered by this lease which are then allocated to a production unit or included in a pooled unit for a well capable of producing oil and/or gas in paying quantities (which lands herein shall be referred to as developed acreage)." The lessee in Friedrich pooled only certain depths in its units, but the Friedrich court held that the word "land" meant surface acreage, all of which was included in the pooled units for purposes of the Pugh clause. Friedrich, 698 S.W.2d at 754. Likewise, the term "lands" in Paragraph 15 of the Lease means surface acreage.
The Lease uses the term land or said lands in the granting clause, the habendum clause, the pooling clause, the delay rental clause, as well as in other paragraphs of the printed Lease. In each instance the term refers to surface acreage. A term will ordinarily be considered to have been used in the same sense in different parts of the same instrument. Gonzalez v. Mission Am. Ins. Co., 795 S.W.2d 734, 736 (Tex. 1990).
A key provision in Paragraph 15 is that the lease remains in effect as to all depths as to all developed acreage. We believe the phrase "all depths" would be unnecessary if the developed acreage is equivalent to the pooled Gas Unit. Further, Paragraph 13 which modifies Paragraph 4 does not purport to effect a severance, and the parties agree Paragraph 15 does not work a horizontal severance.
Conclusion
Like the parties, we do not believe the Pugh clause effected a horizontal severance. We also do not interpret Paragraph 13 as effecting a horizontal severance. Thus, the trial court erred in granting partial summary judgment in favor of the Guerras. We reverse the judgment of the trial court and render judgment for El Paso that the Lease was maintained as to all depths within the surface boundaries of the pooled units described in the Unit Declarations for the Guerra A, B, C, and D Gas Units.
Because our decision is dispositive of the Guerras' claims for damages, we do not address the Guerras' issues on appeal.