ConocoPhillips Company v. Vaquillas Unproven Minerals, LTD.

Opinion

ACCEPTED 04-15-00066-CV FOURTH COURT OF APPEALS SAN ANTONIO, TEXAS 4/9/2015 3:46:42 PM ORAL ARGUMENT REQUESTED KEITH HOTTLE CLERK

No. 04-15-00066-CV FILED IN

In the Court of Appeals 4th COURT OF APPEALS SAN ANTONIO, TEXAS

for the Fourth District of Texas 4/9/2015 3:46:42 PM KEITH E. HOTTLE San Antonio, Texas Clerk

CONOCOPHILLIPS COMPANY, Appellant, V.

VAQUILLAS UNPROVEN MINERALS, LTD., Appellee.

From Cause No. 2014 CVQ000 438 D4 406th Judicial District Court, Webb County, Texas Honorable Oscar J. Hale, Jr., Presiding Judge

BRIEF OF APPELLANT, CONOCOPHILLIPS COMPANY

Michael V. Powell Adolfo Campero State Bar No. 16204400 State Bar No. 00793454 Email: mpowell@lockelord.com Email: acampero@camperolaw.com Cynthia K. Timms Campero & Associates, P.C. State Bar No. 11161450 315 Calle Del Norte, Suite 207 Email: ctimms@lockelord.com Laredo, Texas 78041 Elizabeth L. Tiblets Tel: 956-796-0330 State Bar No. 24066194 Fax: 956-796-0399 Email: etiblets@lockelord.com Locke Lord LLP 2200 Ross Avenue, Suite 2200 Dallas, Texas 75201-6776 Tel: 214-740-8520 Fax: 214-740-8800

ATTORNEYS FOR APPELLANT CONOCOPHILLIPS COMPANY

IDENTITY OF PARTIES AND COUNSEL Party Counsel

ConocoPhillips Company, Michael V. Powell State Bar No. 169204400 Appellant mpowell@lockelord.com Cynthia K. Timms State Bar No. 11161450 ctimms@lockelord.com Elizabeth L. Tiblets State Bar No. 24066194 etiblets@lockelord.com LOCKE LORD LLP 2200 Ross Avenue, Suite 2200 Dallas, Texas 75201-6776 Telephone: (214) 740-8000 Telecopier: (214) 740-8800

Adolfo Campero State Bar No. 00793454 acampero@camperolaw.com Campero & Associates, P.C. 315 Calle Del Norte, Suite 207 Laredo, Texas 78041 Telephone: (956) 796-0330 Telecopier: (965) 796-0399

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Party Counsel

Vaquillas Unproven Minerals, Ltd., Raul Leal State Bar No. 24032657 Appellees rleal@rl-lawfirm.com RAUL LEAL INCORPORATED 5810 San Bernardo, Suite 390 Laredo, Texas 78041 Telephone: (956) 727-0039 Telecopier: (956) 727-0369

Armando X. Lopez State Bar No. 12562400 mandox@rio.bravo.net LAW OFFICES OF ARMANDO X. LOPEZ 1510 Calle Del Norte, Suite 16 Laredo, Texas 78041 Telephone: (956) 726-0722 Telecopier: (956) 726-6049

Gregg Owens State Bar No. 15383500 gregg.owens@haysowens.com Robert G. Hargrove State Bar No. 09303300 rob.hargrove@haysowens.com Alicia R. Ringuet State Bar No. 24074958 alicia.ringuet@haysowens.com HAYS & OWENS L.L.P. 807 Brazos Street, Suite 500 Austin, Texas 78701 Telephone: (512) 472-3993 Telecopier: (512) 472-3883

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Party Counsel

P. Michael Jung State Bar No. 11054600 michael.jung@strasburger.com STRASBURGER & PRICE, LLP 901 Main Street, Suite 4400 Dallas, Texas 75202-2794 Telephone: (214) 651-4724 Telecopier: (214) 659-4022

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TABLE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL ........................................................... ii

TABLE OF CONTENTS ...........................................................................................v

INDEX OF AUTHORITIES.....................................................................................vi

STATEMENT OF THE CASE .................................................................................. 1 STATEMENT REGARDING ORAL ARGUMENT ............................................... 2 ISSUE PRESENTED .................................................................................................3

STATEMENT OF FACTS ........................................................................................4 SUMMARY OF THE ARGUMENT ......................................................................11

ARGUMENT ...........................................................................................................14 1. The Field Rules did not “establish” different units of acreage per well. ...... 14

A. The parties’ competing interpretations................................................14

B. Analysis of the retained acreage clause in light of the Field Rules ....................................................................................................16

2. If there were any doubt about the proper interpretation of Sentence (2), the Court should apply the strong presumption in Texas law against making that sentence a “limitation on the grant.” .............................27

PRAYER FOR RELIEF ..........................................................................................31 CERTIFICATE OF COMPLIANCE .......................................................................33

CERTIFICATE OF SERVICE ................................................................................34 APPENDIX TO APPELLANT’S BRIEF................................................................35

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INDEX OF AUTHORITIES

Page(s)

CASES Anadarko Petroleum Corp. v. Thompson, 94 S.W. 3d 550 (Tex. 2002)....................................................................13, 27, 29

Birnbaum v. SWEPI LP, 48 S.W.3d 254 (Tex. App.—San Antonio 2001, pet. denied)............................16 Chesapeake Exploration, L.L.C. v. Energen Resources Corp., 445 S.W.3d 878 (Tex. App.—El Paso 2014, no pet.) ..................................13, 30

Clifton v. Koontz, 325 S.W.2d 684 (Tex. 1959) ..............................................................................23 ConocoPhillips Co. v. Ramirez, No. 04-05-00488-CV, 2006 WL 1748584 (Tex. App.—San Antonio, 2006) (not designated for publication) .........................................................21, 22 EOG Resources, Inc. v. Killam Oil Co., Ltd., 239 S.W.3d 293 (Tex. App.—San Antonio 2007, pet. denied)....................21, 27 Fox v. Thoreson, 398 S.W.2d 88 (Tex. 1966).................................................................................29 Halbouty v. Railroad Commission, 357 S.W.2d 364 (Tex. 1962) ..............................................................................23 Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) ..............................................................................16 Humphrey v. Seale, 716 S.W.2d 620 (Tex. App.—Corpus Christi 1986, no writ) ............................28 Jones v. Killingsworth, 403 S.W.2d 325 (Tex. 1965) ..............................................................................18

Knight v. Chicago Corp., 183 S.W.2d 666 (Tex. Civ. App.—San Antonio 1944), aff’d, 188 S.W.2d 564 (Tex. 1945)...................................................................................................30

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Knight v. Chicago Corp., 188 S.W.2d 564 (Tex. 1945) ........................................................................29, 30

Matthews v. Sun Oil Co., 425 S.W.2d 330 (Tex. 1968) ..............................................................................28

Natural Gas Pipeline Co. v. Pool, 124 S.W.3d 188 (Tex. 2003) ..............................................................................27

Prize Energy Resources, L.P. v. Cliff Hoskins, Inc., 345 S.W.3d 537 (Tex. App.—San Antonio 2011, no pet.) ................................28

Railroad Commission v. Woods Exploration and Producing Co., 405 S.W.2d 313 (Tex. 1966) ..............................................................................23

Rogers v. Ricane Enterprises, Inc., 773 S.W.2d 76 (Tex. 1989).................................................................................29 Rowley v. Braley, 286 S.W. 241 (Tex. Civ. App—Amarillo 1926, writ dism’d)............................17 Shown v. Getty Oil Co., 645 S.W.2d 555 (Tex. App.—San Antonio 1982, writ ref’d.) ...........................28 Springer Ranch, Ltd. v. Jones, 421 S.W.3d 273 (Tex. App.—San Antonio 2013, no pet.) ..............14, 16, 18, 27 State v. Bilbo, 392 S.W.2d 121 (Tex. 1965) ..............................................................................16 Tomlin v. Petroleum Corp. of Texas, 694 S.W.2d 441 (Tex. App.—Eastland 1985, no writ) ......................................30

STATUTES AND RULES TEX. CIV. PRAC. & REM. CODE § 37.009..................................................................32

TEX. CIV. PRAC. & REM. CODE § 51.014(d) ............................................................... 1 TEX. R. APP. P. 43.2(c) .............................................................................................14

16 T.A.C. §3.38(b)(1) ..............................................................................................10 vii

OTHER AUTHORITIES BLACK’S LEGAL DICTIONARY at 626 (9th ed. 2009) ..........................................17, 18 J. Hayes, Texas Railroad Commission: Some Basics Every Practitioner Should Know, 28 State Bar of Texas, Oil, Gas and Mineral Law Section Report 3, 20 (June 2004).....................................................................................23 WEBSTER’S THIRD NEW INTERNATIONAL UNABRIDGED DICTIONARY (1993) .......... 18

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STATEMENT OF THE CASE This interlocutory appeal requests the Court to interpret, de novo, near-

identical “retained acreage clauses” in two oil and gas leases. Plaintiff-Appellee

Vaquillas Unproven Minerals, Ltd. (“Vaquillas”), the Lessor, claims the retained

acreage clauses caused Defendant-Appellee ConocoPhillips Company

(“ConocoPhillips”), a Lessee, to forfeit substantially more acreage than

ConocoPhillips voluntarily released when ConocoPhillips’ program of continuous

drilling ended. ConocoPhillips disagrees, saying it retained the proper blocks of

acreage under the leases.

Vaquillas sued ConocoPhillips in the 406th District Court, Webb County.

(CR:190). ConocoPhillips filed a traditional motion for summary judgment based

on its interpretation of the leases. (CR:27). Vaquillas filed a traditional cross-

motion for partial summary judgment based on its interpretation of the retained

acreage clause. (CR:200). The trial court, The Honorable Oscar J. Hale, Jr.,

denied ConocoPhillips’ motion for summary judgment and granted Vaquillas’

cross-motion. (CR:433, Appendix (“App.”) B).

The trial court granted ConocoPhillips’ unopposed motion for interlocutory

appeal under TEX. CIV. PRAC. & REM. CODE § 51.014(d). (Id.) By Order dated

February 13, 2015, this Court granted ConocoPhillips’ Petition for Permission to

Appeal. (App. A).

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STATEMENT REGARDING ORAL ARGUMENT Appellant ConocoPhillips requests oral argument.

The question presented by this interlocutory appeal comes before the Court

on cross-motions for summary judgment and presents a question of law.

Nevertheless, the appeal requires the Court to construe retained acreage clauses in

oil and gas leases in light of field rules adopted by the Railroad Commission of

Texas, as well as that Commission’s Statewide Rule 38.

ConocoPhillips believes oral argument could be helpful to the Court as the

Court considers various provisions of the oil and gas leases and the Commission’s

rules. There is also a great deal at stake in this appeal. The trial court has decreed

that ConocoPhillips has forfeited approximately 15,000 acres from decades-old

Webb County oil and gas leases on which ConocoPhillips has drilled over 200

natural gas wells.

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ISSUE PRESENTED Did the trial court err by denying ConocoPhillips’ Motion for Summary

Judgment and by granting Vaquillas’ Cross-Motion for Partial Summary

Judgment? (App. B).

More specifically, the retained acreage clauses authorize ConocoPhillips to

retain 640 acres around each existing gas well at the end of the continuous drilling

program, unless Railroad Commission field rules provide for spacing or proration

“establishing different units of acreage per well.” If that exception is triggered,

those “established different acreages” are held in lieu of 640 acres. Did the trial

court err by holding that spacing requirements in the field rules, which require a

minimum of 40 acres in order to obtain a drilling permit for a new well, caused

ConocoPhillips’ leases to terminate except for 40 acres around each existing gas

well?

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STATEMENT OF FACTS The Oil and Gas Leases. ConocoPhillips is Lessee, and Vaquillas the

Lessor, under two oil and gas leases covering Webb County land. Sworn copies of

the leases are in the record at CR:47-88 and 283-323, and copies are attached as

Appendices C and D to this Brief (the “Leases”) (CR:192).

By the Lease at Appendix C, granted in 1974 and amended in 1987,

Vaquillas (and its predecessors) conveyed to ConocoPhillips’ predecessor the

mineral estate underlying 26,622.79 acres for “five years . . . and as long thereafter

as oil, gas or other mineral is produced from said land or land with which said land

is pooled hereunder.” (CR:192, 209). By the Lease at Appendix D, dated 1987,

Vaquillas granted the mineral estate under an additional 6,740 acres, except the

term of that Lease was for “three years . . . and as long thereafter as oil, gas or

other mineral is produced from said land or land with which said land is pooled.”

(Id.)

All of the wells at issue in this case are natural gas wells. For gas wells,

both Leases authorize ConocoPhillips to pool units up to 640 acres in size.

Paragraph 4 of the Leases, which grants pooling authority, states:

. . .units pooled for gas hereunder shall not substantially exceed in area 640 acres each plus a tolerance of ten percent (10%) thereof, provided that should governmental authority having jurisdiction prescribe or permit the creation of units larger than those specified, for the drilling or operation of a well at a regular location or for obtaining maximum allowable from any well to be drilled, drilling or already

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drilled, units thereafter may conform substantially in size with those prescribed or permitted by governmental regulation.

Paragraph 4 gives the Lessee “the right and power to pool or combine the

acreage covered by this lease or any portion thereof as to oil and gas, or either of

them, with any other land covered by this lease and/or with any other land, lease,

or leases in the immediate vicinity thereof . . . .” Paragraph 16 restricts that power

somewhat by restricting pooling only to other lands owned in whole or part by

Vaquillas, but that restriction is not pertinent here.

Vaquillas’ claim in this action is based on one isolated provision in

Paragraph 18, the retained acreage clause, of the Leases. In order to facilitate the

discussion in this Brief, ConocoPhillips will separate and number the four phrases

or sentences of that clause that are pertinent here, and then refer to those

“Sentences” by number: 1

Sentence (1): “On November 1, 1990, Lessee covenants and agrees

to execute and deliver to Lessor a written release of any and all

portions of this lease which have not been drilled to a density of at

least 40 acres for each producing oil well and 640 acres for each

producing or shut-in gas well,”

1 The provisions quoted are from the 26,622.79-acre Lease at Appendix C. The only difference between the language of Paragraph 18 in the two Leases is that Paragraph 18 of the 6,740-acre Lease (App. D) starts with: “At the end of the primary term, Lessee covenants and agrees . . . .”

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Sentence (2): “except that in case any rule adopted by the Railroad

Commission of Texas or other regulating authority for any field on

this lease provides for a spacing or proration establishing different

units of acreage per well, then such established different units shall be

held under this lease by such production, in lieu of the 40 and 640-

acre units above mentioned;”

Sentence (3): “provided, however, that * * * if, after the completion

or abandonment of any such well Lessee commences the drilling of an

additional well within Ninety (90) days from the completion or

abandonment of the preceding well, or continuously conducts drilling

operations in good faith and with reasonable diligence on said lease

without any cessation for longer than Ninety (90) days, said lease

shall remain in full force and effect during such drilling operations

and until the end of Ninety (90) days after the completion or

abandonment of the final well, at which time Lessee shall execute and

deliver to Lessor said written release, releasing all portions of the

lease not then so developed.”

Sentence (4): “Each retained unit shall contain at least one (1) well

producing or capable of producing oil or gas in paying quantities, and

the acreage within a unit shall be contiguous.”

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(Emphasis added).

Sentence (3), quoted above, established the continuous drilling program that

extended the date after which ConocoPhillips had to release acreage. There is no

dispute that by continuous drilling, ConocoPhillips maintained the 26,622.70-acre

Lease in full force and effect for many years after November 1, 1990, and the

6,740-acre Lease in full force and effect many years after the end of its primary

term. ConocoPhillips’ continuous drilling program ended at or about the date

alleged in Vaquillas’ Petition, June 21, 2012. (CR:193; 242). Vaquillas counted

that by that date, ConocoPhillips had drilled 208 wells on the two Leases.

(CR:203, 224).

In early 2014, ConocoPhillips filed Partial Releases in the Webb County

deed records that released all acreage covered by the Leases except for 640 acres

around each producing or shut-in gas well, as permitted by Sentence (1) of the

retained acreage clause. (CR:194; 90-179). Vaquillas contends those Partial

Releases were insufficient and asserts that at the end of the continuous drilling

program, ConocoPhillips’ Leases terminated as to all acreage except 40 acres

around each producing or shut-in gas well. (CR:195-96; 227). Vaquillas moved

for summary judgment that 25,042 of the total 33,363 acres Vaquillas granted to

ConocoPhillips by the Leases “reverted” to Vaquillas when the continuous drilling

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program ended, and consequently, ConocoPhillips must release 15,351 more acres

than those released by the Partial Releases it already filed. (CR:203, 204-05).

The Field Rules. Vaquillas bases its contention on the exception in

Sentence (2) of Paragraph 18, quoted above, and the Railroad Commission’s Field

Rules for the Vaquillas Ranch (Lobo Cons.) Field, Webb County, Texas (the

“Field Rules”). The Commission initially adopted Field Rules for the Lobo

Consolidated Field in 1998 (App. E, CR:183, 245). It amended those rules in

2010 (App. F, CR:181, 254). There is no dispute that these Field Rules apply to

the field that includes the Leases.

The Field Rules do not “establish” any mandatory units of acreage per well.

Neither the Commission’s adoption of Field Rules in 1998, nor its amendment of

those rules in 2010, required ConocoPhillips to make any changes to its gas wells

on the Leases.

Rule 3 in the original 1998 Field Rules is the proration rule for the field.

(App. E). Unlike other forms of proration rules, Rule 3 of these Field Rules does

not specify a maximum amount of acreage that may be allocated to a well as a

factor in the proration formula. 2 Vaquillas correctly explains proration rules as

2 There is an example in the record of another field rule that does limit the size of proration units to 160 acres. (CR:188-89). Rule 2 of the Temporary Field Rules for the Big Reef (Edwards) Field, Webb County, adopted June 2002, states: “No proration unit shall consist of more than ONE HUNDRED SIXTY (160) ACRES [plus a 10 percent tolerance].” Id.

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follows: “[a] prescribed proration unit does not address the number of acres

necessary to drill a well. It simply specifies the maximum amount of acres that an

operator may assign to a well as a proration unit for that well. * * * Prescribed

proration units are by their nature maximum-sized units, because they prescribe the

maximum acreage that an operator may assign to a well as a proration unit for

production allowable purposes.” (CR:208-09, emphasis added). ConocoPhillips’

point is that the Field Rules for this field contain no “prescribed proration units,”

and they do not specify, in any other way, a maximum amount of acres

ConocoPhillips may pool for any well.

In the trial court, Vaquillas did not base its argument on the proration rule,

Rule 3 of the Field Rules. Rather, it based its argument on Rule 2, the spacing

rule. (CR:211-13; 222 n.59).

Rule 2 provides no different spacing from the Statewide Rules applicable

before field rules were adopted for this field, i.e., the spacing in the rule requires a

minimum of 40 acres for obtaining a permit to drill a new well. (App. E). Rule 2

accomplishes that result by providing that wells may not be drilled closer than 467

feet to any lease line, or 1,200 feet from another well in the same reservoir. (App.

F). These are the same spacing distances that are found in the Statewide Spacing

Rule applicable in the absence of field rules. See 16 T.A.C. § 3.37(a)(1).

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When, as here, a field rule contains only spacing rules, a Table in the

Commission’s Statewide Rule 38(b)(2) supplies the minimum acreage necessary

for obtaining a Commission permit to drill a new well.3 For the 467 and 1,200 feet

spacing in these Field Rules, the Table specifies a minimum drilling unit of 40

acres. (Statewide Rule 38 and its Table are attached as Appendix G). The Table

shows the number of acres that are included in the “standard unit” associated with

various spacing rules, i.e., the smallest amount of acreage required for obtaining a

drilling permit for a well, irrespective whether the well is ultimately completed as

an oil or gas well. But the only prohibition established by Rule 38 is that “[n]o

well shall be drilled on substandard acreage.” 16 T.A.C. §3.38(b)(1).

“Substandard acreage” means “[l]ess acreage than the smallest amount established

for standard or optional drilling units.” Id. at §3.38(a)(4). Thus, as pertinent here,

3 The Table is as follows:

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the only prohibition regarding acreage that may be derived from these Field Rules

is that the Commission will not issue a permit for drilling a new well on less than

40 acres.

Statewide Rule 38 is titled “Well Densities,” 16 T.A.C. §3.38 (App. G), and

the 40-acre requirement for a drilling unit is a density, not a spacing, requirement.

Statewide Rule 38 defines a “drilling unit” as “the acreage assigned to a well for

drilling purposes.” 16 T.A.C. § 3.38(a)(2) (App. G, emphasis added). As

Vaquillas correctly explains: “[t]he density requirement [prescribes] the minimum

number of acres the operator must have to drill a well. * * * Such units are by the

nature minimum-sized units, because they prescribe the minimum acreage required

to obtain a Railroad Commission permit to drill a well.” (CR:208).

The Field Rules establish no density requirement, or other unit size

requirement, that extends beyond the issuance of a drilling permit.

SUMMARY OF THE ARGUMENT The Leases granted ConocoPhillips a fee simple determinable estate in the

minerals in and under 33,363 acres of Webb County land. By the time

ConocoPhillips’ continuous drilling program ended in 2012, ConocoPhillips had

drilled more than 200 gas wells on that land. Under Sentence (1) in the retained

acreage clause, ConocoPhillips was entitled to retain, under lease, 640 acres for

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each gas well. ConocoPhillips was obligated to release the remainder of the

acreage back to Vaquillas, which it did.

Contrary to Vaquillas’ argument, the exception in Sentence (2) of the

retained acreage clause does not apply. The Railroad Commission’s Field Rules,

adopted in 1998, did not provide “a spacing or proration establishing different units

of acreage per well.” The Field Rules did nothing but carry forward from the

Statewide Spacing Rule the same requirement that an operator must assemble a

minimum of 40 acres before the Commission will issue a permit to drill a new

well. The Field Rules effected no change to ConocoPhillips’ gas wells in the field.

Consequently, when ConocoPhillips’ continuous drilling program ended, no units

different from 640 acres had been “established” in the field by Field Rules.

If Vaquillas were correct in contending that Sentence (2) of the retained

acreage clause limits ConocoPhillips to retaining only the minimum acreage

required to obtain a permit to drill a new well, that minimum acreage will likely be

less than 640 acres. Accordingly, Vaquillas’ interpretation erroneously makes the

exception in Sentence (2) swallow the 640-acre general rule in Sentence (1).

In addition, Vaquillas’ proposed interpretation would render illusory the

pooling clause’s authority to pool up to 640 acres for gas wells, and render

superfluous Sentence (4)’s statement that ConocoPhillips must have at least one

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well per block of retained acreage. ConocoPhillips could not drill more than one

well on Vaquillas’ proposed retained 40-acre blocks.

Vaquillas’ interpretation would also obliterate the parties’ clear

differentiation between the acreage assigned to oil wells (40 acres) and gas wells

(640 acres) that is stated twice in the Leases. Under Vaquillas’ interpretation, both

oil and gas wells would retain only 40 acres.

But most significantly, Vaquillas’ erroneously interpretation of Sentence (2)

violates the established rule of Texas law that “we will not hold the lease’s

language to impose a special limitation on the grant unless the language is so clear,

precise, and unequivocal that we can reasonably give it no other meaning.” E.g.,

Anadarko Petroleum Corp. v. Thompson, 94 S.W. 3d 550, 554 (Tex. 2002). This

rule applies when interpreting retained acreage clauses. E.g., Chesapeake

Exploration, L.L.C. v. Energen Resources Corp., 445 S.W.3d 878, 883 (Tex.

App.—El Paso 2014, no pet.).

Specifically, Vaquillas claims Sentence (2) results in more than 15,000

additional acres “reverting” to Vaquillas under the retained acreage clause. But

Sentence (2) does not mandate that result “so clearly, precisely, and

unequivocally” so that the Court could “reasonably give it no other meaning.”

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ARGUMENT Standard of Review. This Court reviews the trial court’s summary

judgment ruling de novo. E.g., Springer Ranch, Ltd. v. Jones, 421 S.W.3d 273,

279 (Tex. App.—San Antonio 2013, no pet.). When, as here, both parties moved

for summary judgment and the trial court granted one motion and denied the other,

this Court considers the summary judgment evidence presented by both sides,

determines all questions presented, and if the Court determines the trial court erred,

renders the judgment the trial court should have rendered. Id. See TEX. R. APP. P.

43.2(c).

1. The Field Rules did not “establish” different units of acreage per well.

A. The parties’ competing interpretations In Sentence (1) of the retained acreage clause, the parties agreed that

ConocoPhillips was entitled to retain 640 acres “for each producing or shut-in gas

well” when its continuous drilling program ended. Consequently, when

ConocoPhillips filed its Partial Releases of the Leases, it correctly retained 640

acres per gas well as agreed in Sentence (1).

Vaquillas, on the other hand, contends the exception in Sentence (2)

controls. Vaquillas claims that under the exception, the Field Rules “provide for a

spacing or proration establishing different units of acreage per well,” and thus,

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“such established different units shall be held” in lieu of the 640-acre units

specified in Sentence (1).

In the trial court Vaquillas offered no substantial analysis of the Field Rules,

except to say those rules identify one kind of unit—a minimum 40-acre drilling unit

to obtain a Commission permit to drill a new well. (CR:215). From that

observation, Vaquillas leapt, erroneously, to the conclusion that the minimum 40-

acre requirement for a drilling permit in those rules triggered the exception in

Sentence (2). Vaquillas moved for (and was granted) partial summary judgment

that ConocoPhillips “retains only 40 acres for each producing and shut-in-gas well

drilled by [ConocoPhillips] on the oil and gas leases that are the subject of this

lawsuit.” (CR:202).

Consequently, the lease interpretation question for this Court is whether

ConocoPhillips correctly retained 640 acres per well under Sentence (1) of the

retained acreage clause, or whether (as Vaquillas contends) the Field Rules

triggered the exception in Sentence (2) of that clause? As will be discussed in

greater detail below, Vaquillas maintains that Sentence (2) operates as a limitation

on the grant ConocoPhillips received by virtue of the Leases. Consequently,

Vaquillas argues that all acreage granted by the Leases to ConocoPhillips

“reverted” to Vaquillas at the end of the continuous drilling program, except for 40

acres around each existing well. Vaquillas’ Petition expressly states: “At the

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Release Date, the Reverted Minerals automatically reverted to Vaquillas.”

(CR:195, see also CR:196).

B. Analysis of the retained acreage clause in light of the Field Rules The general rules for construing oil and gas leases are well known. The

Court examines the entire lease “and consider[s] each part with every other part so

that the effect and meaning of one part on any other part may be determined.”

Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996);

Birnbaum v. SWEPI LP, 48 S.W.3d 254, 257 (Tex. App.—San Antonio 2001, pet.

denied). The Court gives terms in the lease “their plain, ordinary, and generally

accepted meaning unless the instrument shows that the parties used them in a

technical or different sense.” Heritage, 939 S.W.2d at 121; Birnbaum, 48 S.W.3d

at 257. When construing oil and gas leases, the Court should “avoid when possible

a construction which is unreasonable, inequitable, and oppressive. Springer

Ranch, 421 S.W.3d at 287.

Neither party contends the retained acreage clause is ambiguous, so the

Court may interpret the clause as a matter of law. E.g, Springer Ranch, 421

S.W.3d at 279. Furthermore, the Court may interpret the Commission’s Field

Rules as a matter of law. See, e.g., State v. Bilbo, 392 S.W.2d 121, 122 (Tex.

1965) (interpretation of certificate issued by the Commission presents a question of

law).

17

“Establishing” and “established” different units. The contested language

in the retained acreage clause is Sentence (2)’s statement that “in case any rule

adopted by the [Commission] . . . provides for a spacing or proration establishing

different units of acreage per well, then such established different units shall be

held under this lease by such production, in lieu of the . . . 640-acre units above

mentioned.”

In that language, the parties twice used forms of the word, “establish.” The

first time “establish” is used, the form is “establishing,” which modifies the phrase

“rule adopted by the Commission [that] provides for a spacing or proration.” That

usage suggests the “establishing” of different units of acreage per well occurs

when the Commission adopts a field rule.

The second time the parties used a version of “establish,” they employed the

past tense, i.e., they referred to “established different units,” suggesting that

different units had already been “established” in the past. In the context of the

entire phrase, the meaning is that different units were “established” when the Field

Rules were adopted, as a result of the Field Rules.

The ordinary meaning of “establish” is “to settle, make, or fix firmly.”

BLACK’S LEGAL DICTIONARY at 626 (9th ed. 2009). Similarly, an old Texas case

says “established” means “[m]ake steadfast, firm, or stable, to settle on a firm or

permanent basis.” Rowley v. Braley, 286 S.W. 241, 245 (Tex. Civ. App—Amarillo

18

1926, writ dism’d). WEBSTER’S THIRD NEW INTERNATIONAL UNABRIDGED

DICTIONARY (1993) says “establish” means either “to make firm or stable,” or to

“settle or fix after consideration by enactment or agreement.” Id. at 778.4

These Field Rules did not “establish” different units. Using those

common definitions of “establish,” it is incorrect to argue that the Field Rules

“made firm or stable,” “settled on a permanent basis,” or “settled or fixed after

consideration by enactment or agreement” a requirement that units for gas wells

must be different from the 640 acres granted by the pooling authority of the Leases

and specified for retention under Sentence (1) of the retained acreage clause. Upon

the Commission’s adopting of the Field Rules, those rules neither required nor

made any change to ConocoPhillips’ gas wells in the field, i.e., the Field Rules

imposed no requirement that different units be “established” for wells in

production or shut-in awaiting production.

The Field Rules contain only one requirement that pertains to quantity of

acreage. They do that by means of the spacing rules—at least 467 feet from lease

4 The Supreme Court’s opinion in Jones v. Killingsworth, 403 S.W.2d 325 (Tex. 1965), illustrates the importance of focusing on the specific words parties employ in oil and gas leases. In Jones, the Court held that the word “prescribed” did not mean “permitted.” Consequently, before Sentence (2) comes into play, the Commission must “establish” units of a different size than 640 acres. The parties did not say the exception in Sentence (2) comes into play if the Commission adopts a Field Rule that merely permits drilling on units of fewer than 640 acres, and that is all the Field Rules do. They permit operators to drill on a minimum of 40 acres, but they do not “establish” 40-acre units.

19

lines and 1,200 feet from other wells—found in Rule 2. By applying those

minimum spacing rules to the Table in Statewide Rule 38, 16 T.A.C. § 3.38(b)(2)

(App. G, fn. 3, infra), one sees that the minimum density, or drilling unit size, is 40

acres. As Vaquillas correctly explains: “[t]he density requirement [prescribes] the

minimum number of acres the operator must have to drill a well.” (CR:208).

Thus, the sole acreage requirement imposed by the Field Rules is a minimum

acreage requirement for the obtaining of a permit to drill a new well. The Field

Rules do not say there is anything wrong with a 640-acre unit for any producing or

shut-in gas well. Simply put, nothing in the Field Rules “established” different

units from the 640-acre retained acreage units to which the parties agreed in

Sentence (1) of the retained acreage clause.

Two additional rules of oil and gas lease construction. There are two

additional reasons why Vaquillas’ proposed interpretation of the retained acreage

clause is wrong:

First, under Vaquillas’ interpretation that minimum drilling units

control, the exception in Sentence (2) would swallow the general rule in Sentence

(1). Whether a particular field is governed by a special field rule or by Statewide

Rules 37 and 38, the Commission requires an operator to assemble a minimum

number of acres before the Commission will issue a drilling permit for a new well.

And it is unlikely that the minimum number of acres the Commission would

20

require for a drilling permit would be more than 640. One may see that by

reviewing the Table in Statewide Rule 38 on which Vaquillas relies, reproduced at

fn. 3, infra. The largest “standard drilling unit” in the entire Table is 40 acres. See

16 T.A.C. § 3.38(b)(2)(A) (App. G). All other drilling units listed in the Table are

smaller, ranging from 2 to 20 acres. Id.

Consequently, if what Vaquillas claims were correct—i.e., that one would

look to the minimum acreage required for a drilling unit by a Field Rule—then the

general rule of 640-acres in Sentence (1) likely would never apply. Under

Vaquillas’ argument, if a field rule exists, one first would look to see what

minimum drilling units were triggered by the spacing rules in that rule, by

consulting either the rule itself or Statewide Rule 38’s Table. Then as Vaquillas

wants this Court to interpret the retained acreage clause, that minimum drilling

unit—usually 40 acres, likely never more than 640 acres—will always prevail.

Sentence (1)—the 640-acre general rule—would become meaningless. The

exception will have swallowed the rule.

It would have been simple for the parties to write the interpretation for

which Vaquillas contends into the retained acreage clause. To capture Vaquillas’

proposed interpretation, the parties needed to write only that when the retained

acreage clause operates, the lessee may retain around each well only the minimum

amount of acreage required by the Commission to obtain a drilling permit. That is

21

the construction for which Vaquillas contends and the construction the trial court

adopted. But as this Court has said, courts may not rewrite leases in the guise of

interpreting them. E.g., EOG Resources, Inc. v. Killam Oil Co., Ltd., 239 S.W.3d

293, 300 (Tex. App.—San Antonio 2007, pet. denied). Yet that is what Vaquillas

wants this Court to do.

This Court considered a retained acreage clause very similar to the one in

these Leases in ConocoPhillips Co. v. Ramirez, No. 04-05-00488-CV, 2006 WL

1748584 (Tex. App.—San Antonio, 2006) (not designated for publication). For

one of the wells at issue in Ramirez, the Serafin No. 1, there were no applicable

field rules. Instead, the Commission’s Statewide Rules applied. Ramirez sought to

limit ConocoPhillips’ retained acreage for the Serafin No. 1 to 40 acres by relying

on the minimum 40-acre drilling units resulting from application of Statewide Rule

37’s spacing requirements to the Table in then-existing Statewide Rule 38. See

2006 WL 1748584 at *1. The spacing required by Statewide Rule 37 was 467 and

1,200 feet, the same spacing carried into the Field Rules at issue in this appeal. See

16 T.A.C. §3.37(a)(1). The Table in Statewide Rule 38 expressly applies both to

Statewide Rules and field rules, so Statewide Rule 37’s spacing triggered 40-acre

drilling units, just like the Field Rules at issue here. See Ramirez, 2006 WL

1748584 at *3.

22

Although the trial court ruled for Ramirez, this Court reversed, rejecting

Ramirez’s attempt to limit ConocoPhillips to 40 acres of retained acreage around

the Serafin No. 1 well by application of Statewide Rule 38 through the spacing

requirements stated in Statewide Rule 37. The exception in the retained acreage

clause in Ramirez required, as does the retained acreage clause here, for the

Commission to adopt a rule “for a field.” In Ramirez, this Court gave meaning to

the phrase, “for a field,” and held the Commission’s Statewide Rules were not

adopted “for a field.” Consequently, Ramirez’s attempt to apply the exception in

that retained acreage clause failed at the threshold. 2006 WL 1748584 at *2.

But one of the reasons this Court gave for its holding in Ramirez is

applicable here. This Court observed that if Ramirez’s arguments had been

correct, “the structure of [the retained acreage clause] is turned on its head: the

first clause [here Sentence (1)] would never apply, while the ‘except’ clause [here

Sentence (2)] would state both the general rule . . . and the exception.” If

Vaquillas were correct, the exact same would be true in this appeal. The general

rule in Sentence (1) would never apply. The exception in Sentence (2) always will.

As this Court wrote in Ramirez, that construction “would be not only nonsensical

but contrary to general rules of construction.” Ramirez, 2006 WL 1748584 at *3.

This certainly does not mean, as Vaquillas argued below, that the word

“spacing” in Sentence (2), where that sentence refers to “spacing or proration,” has

23

no meaning. Over the years, the Commission has adopted field rules that establish

maximum densities for wells in specific fields. There are mentions of such field

rules in decided cases. See, e.g., Railroad Commission v. Woods Exploration and

Producing Co., 405 S.W.2d 313, 326 (Tex. 1966) (Smith, J., dissenting) (stating

that field rules at issue “established a 320-acre spacing unit rule.”); Halbouty v.

Railroad Commission, 357 S.W.2d 364, 368 (Tex. 1962) (quoting field rule

stating: “the above spacing rule and the other rules to follow are for the purpose of

permitting only one well to each one hundred and sixty (160) acre proration unit”);

Clifton v. Koontz, 325 S.W.2d 684, 695 (Tex. 1959) (stating that field rules at issue

“provide for 320-acre units with 10 percent tolerance so that a maximum of 352

acres may be assigned.”). 5 But the Commission did not include such a provision in

the Field Rules at issue in this appeal.

If the Field Rules for the Lobo Consolidated Field had established a

maximum unit size for gas wells different from 640 acres (which they did not),

ConocoPhillips would have been required to conform to the rules as soon as they

became effective. Different units would have been “established,” and Sentence (2)

would then apply when the continuous drilling program ended. In other words, if

5 “Rule 38 establishes the minimum number of acres that must be assigned to each well in order to obtain a drilling permit. In the absence of special field rules, the minimum requirement is 40 acres per well.” J. Hayes, Texas Railroad Commission: Some Basics Every Practitioner Should Know, 28 State Bar of Texas, Oil, Gas and Mineral Law Section Report 3, 20 (June 2004) (emphasis added).

24

the Field Rules had “established” different units, those different units would have

taken effect when the Field Rules were adopted. But the Field Rules effected no

changes to acreages for producing wells.

Second, under Vaquillas’ interpretation, the power granted in

Paragraph 4 of the Leases to pool up to 640 acres for gas wells would be

destroyed. As explained above, Paragraph 4 of both Leases granted

ConocoPhillips the power to pool for gas wells up to 640 acres. Paragraph 4 also

provides that if the Commission “prescribes or permits” the creation of larger units,

ConocoPhillips’ power to pool would include those larger units. (App. C & D).

Also as explained above, the general rule in Sentence (1) of the retained acreage

clause allows ConocoPhillips to retain 640 acres for each gas well.

That both Paragraphs associate gas wells with 640-acre blocks of acreage is

not coincidence. Vaquillas’ proposed interpretation of Sentence (2) would create

three surprisingly negative results for the lessee.

(A) Even though the Lessor granted the right to pool up to 640 acres for

gas wells, each 640-acre unit, although properly pooled and operated in good faith,

would abruptly shrink to 40 acres when the retained acreage clause operates. 6 This

6 Vaquillas argued in the trial court that ConocoPhillips would had to drill 16 gas wells per 640-acres in order to “fully develop the acreage” and thereby earn the right to retain that 640 acres under the retained acreage clause. (CR:379). That argument conflicts with the authority Vaquillas granted ConocoPhillips in Paragraph 4 to pool 640 acres for gas wells, and it also directly conflicts with

25

would be true—and oddly so—even though Rule 2 of the Field Rules, on which

Vaquillas relies, has been in effect since February 24, 1998, yet this “shrinking”

did not occur when (or since) those Field Rules were adopted.

(B) The retained acreage clause does not operate to terminate the Leases;

it requires only a release of certain acreage from the Leases. Consequently, after

the retained acreage clause operates, the pooling clause in Paragraph 4 should

remain in full force in effect.

But, under Vaquillas’ erroneous interpretation, the pooling clause becomes a

dead letter. Under Vaquillas’ interpretation, ConocoPhillips would retain under

lease only 40 acre blocks around individual wells. It will be impossible for

ConocoPhillips to exercise the power granted in Paragraph 4 to pool up to 640

acres, or even to drill a new gas well on an existing 640 acre unit. Consequently,

Vaquillas’ proposed interpretation of Paragraph 18, the retained acreage clause,

cannot be harmonized with Paragraph 4 of the same Leases.

Furthermore, under Vaquillas’ erroneous interpretation of Sentence (2), two

words in Sentence (4) of the retained acreage clause are rendered superfluous.

the general rule in Sentence (1) of the retained acreage clause. Under Vaquillas’ contentions, the pooling authority for gas wells under Paragraph 4 and Sentence (1) of the retained acreage clause would become illusory.

The Leases do not state, as Vaquillas erroneously claims, that ConocoPhillips was obligated to “drill . . . additional wells to develop the leasehold acreage to the density provided by Railroad Commission rules.” (CR:203).

26

Sentence (4) states there must be “at least” one well per block of retained acreage.

If Vaquillas’ 40-acre argument were correct, there could never be more than one

well per 40-acre block of retained acreage because the Commission would not

issue a permit for a second well, either for oil or gas.

On the other hand, all paragraphs of the Leases harmonize under

ConocoPhillips’ interpretation of the retained acreage clause. ConocoPhillips

retains 640-acre blocks of acreage around wells, the same as Paragraph 4, the

pooling authority, allows it to do. Consequently, ConocoPhillips may continue to

pool and maintain 640-acre gas units. Furthermore, ConocoPhillips may obtain

permits to drill new wells on those 640-acre blocks, so as long as the Field Rule’s

from-lease-line and between-well spacing requirements are met.

(C) The Leases plainly contemplate that the operator will assign different

acreages to oil and gas wells. Paragraph 4 restricts pooling for oil wells to 40

acres, but allows pooling for gas wells up to 640 acres. Sentence (1) of the

retained acreage clause allows ConocoPhillips to retain only 40 acres around

producing oil wells, but 640 acres around gas wells. Vaquillas’ proposed

interpretation of Sentence (2) would completely destroy the differentiation the

parties clearly intended between acreages assigned to producing oil and gas wells.

Vaquillas’ argument causes that result by relying, at bottom, on Statewide Rule 38,

which does not distinguish, for drilling permit purposes, between oil and gas wells.

27

As this Court frequently has observed, courts should strive to harmonize and

give effect to all provisions of the Leases “so that none will be rendered

meaningless.” E.g., Springer Ranch, 421 S.W.3d at 279; EOG Resources, 239

S.W.3d at 300. ConocoPhillips’ is the only interpretation that gives meaning to all

provisions of the Leases. Vaquillas’ incorrect interpretation does not. Indeed, it is

simply impossible to find within Sentence (2) the wholesale revisions to the Leases

Vaquillas’ erroneous interpretation would make.

2. If there were any doubt about the proper interpretation of Sentence (2), the Court should apply the strong presumption in Texas law against making that sentence a “limitation on the grant.” For the reasons above, the Commission’s Field Rules covering these Leases

do not trigger the exception in Sentence (2) of the retained acreage clause in the

Leases. But even if there were any doubt, this Court should apply the strong Texas

law presumption against construing a lease provision to effect a limitation on the

grant. Under that presumption, the Court should not interpret Sentence (2) to work

the forfeiture for which Vaquillas contends.

By way of background, these Texas oil and gas leases were conveyances by

which Vaquillas and its predecessors granted to ConocoPhillips’ predecessor the

fee simple determinable in the mineral estate under the land described in the

Leases. Natural Gas Pipeline Co. v. Pool, 124 S.W.3d 188, 192 (Tex. 2003);

accord Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002);

28

Prize Energy Resources, L.P. v. Cliff Hoskins, Inc., 345 S.W.3d 537, 551-52 (Tex.

App.—San Antonio 2011, no pet.). As described above, the Leases at issue

conveyed mineral estates to ConocoPhillips for five and three year primary terms

and “as long thereafter as oil, gas, or other mineral is produced from said land or

land with which said land is pooled hereunder.” 7

Furthermore, “an oil, gas and mineral lease is indivisible by its nature.

Production from any part of the lease keeps the lease in effect during the primary

term as for so long as oil, gas and other minerals are being produced as to all lands

described in the instrument.” Shown v. Getty Oil Co., 645 S.W.2d 555, 560 (Tex.

App.—San Antonio 1982, writ ref’d.); accord, Matthews v. Sun Oil Co., 425

S.W.2d 330, 333 (Tex. 1968); Humphrey v. Seale, 716 S.W.2d 620, 622 (Tex.

App.—Corpus Christi 1986, no writ). ConocoPhillips had completed more than

two hundred gas wells on the Leases by the time its continuous drilling program

ended. (CR:203).

Accordingly, ConocoPhillips’ production from the two Leases entitles

ConocoPhillips to maintain the Leases in full force and effect until an event of

7 Vaquillas attempted to minimize the legal effect of the Leases in the trial court, suggesting the Leases merely “transferred the rights to explore, drill, produce, and market the minerals to an oil and gas company with the skill and financial ability to do so.” (CR:206). No doubt the Leases did that, but as discussed above, they did more. They conveyed the mineral estate in fee simple determinable to ConocoPhillips. The significance is that, as discussed in this section of this Brief, the presumption against construing lease clauses to effect limitations on the grant is fully applicable to the retained acreage clause.

29

defeasance, or limitation on the grant, occurs. The first limitation on the grant,

found in the habendum clause in Paragraph 2 of the Leases, is cessation of

production in paying quantities, which has not occurred. The second limitation on

the grant is in Sentence (1) of the retained acreage clause, which obligates

ConocoPhillips to release all but 640 acres around producing or shut-in gas wells.

ConocoPhillips has complied. Under Vaquillas’ erroneous argument, Sentence (2)

of the retained acreage clause would operate as a third, very substantial “limitation

on the grant.” Consequently, in “limitation-on-the-grant” terminology, the

question posed by this appeal is whether because of Sentence (2), ConocoPhillips

forfeited and must now release over 15,000 additional acres because that

additional, alleged limitation on the grant caused ConocoPhillips to forfeit all but

40 acres around producing and shut-in gas wells?

Texas law creates a strong presumption against giving Sentence (2) the

limitation-on-the-grant effect for which Vaquillas contends. As the Supreme Court

has held time and again, “we will not hold the lease’s language to impose a special

limitation on the grant unless the language is so clear, precise, and unequivocal that

we can reasonably give it no other meaning.” Anadarko Petroleum Corp., 94 S.W.

3d at 554; accord, Rogers v. Ricane Enterprises, Inc., 773 S.W.2d 76, 79 (Tex.

1989); Fox v. Thoreson, 398 S.W.2d 88, 92 (Tex. 1966); Knight v. Chicago

Corp., 188 S.W.2d 564, 566 (Tex. 1945).

30

When the Knight case was before this Court, Justice Norvell, then a member

of this Court, held that even if there are two reasonable constructions of a lease, the

Court will choose the one that does not result in “a forfeiture (or termination of the

estate upon limitation).” Knight v. Chicago Corp., 183 S.W.2d 666, 671 (Tex. Civ.

App.—San Antonio 1944), aff’d, 188 S.W.2d 564 (Tex. 1945).

Texas courts apply the presumption against a limitation on the grant when

interpreting retained acreage clauses. See Chesapeake Exploration, L.L.C. v.

Energen Resources Corp., 445 S.W.3d 878, 883 (Tex. App.—El Paso 2014, no

pet.) (citing Anadarko Petroleum Corp., 94 S.W.3d at 554, and stating “adopting

the construction [of a retained acreage clause] urged by Chesapeake imposes an

unnecessary limitation on the kind and character of the estate the parties chose to

convey, i.e., an expansive one maintained by production from any part of pooled

lands unless limited by language so clear, precise, and un-equivocal that no other

conclusion could be reached.”); Tomlin v. Petroleum Corp. of Texas, 694 S.W.2d

441, 442 (Tex. App.—Eastland 1985, no writ) (citing Fox, 398 S.W.2d at 92, and

applying the presumption against a limitation on the grant to hold that retained

acreage clause expressly referring only to oil wells did not mandate release of

acreage around gas wells).

ConocoPhillips requests the Court to apply the presumption in this appeal.

ConocoPhillips does not agree that Vaquillas’ construction of Sentence (2) is

31

reasonable, equitable or unoppressive. Indeed, as described above in this Brief,

when one gives the words “establishing” and “established” their plain and ordinary

meaning, the exception in Sentence (2) is not triggered, and the general rule of

Sentence (1) prevails. But whatever else one may say about Vaquillas’

interpretation of Sentence (2), one certainly cannot say that sentence, when viewed

in light of the Field Rules, is so clear and precise that no conclusion other than

Vaquillas’ proposed reading can be reached. Consequently, Vaquillas’

interpretation of Sentence (2)—which would create a very significant additional

limitation on ConocoPhillips’ grant—should be rejected.

PRAYER FOR RELIEF ConocoPhillips prays this Court will reverse the trial court’s Amended order

on Cross-Motions for Summary Judgment (CR:433, App. B), grant

ConocoPhillips’ Motion for Summary Judgment, and deny Vaquillas’ Cross-

Motion for Partial Summary Judgment. The Court should reverse the declaration

on page 1 of the trial court’s Order and declare that ConocoPhillips did not breach

the Leases by retaining 640 acres per producing and shut-in gas wells when

ConocoPhillips’ continuous drilling program ended, and is not required to release

additional acreage, as Vaquillas contends.

ConocoPhillips also prays for recovery of its costs on appeal, remand to the

trial court for determination whether ConocoPhillips is entitled to costs, including

32

reasonable attorneys’ fees, under Texas Civil Practice & Remedies Code § 37.009,

and for all other relief to which it is entitled.

Respectfully submitted,

/s/ Michael V. Powell Michael V. Powell State Bar No. 16204400 Email: mpowell@lockelord.com Cynthia K. Timms State Bar No. 11161450 Email: ctimms@lockelord.com Elizabeth L. Tiblets State Bar No. 24066194 Email: etiblets@lockelord.com Locke Lord LLP 2200 Ross Avenue, Suite 2200 Dallas, Texas 75201-6776 Tel: 214-740-8520 Fax: 214-740-8800

Adolfo Campero State Bar No. 00793454 Email: acampero@camperolaw.com Campero & Associates, P.C. 315 Calle Del Norte, Suite 207 Laredo, Texas 78041 Tel: 956-796-0330 Fax: 956-796-0399

ATTORNEYS FOR APPELLANT CONOCOPHILLIPS COMPANY

33

CERTIFICATE OF COMPLIANCE Pursuant to Texas Rule of Appellate Procedure 9.4(i)(3), as amended effective December 1, 2012, the undersigned certifies that this Petition complies with the length limitations of Rule 28.3(g) (which the undersigned understands now to be stated in Rule 9.4(i)) and the typeface requirements of Rule 9.4(e).

1. Exclusive of the contents excluded by Rule 9.4(i)(1), this Brief contains 7,189 words as counted by the Word Count function (including textboxes, footnotes, and endnotes) of Microsoft Office Word 2010.

2. This Brief has been prepared in proportionally spaced typeface using:

Software Name and Version: Microsoft Office Word 2010 Typeface Name: Times New Roman Font Size: 14 point

/s/ Michael V. Powell Michael V. Powell

34

CERTIFICATE OF SERVICE I hereby certify that on the 9th day of April 2015, a true and correct copy of Brief of Appellant, ConocoPhillips Company, was served by eFile Texas and/or pdf on Appellees through its counsel of record listed below:

Gregg Owens Raul Leal Email: gregg.owens@haysowens.com Email: rleal@rl-lawfirm.com Robert G. Hargrove Raul Leal Incorporated Email: rob.hargrove@haysowens.com 5810 San Bernardo, Suite 390 Hays & Owens L.L.P. Laredo, Texas 78041 807 Brazos Street, Suite 500 Tel: 956-727-0039 Austin, Texas 78701 Fax: 956-727-0369 Tel: 512.472.3993 Fax: 512.472.3883

A. Michael Jung Armando X. Lopez Email: michael.jung@strasburger.com Email: mandox@rio.bravo.net Strasburger & Price, LLP Law Offices of Armando X. Lopez 901 Main Street, Suite 4400 1510 Calle Del Norte, Suite 16 Dallas, Texas 75202-3794 Laredo, Texas 78041 Tel: 214-651-4724 Tel: 956-726-0722 Fax: 214-651-4330 (main) Fax: 956-726-6049 Fax: 214-659-4022 (direct)

Counsel for Vaquillas Unproven Minerals, Ltd.

/s/ Michael V. Powell Michael V. Powell

35

No. 04-15-00066-CV

In the Court of Appeals for the Fourth District of Texas San Antonio, Texas CONOCOPHILLIPS COMPANY, Appellant, V.

VAQUILLAS UNPROVEN MINERALS, LTD., Appellee.

From Cause No. 2014 CVQ000 438 D4 406th Judicial District Court, Webb County, Texas Honorable Oscar J. Hale, Jr., Presiding Judge

APPENDIX TO APPELLANT’S BRIEF

Tab Court of Appeals Order Granting Petition for Permission to Appeal.......................................................................................................... A Trial Court Amended Order on Cross-Motions for Summary Judgment........ B Oil, Gas and Mineral Lease (26,622.79 acres)......................................... C Oil, Gas and Mineral Lease (6,740 acres)....................................................... D Railroad Commission Order Adopting Field Rules for the Vaquillas Ranch (Lobo Cons.) Field Dated February 24, 1998 .................. E Railroad Commission Final Order Amending Field Rules for the Vaquillas Ranch (Lobo Cons.) Field Dated November 2, 2010 .................... F Railroad Commission Statewide Rule 38......................................................... G

FILE COPY

ConocoPhillips CompanyAppellant/s

Fourth Court of Appeals San Antonio, Texas February 13, 2015

No. 04-15-00066-CV

CONOCOPHILLIPS COMPANY, Appellant

v.

VAQUILLAS UNPROVEN MINERALS, LTD., Appellee

From the 406th Judicial District Court, Webb County, Texas Trial Court No. 2014CVQ000438-D4 Honorable Oscar J Hale, Jr., Judge Presiding

ORDER Sitting: Sandee Bryan Marion, Chief Justice Karen Angelini, Justice Marialyn Barnard, Justice

The appellant’s unopposed petition for permission to appeal from an interlocutory order is GRANTED. TEX. R. APP. P. 28.3. “A separate notice of appeal need not be filed” as “a notice of appeal is deemed to have been filed on [the date of this order].” Id. at 28.3(k). This appeal is governed by the rules for accelerated appeals. Id.

The clerk’s record is due no later than February 23, 2015. Id. at 35.1(b). The clerk of this court is directed to file a copy of this order with the trial court clerk. Id. at 28.3(k).

_________________________________

Sandee Bryan Marion, Chief Justice

IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the said court on this 13th day of February, 2015.

___________________________________

Keith E. Hottle Clerk of Court

433

:;

CAUSE NO. 2014CVQ000438 D4

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AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JU ..

~

On October 30,2014, Defendant's Motion for Summary Judgment and lai tiffs Cross-

Motion for Partial Summary Judgment were heard. The Court, having reviewed the motion,

briefs, responses, competent summary judgment evidence, and argument of counsel, rules on "

these motions as follows.

IT IS ORDERED, ADJUDGED, AND DECREED that Defendant's Motion for

Summary Judgment is DENIED.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Plaintiffs Cross-

Motion for Partial Summary Judgment is GRANTED. The Court DECLARES that Defendant

has breached the 26,622.79-acre Lease and the 6,740-acre Lease by failing to release all acreage

in excess of 40 acres for each producing and shut-in natural gas well capable of producing in

paying quantities.

This Order of the Court decides the central question in this case, which is the number of

acres under two oil and gas leases that Defendant ConocoPhillips Company retains under the

"retained acreage" clauses of the leases at the conclusion of ConocoPhillips' continuous drilling

operations. The Court finds that the question decided by this order is a controlling question of

AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGEl

434

law as to which there is a substantial ground for difference of opinion. The Court also fmds that

I .,'.'1 immediate appeal of the order will materially advance the ultimate termination of this litigation.

This Court's Order, and the underlying controlling question of law, involve the parties'

competing legal interpretations of the language of the "retained acreage" clauses and certain

Field Rules adopted by the Railroad Commission of Texas. Although the Court has ruled in

favor of the Plaintiff lessor, Vaquillas Unproven Minerals, Ltd., the Court concludes there are

substantial grounds for difference of opinion regarding whether the leases allow ConocoPhillips

to retain 40 acres per well, as Plaintiff contends, or 640 acres, as ConocoPhillips contends.

An immediate appeal from this Court's Order will materially advance the final

conclusion of litigation. Plaintiff seeks judgment ordering ConocoPhillips to execute releases of

over 15,000 acres described in the leases, as well as possible direct and consequential damages

flowing from ConocoPhillips' alleged breach of the "retained acreage" clauses of the leases. If

ConocoPhillips is forced to release the acreage but later wins an appeal determining that

ConocoPhillips' original interpretation is correct, significant problems could develop. On the

.; other hand, the lessor, Vaquillas Unproven Minerals, Ltd. is interested in having the release of .,:]

acreage as soon as possible. Furthermore, the Court and the parties anticipate that a

determination of Plaintiffs damages, if any, will be costly and time-consuming.

ConocoPhillips desires to take an interlocutory appeal. The Court rules that such appeal

shall be defined by the lease interpretation question addressed in the parties' cross-motions for

summary judgment. More specifically, the question is whether the leases' retained acreage

clause allows ConocoPhillips Company to retain only 40 acres per each producing or shut-in gas

well it has drilled on the two leases, or whether ConocoPhillips is allowed to retain 640 acres

(Plus I 0% tolerance) for each wells.

AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGE 2

435

IT IS HEREBY ORDERED that, pursuant to Texas Civil Practice & Remedies Code §

51.014(d) (West. Supp. 2014) an interlocutory appeal is ALLOWED from this Order.

IT IS FURTHER ORDERED that trial of this action is stayed pending the interlocutory

,j appeal. The Court's Pre-Trial Guideline Order and Scheduling Order are hereby VACATED. -:1

The parties may proceed with discovery and pretrial proceedings by agreement or with leave of

Court.

SIGNED this 4- day Of9"'=".jI.tAA-..,=="T\------' 2015.

( )~,,~ Ho1:"Oscar 1. Hale, Jr. Judge Presiding

AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGE 3

436

·,., 'l APPROVED AS TO FORM:

'

."! .;

I ~ ~~p'<..q Michael V Powell State Bar No. 16204400 Email: mpowell@lockelord.com -I Elizabeth L. Tiblets .,, State Bar No. 24066194 Email: etiblets@lockelord.com .~ LOCKE LORD LLP 2200 Ross Avenue, Suite 2200 Dallas, Texas 75201-6776 Tel: 214-740-8520 Fax: 214-740-8800

Adolfo Campero State Bar No. 00793454 Email: acampero@camperolaw.com CAMPERO & ASSOCIATES, P.c.

'I 315 Calle Del Norte, Suite 207 I Laredo, Texas 78041 j ] Tel: 956-796-0330 Fax: 956-796-0399

ATTORNEYS FOR DEFENDANT CONOCOPHILLIPS COMPANY

) •

AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGE 4

437

- ---- - - - - - - -- -- ---

APPROVED AS TO FORM:

I -, /s/ P. Michael lung P. Michael lung State Bar No. 11054600 Email: michael.jung@strasburger.com STRASBURGER & PRICE, LLP 901 Main Street, Suite 4400 Dallas, Texas 75202-3794 Tel: 214-651-4724 Fax: 214-651-4330 (main) Fax: 214-659-4022 (direct)

Gregg Owens State Bar No. 15383500 Email: gregg.owens@haysowens.com Robert G. Hargrove - State Bar No. 09303300 Email: rob.hargrove@haysowens.com i -I HAYS & OWENS L.L.P. 807 Brazos Street, Suite 500 I Austin, Texas 78701 -j Tel: 512-472-3993 .1 Fax: 512-472-3883

Annando X. Lopez State Bar No. 12562400 Email: mandox@rio.bravo.net LA W OFFICES OF ARMANDO X. LOPEZ 1510 Calle Del Norte, Suite 16 Laredo, Texas 78041 Tel: 956-726-0722 Fax: 956-726-6049

Raul Leal State Bar No. 24032657 Email: rleal@rl-lawfirm.com RAUL LEAL INCORPORATED 5810 San Bernardo, Suite 390 Laredo, Texas 78041 Tel: 956-727-0039 Fax: 956-727-0369

ATTORNEYS FOR V AQUILLAS UNPROVEN MINERALS, LTD.

AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT PAGES

47

.'\" ~-'. '~wWi P'i>du~tn U {'"'' ?O,~lnllnll ~ SI'lionlr, Co •• 1l0UI\0~. T'~II uo ACAI PoOUnr- Pr:ovilion _, I ~!, " OIL, GAS AND Mliu(RAL LEASE AMENDING OIL', GAS AND''ntNERAL.

LEASE DATED JUNE 15, 1974 (AS AMENDED) BETWEEN LESSOR-AND LESSEE HEREIN

26,622.79-acres of land, more or less, situated'in Webb County. Texas more fully described in Exhibit "A" attacli"ed"'he'reto and made a part of this Lease for all relevant purposes. including limitations upon warranty as specifically set out therei~.

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".

ADDENDUM TO AMENDED OIL AND GAS LEASE From Vagui11as Ranch Co., Ltd. et a1 To Conoco Inc., Oated November 1, 1987

12. Should Lessee be prevented from complying with covenants of this lease by reason of conditions or acts set forth in Paragraph '11' hereof, then Lessee agrees annually to pay to Lessor an amount equal to the delay rentals herein provided for during such period of prevention, whether same be during or subsequent to the primary term, and such payment shall be made at the end of each year of prevention either to Lessor or to the depository above named for credit to the account of Lessor.

13. This lease does not cover or include any right or privilege of hunting or fishing on any part of the above described land, cwd Lessee agrees with lessor that neither he nor his assigns or agents or employees of his aSSigns, will bring firearms or dogs upon the leased premises, and should this provision against hunting and fishing be violated by any agents I servants, employees or contractors of Lessee's assigns, any such person so Violating same shall have no further right to enter upon the leased premises, and such person shall be regarded as and shall be a trespasser on the premises of Lessor and be subject to the penalties imposed upon trespassers under the laws of the State of Texas.

14. It Is expressly agreed and understood that after production of

oil and gas in commercial quantities is obtained from the leased premises, the mi nimum annua 1 income to Lessor from payment of renta 1s , shut- i n royalty and royalty on production shall be sum of not less than Two ($2.00) Dollars per acre on the total acreage retained and then covered by this lease, but this provision shall not impair the right and privilege of Lessee, his successors and aSSigns, to release and surrender any part of the above described leased premises as herein provided. Lessee, his successors and aSSigns, shall determine within 90 days from the expiration of any lease year during which royalties have been paid on actual production the amount of any deficiency, and shall within said gO-day period pay such deficiency to Lessor or deposit same to Lessor's credit at

i-CIlP - -0012146i ----

-1-

GWB2/dm 130(1)

, -,- ,.. , , 49

50

the depository hereinabove designated. Default in the payment of such deficiency shall "at operate to tenllinate this lease or any part hereof, but Lessee, his successors and assigns, agrees to personally pay such deficiency to Lessor at Laredo in Webb County, Texas, together with any reasonable cost, including attorney's fees, incurred by Lessor in collecting such deficiency if not paid within the gO-day period hereinabove provided for.

15. Nothwithstanding any other provision herein contained, this oil, gas and mineral lease is limited to oil, gas and sulphur and minerals produced with oil and gas, and does not include minerals other than oil, gas and sulphur and minerals produced with oil and gas, as Lessor herein excludes from the leasehold estate herein granted, and reserves unto himself, his heirs and assigns, all minerals other than oil, gas and sulphur and minerals that may be produced with oil and gas, but it is expressly agreed that 'gas' as used herein includes gas, condensate, distillate or any other gaseous substance or any other mineral produced with oil and gas, including sulphur.

16. The right to pool under Paragraph '4' of this Oil, gas and mineral lease shall be limited to lease or leases on land belonging ·to Lessor herein, or in which lessor owns an interest in the oil, gas and other minerals.

17. For the purposes of the annual renta 1 payments due under paragraph 5, Lessor and Lessee agree that said payments have been timely

paid and received, and that this Lease is perpetuated, without the necessity of further delay rental payments, until the expiration of the primary term.

18. On November 1, 1990, Lessee covenants and agrees to execute and deliver to Lessor a written release of any and all portions of this lease which have not been drilled to a density of at least 40 acres for each producing oil well and 640 acres for each producing or shut-in gas well, except that in case any rule adopted by the Railroad Commission of Texas or other regulating authority for any field on this lease provides for a

!CiiP" ooi21471 -2- -----~-----

GWB2/dm 130(1)

spacing or proration establishing different units of acreage per well, then such established different units shall be held under this lease by such production, in lieu of the 40 and 640-acre units above mentioned; provided, however, that if at such date lessee is engaged in drilling or reworking operations the date for the execution and delivery of such release shall be postponed and the entire lease shall remain in force so long "as operations on said well or wells are prosecuted with reasonable diligence, and if, after the completion or abandonment of any such well lessee commences the drilling of an additional well within Ninety (90) days from the completion or abandonment of the preceding well, or continuously conducts drilling operations in good faith and with reasonable diligence on said lease "Without any cessation for longer than Ninety (90) days, said lease shall remain in full force and effect during such drilling operations and until the end of Ninety (90) days after the completion or abandonment of the final well, at which time lessee shall execute and deliver to lessor said written release, releasing all portions of the lease not then so developed. Each retained unit shall contain at least one (1) well producing or capable of producing oil or gas in paying quantities, and the acreage within a unit shall be contiguous.

If, after the date the partial release called for under this Paragraph 18 takes affect, all production from a retained unit around a well or wells cease to produce oil or gas in commercial or in paying quantities, Lessee shall have one hundred eighty (180) days thereafter within which to commence operations to establish or re-establish production therein in commercial or paying quantities, whether such production be from the same wellbore or other wellbore. If such operations result in commercial producti on, then thi s 1ease, as it app 1 i es to such un it sha 11 continue until such commercial or paying production again ceases. However, if such operations do not result in commercial production, then Lessee shall have ninety (90) days after completion of such operations within which to commence drilling or reworking operations within such unit, and this lease, as it applies to said unit, shall remain in force so long as operations on said well or for drilling or reworking of any additional well therein are prosecuted with no cessation of more than ninety (90) consecutive days, and if they result in the production of oil or gas therein, so long thereafter

lCOPOo121"~ -3- --------:--

GWB2/dm 130(1)

as oil or gas is produced from said unit. As to any unit upon which commercial production may periodically terminate, the above right to timely resume operations and continue this lease as to such unit shall be reoccurring right.

The stipulation above as to the size of retained tracts around wells shall never be construed as a satisfaction of Lessee's right, duty and obligation to reasonably develop the leasehold held by Conoco or its successors or assigns. After November 1, 1990, Lessee agrees to drill such additional wells on the leased premises or such portions thereof as may be in force

and effect from time to time, as may be necessary to reasonable develop the same for the production of oil and/or gas as a reasonable prudent operator.

19. A portion of paragraph 3 has been deleted and the following is in lieu thereof.

(b) ,on gas, including caSinghead gas or other gaseous substances,

produced from said land, the Lessors royalty shall be calculated and paid as follows:

a) Sales To Non-Affiliated Third Parties:

In the event Lessee enters into a gas sales contract with a

non-affiliated third party, Lessor's royalty shall be one-sixth (1/6) of the gross proceeds received by Lessee from the sale of such gas.

b) Sales To Related Or Affiliated Entities For Resale:

In the event Lessee enters into a gas sales contract to sell gas to a related or affiliated entity, then Lessor's royalty shall be computed on the greater of the following: 1. One-sixth (1/6) of the gross proceeds received by lessee or any affiliate or related entity from the sale of such gas to the first non-affiliated entity, or

2. One-sixth (1/6) of the highest price reasonably obtainable for gas by Lessee and other producers or operators in the

-4-

GWB2/dm 130(1)

east one-fourth of Webb County, Texas, who are producing gas

of like kind, quality and quantity.

In this regard, it is understood that the "highest price reasonably obtainable" may be equal to, but is not necessarily, the highest price then being obtained by other producers or operators in the east one-fourth Of Webb County, Texas, who are producing gas of 11ke kind, quality and quantity.

c) Taking, Selling Or Delivery Of Gas To Lessee Or Its Related Or Atfil iated Entities For Use (Not For Resale): In the event Lessee takes gas for its own use, or sells or transfers gas to a related or affiliated entity for use, then Lessor's royalty shall be computed on tbe greater of the following:

1. One-sixth (1/6) of the highest price reasonably obtainable for gas by Lessee and other producers 01" operators in the east one-fourth of Webb County, Texas, who are producing gas of like kind, quality and quantity.

In this regard; it is understood that the "highest price reasonably obtainable" may be equal to but is not necessarily the highest price then being obtained by other producers or operators in the east one-fourth of Webb County, Texas, who are producing gas of like kind, quality and quantity, or

2. One-sixth (1/6) of the quarterly weighted average of the pri ces being pa i d by "purchasers" (as here; nafter defi ned) in the east one-fourth of Webb County, Texas, who are purchas i ng gas of 1i ke ki nd and qua 1i ty. For the purposes of calculating the average price under this Paragraph c2, prices paid shall be those as reported in the Energy Planning Book publ ication or as reported to the State of

-5-

GWB2/dm 130(1)

Texas for severence tax purposes. uPurchasers" shall mean

the. three largest purchasers based on volume of gas purchased for such calendar quarter, in the east one-fourth of Webb County, Texas. For an example of the calculation of the quarterly weighted average of such price, see Exhibit UB"

Lessor and Lessee shall meet within eleven (11)· months after the end of each calander year. At least thirty (30) days prior to such meeting, Lessee should furnish to Lessor a statement or other documentation of the basis upon which royalties accrued to lessor under the terms of the Lease for the previous calender year. Any additional royalties calculated by Lessee to be due, if any, shall be paid at such meeting. Within one (1) year from delivery of the above referred to statement or other documentation, lessor shall notify Lessee of any discrepancies. Failure to notify lessee timely of any discrepancies shall constitute final acceptance of royalty payments as covered by such s~atements or other documentation. The first period for which Lessee shall prepare such statements or other documentation shall begin on April 1, 1988 and end on December 31, 1988. Nothing in this paragraph shall preclude Lessor from claiming any royalty which Lessor is entitled to as a result of mistake in computation, oversight in computation, or error in computation of royalty or which may result from the subsequent disclosure of a discrepancy.

LESSOR'S royalty shall be without deduction for any costs. such as, but not limited to, costs of producing, gathering, storing, separating, treating, dehydrating, compreSSing, processing, transporting and otherwise making the oil, gas and associated substances ready for sale or use, except for a) severance and related taxes, and b) reasonable transportation expenses which may be necessary to be paid to non-affiliated third parties or entities to get Lessor's gas to a market or point of sale off the leased premises and which sale or sales will result in a net price equal to or higher than if said gas had been sold at the wellhead.

LESSOR'S royalty on all production from depths below the stratigraphic equivalent of the top of the Cretaceous System as seen at 12,810 feet

--------- lcop 0012151 I -6-

GWB2/dm 130(1)

in the electric log of the Vaquillas #7 Well located 260' FNL and 1,700' FWL of Survey 987, A2061, Webb County, Texas, under the lands now held by Lessee under this Lease shall be one-fifth (1/5) instead of one-sixth (1/6).

LESSEE may submit a copy of a proposed gas sales contract to Lessor which is acceptable to Lessee and request that Lessor approve same for royalty computation purposes. Lessor shall have thirty (30) days after receipt of a gas contract to approve same. If lessor approves same or does

not timely decline to do so, then lessor's royalty on gas sold under such gas sales contract shall be based on the gross proceeds received under said contract.

GAS contracts with a term in excess of three (3) years shall contain a provision for price redetermination no later than the end of the 3rd year and subsequent price redeterminations thereafter at intervals no greater than two (2) years apart.

20. Lessee agrees to fill all slush pits and level the same when they have ceased to be used and to restore the land to as near its original state as is practicable and to pay for damages to the surface of the land and the improvements, water wells, growing crops and livestock thereon, and to any other personal property of Lessor, Vaquillas Ranch Company, Ltd., occasioned by, arising out of, or resulting from operations by Lessee, his agents, employees or independent contractors on the land hereby leased to Lessee. Lessee also agrees, when requested in writing by Lessor, to divulge to Lessor true and correct information as requested by Lessor as to all drilling, producing and marketing operations conducted under this lease and to furnish to lessor copies of all electric well logs taken hereunder; provfded, however, Lessee shall not be obligated to release such information until it has been released to the industry.

21. lessee hereby agrees to ensure that the two exit gates on F.M.

2895 (Forest Gate and Reynolds Gate) are guarded in an efficient and prudent manner during drill ing, reworking or plugging operations and at other times as mutually agreed to by Lessee and Lessor. As to the exit

-7-

GWB2/dm 130(1)

gate on the north side of U.S. Highway 59, Lessee agrees to use its best efforts to work out an arrangement with other exploration companies using such gate to ensure that it is guarded in an efficient and prudent manner during drilling, reworking or plugging operations and other times as mutually agreed to by Conoco and Lessor. Further, Lessee agrees to use its best efforts to work out an arrangement with TransAmerican Natural Gas Corporation or its successors or assigns to ensure that the exit gate located 9 miles north of Aguilares, Texas, on F.M. 2895 is guarded in an

efficient and prudent manner during drilling, reworking or plugging operations and at other times as mutually agreed to by Lessee and lessor. In regard to gates used by Lessee and other exploration companies, Lessee agrees to pay its share of the cost of guarding such gates when such gate guards are required under this agreement. Lessee shall not be obligated to furnish a gate guard on any gate which has been abandoned or is not being used by Lessee.

22. Lessee agrees that before abandoning any well drilled on said lease for oil or gas purposes, it will notify the owner or the surface estate in person or by telephone of its intention to do so, and it will allow said owner of the surface estate a reasonable time, not exceeding twenty-four (24) hours thereafter, within which to elect to take over the hole for the purpose of attempting to make and complete a water well. lessee agrees to consult with such surface owner as to the location of a potential water zone, without any liability or warranty for such consultation. Upon the owner of the surface estate election, within the specified time, to attempt to complete the well as a water well and complying with all rules and regulations of the Railroad Commission of Texas and applicable statutes, Lessee will, at its expense, set all plugs to just below the deSignated water sand as may be required by the Railroad Corrmi ss ; on and thereafter deli ver the we 11 to sa i d owner of the surface estate, leaving in such well all surface casing and such intermediate casing as may have been run and set to at least the depth of the designated water sand and thereafter the owner of the surface state shall own the well and shall be responsible for all subsequent matters in connection with the well and for compliance with the applicable statutes and regulations of all regulatory agencies having jurisdiction. Lessee shall have no liability to

-8-

GWB2/dm 130( 1) --~-~---

IcOP 0012153 I - -..- - -.- - -

, ,

56

--

Lessor in connection with any of the operations which may be conducted by the owner of the surface estate who shall thereafter bear all responsibility and liability with respect thereto. It is expressly understood that Lessee shall not be required to furnish any additional casing or other equipment for any well plugged back at the request of the owner of the surface estate under this paragraph. Should the owner of the surface estate elect not to attempt to make a producing water well out of any such hole, Lessee shall plug the well in accordance with all applicable rules, regulations and statutes.

23. It is expressly agreed and understood that for the purposes of this lease the following definitions shall apply:

lICorranencesll - A well shall be deemed commenced on the date which the drilling bit enters the earth for the drilling of a well.

IIAbandoned li - A well shall be deemed abandoned on the day when it is finally plugged as a dry hole.

"Completed" - A well shall be deemed completed thirty (30) days after the day the Lessee sets production casing.

24. Lessor and lessee agree to 1imit the commencement of actual

drilling during deer hunting season to 1) those wells drilled in areas which would not disturb deer hunting, and 2) offset wells. If Lessee must commence a well during deer hunting season to perpetuate said lease, then Lessor will either a) not object to the drilling of such well during deer hunting season or b) agree to extend the commencement date for such well to a mutually agreeable date after deer hunting season ends. For the purposes of this paragraph "deer hunting season II shall be that period defined by

State law.

25. Nothwlthstanding anything contained herein to the contrary, the Lessor at any time and from time to time, upon not less than ninety (90) days notice to the holder of this lease, may elect to require the payment of any royalties accruing to such royalty owner under this lease to be made in kind; provided that any expenses incident to the exercise of such

election shall be borne by Lessor and such election shall be for periods of not less than twelve (12) months. Lessor shall only be allowed to take in

-9-

GW82/dm 130(1)

kind when lessee is producing for his own account. In the event of such an election by Lessor, Lessee shall cooperate fully with Lessor in allowing Lessor to take their royalty in kind, including permitting Lessor to use Lessee's wellhead equipment and, to the extent that Lessee has assignable rights, the use of lessee's purchaser's transportation facilities in good faith and not to exceed prevailing charges for similar services in the industry at the time if Lessee or its affiliates are transporting the gas, but if Lessee has a third party contract for the transport of said gas, Lessor will be bound by said contract. Should Lessee desire to enter into a gas purchase contract having a term of more than one (1) year, then (a) Lessee shall include in such contract a provision that allows Lessor to elect to take its gas in kind and be released from such contract one hundred twenty (120) days after notice, or (b) Lessor may approve of such contract in writing, in which event, lessor may elect to tak.e its gas in kind either at the end of such gas contact or one (1) year after notice to Lessee, whichever happens sooner. Any equipment installed by Lessor necessary to take in kind must be approved by lessee and maintained according to lessee's specifications.

If Lessee is unable to obtain a more favorable gas contract because of lessor's reservation of this election to take in kind, then lessee may elect to give notice of its intention to sign a gas contract acceptable to Lessee and request that lessor join in signing same, and if lessor elects to Sign same, then Lessor's royalty share of revenue shall be bound by such contract and Lessor may not elect to take its royalty in kind during the term of such gas purchase contract.

26. This Amendment is applicable to only that leasehold interest presently owned and held by Conoco Inc. Nothing contained herein shall in any way inure to the benefit of or be applicable to third parties who hold or claim any interest in said 26,622.79 acre lease or who claim an undivided interest therin either jointly or separately with Conoeo. Nothing herein shan in any way prejudice any claim, demand or cause of action which Vaquillas may have or assert against third parties holding any leasehold interests in Vaquillas lands. Nothing herein shall be construed as a release or modification of any right, claim or cause of action which

-10- i'cop.~ls51 GWB2/dm 130(1) ---~-------

Vaquillas may have aga.inst third parties who claim any interest in said 26,622.79 acre lease or any other Vaqui11as lease.

27. Lessor does further RATIFY, CONFIRM and ADOPT all of the terms, provisions and conditions of said June 15, 1974 Lease, as amended and as it applies to those rights held by Conoco Inc. thereunder, and that such lease, as amended and as it applies to Conoee Inc. is in full force and effect as of this date. Further, nothing contained herein shall in any way inure to the benefit of or be' applicable to any interest held by third parties in and to the June 15, 1974 Oil and Gas lease.

DATED this <51'~ day of January, 1988.

VAQUILLAS RANCH COMPANY, LTD. VAQUILLAS UNPROVEN MINERAL TRUST

8y:

By:

VAQUILLAS PROVEN MINERAL TRUST CONOCO INC.

. Wal er, Jr., rustee !jd By: ~.f~~~-Jl/~ By: 6: ,~og*~ &~ 'tl~ E. er

I

uiros, ru tee )

-11-

GWB2/dm 130(1)

EXH I 8 I T "A"

.!!llir A8STRACT CERTIFICATE GRANTEE ACRES

16~9 I'll 0 llS8 eeso • RGNG 640;0 1651 1112 1159 eeso & RGNG 640.0 1652 2876 1159 \/. H. Taylor 640.0 1661 1122 1164 CCSO & RGNG 640.0 1663 1123 1165 ecso & RGNG 640.0 1633 1323 4/808 GC & SF 640.0 163~ 2252 4/808 GC & SF 659.96 1665 1124 1166 CCSO & RGNG 640.0 5.1/21666 2253 1166 eeso & RGNG 328.75 N.l/2 1666 3142 1166 ceso & RGNG 328.79 468 2255 236 AS & H 659. '" 467 799 236 AS • H 640.0 1635 1797 17 TC Ry. 640.0 865 1438 12/2541 H • GN 640.0 1683 1115 1175 CCSO & RGNG 640.0 1691 1267 5446 Ge • SF 640.0 1696 2418 5448 GC • SF 640.0 1695 1268 5448 Ge • SF 640.0 279 (pt. only) 1353 3702 GC & SF 458.2 1004 2421 21105 J. Poi tevent 634.58 1692 2419 5~~6 GC • SF . 613.04 1693 1269 5447 GC. SF 640.0 2112 2420 & 1925 631 B.~F. James 627.12 276 i552 3700 Ge & SF 640.23 228 2550 134~, .. CCSO ,& 'RGNG 636.93 '227 1133 13W~ ceso & RGNG 640.0 988 2593 2/103 J •. Pol tevent 637.10 987' 2061 .211,93' J .. Poltevent 640.0 213' 1141 13~9. eeso & RGNG 640.0 275' 1336 3700 ' , 'GC ',,& "SF' 640.0 ·27H' 1337 3701 cqQ& RGNG 640;0 :~'.1/~ '31. BI9Ck 2 1043 453 ..eeso:,,& ,~GNG 320.0 , 25. Block 2 1042 ~52 'eeso & RGNG 640.0 '232" 2148 1346 CCSO & ReNe 462.70 '233" 1117 1347 ceso &ReNe 4~5.9 N.H2 51. Block 2 1045 460 . ecso & ReNe 320.0 ,259 (pt. only) 1137 1074 eeso &RGNG 600.0 1955 1328 4526 Ge & SF 640.0 2057 985 302 eeso & ReNG 652.25 2060 (pt. only) 3329-30 303 CT & H 440.0 LI/2 2059 984 303 eT& H 320.0 E.l/2 1953" 1329 4527 Ge& SF 320.0 1627 (Pt. only) 1324 4683 Ge & SF 160.0 1629 (pt. only) 1275 4682 GC & SF 292.65 \/.1/2 1662 2230 1164 eeso & RGNe E.l/21648 329.31 \/.1/21648 24" 1157 eeso & RGNe 325.75 3301 1157 ceso & ReNe 325.75 26. Block 21'1 452 R. D •. Barnsley 640.0 2335 3025 School W. Brown 27.3 E.l/2 1956* 2560 4526 Ge & SF 327.34 Lessor's·warranty hereunder as to all of Surveys 987,273,275,27],26, the E.l/Z of 1953, E.I/2 of 1956 and ~Ol.9 acres out of Survey 233 (all except 54 acreS out of SW corner of said Sur. 23;) Is expressly limited to 1/2 of the executIve rights In the 011. and gas rights In and under said lands, and as to all of Survey 232 :I~ :e~pressly limited to 4/5 of the execut ive rIghts In the oll.and gas rights. . .,

The following parts of surveys are expressly exc1uded'~eref~om, -vIz.·:. (I) The SE 1/4 of S~ 1/4, 511 1/4 of HE 1/4 (80 acs.L'andN ',1/2 of S~ I/~ and S\/ 1/4 of s~ 1/4 (120 acs.) of CT&H Survey 2060. ..' .".', ..... ' ..

(2) The w. 3/4 or GC~SF Survey 1627 described tn O&G Lse. to Daniel A. Pedrotti dated September 24, 1973, as a~ended.

Any part of a survey listed herein not included \.,.Ithin any specific fraction.,1 reference preceding the su'rver refercnc;e.

(4) The HE 160 acre' of GC&SF Survey 279. (5) ·Block 11 as per the E.D.Claggett Subdivision of rccord 2 Plat Records 29, Wcbh County, contiJinlng ~O acre~ tl~in9 the N\I I/lf of SE Ill; of CCSO & RGNG Survl'~' 259.

I

(6) All of the \"I. 320 ;l.:r~'i> of Survey 1629 d(.'scribl!d and included In O&G lsc. tu l),lIllel A.

Pedrotti dated $"j'\.';:lh\.'r 2~, 1973, a,s amcndt"d, T~OPOOI2i57:. --~---~-.--- 60

EXlIlIlT •

C.lculatlon of toy.hy to b. SNld on ,II d.. ~I't'.nd to L..... or ,utill.tll for UII ,.M nn for 1' . . . 1.') In ,,"cardlne. vlth p.,.,rlp)! 19.

"lnclp.h ,.y L.llor roy.Uy b.nd on thl ,r ..ttr of th' v.l;ht.d .v.,.;. price ptld by th. th,u lar, .. t volUdtrtc pUrchllra for the ".l.nd,r qulner In the .. at q\lIrttl' of v.bb Covnty 01' the 1III10"ttll 'Yin'll' of th. pr!c; .. us.d by tilt L... or for roy., lY P')'MAt pIoIrpD . . . .

Oat. Sourc.s [n...vy 'luvdn; loot publication or IS reported to til. nu. of tun hlr IIv.rene. tax pvrpaa.,.

sup 1. [lIlc;ul". th. v.I'IIht.d IIV'1'II0' prln tor the IIMth for ,lIc;h of tllll 'hI''' ttr..,."

volu-. P\lrc;hllll. for til quirt., 11"_ the tax r.carda.

Pureh .... fro .. 's!I!P'ny A

L.ne , 100,000 2.00 ZOO,a63 Unit 14 ao,ooo 1.51 120,eOO

leO,ezt I." 29t,733

TOtAL Unftltd T.... 360,ez, Tren._I .. ton

613,396/160,e21 • SI.70/MMltu.

IIp .. t pl'oc.du,. for reNlnln~ two lIantlll for thll purch ... r .nd for remaining tlla purch .......

Step 2. Calcul't. the vahllt.d IVerl\l' prle. of the thr •• Ilrv.n va\ulII.trlc pur!;""'" lor the qulrllt u.lno JIIOntilly VII" .. troll IUp 1.

"onth·J'oy,ry '9!§ Month· ,ebruuy 19815 Honth , H.reh IfIU!

Emb.WL VOlUM Prlca Extension VO\\nI' Pr!c. Exten.lon Val~. Prlc. Ext.nslan Me' l/HCf • MCf S/HC' • Me' S/KC' • United Tax.. 360,821 1.10 613,396 397,130 1.515 627,465 3Z0,l06 1.58 506,083 TUMIII .. lon

UTUO! South Gulf

Tot.l.

'oo,m ill..222 LH 1,136,044 1.5$ 620,346 ~ = 350,723

1,833,74Z 1,047,009 1.60 WI.

561,157 lll.m 500,1261.55 ~.'~,5~'"--o'~~~'~'"'

1,613,255 1,121,432 775,195

1,756,658

SUI! of Volu.." lUll ot ExUn,'o!\, Vefghud Ayerai' P~!c,

Toul. 3,304,485 5,263,855 1.59

sup 3. tlleulu. w.IGht.d ,v,nv' prtu und by L..... to calcul'tI roy.lty p'YIII,nta on ' " d,llvered to L..... or .HtI"t .. and not for 1' . . . 1••

Month.January 'filII Month.February 191111 Mgnth·Mush 1988

Voh... Pl'lc. Extln.fan vatu-. Prfc. Ext.n.lon \/01101IIII Prlc. Exun,lon MCf '/IICf • Kef SIMCf • 'Of $-/Her • 155,000 1.60 248,000 140,000 1.62 Z26,aOO 155,000 l.se 244,900

III! 9' YoIV .." SUP' 9' ClIun.'on. ""phtrd Aysrur Pelu

719,100 1.60

IUp 4. COIIPIr. w.l,ht.d 'Y'l"Ig. price c,IGullt.d In Sup 2 to lh. 1I.!vhud ..... r.'. , .....

prlc. c,lcul.ud In n.p 3.

SI.60IHCf I, lraUer th.n St.59/KCf '0 no .ddltlon.t !"Oy.lty P.YIII,/1t •• r, requlrad 10r th h qull'ur.

VOIUIIII .nc! prlc" v"d In thlt t . . .pl. Itl Utld for IIlunl'ulan .nd ... y nat b. nfl'''I .... ' of .ctu.1 condltlona.

THE STATE OF TEXAS § § COUNTY OF WEBB § <.{iL This instrument was acknowledged before me on the q day of January, 1988, by J. O. WALKER, JR., General Partner of Vaquillas Ranch Co., Ltd., A Texas Limited Partnership, on behalf of said partnership.

~ .. &LA," *~V{'~ Notary Public in an or The State of Texas. <)C) My COl11llission Expires 7-3- 0 ,

Lt:l\lRA BA LL€vJ Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB § oy--L This instrument was acknowledged before me on the I day of January, 198B, by E. WALKER QUIROS, General Partner of Vaquillas Ranch Co., Ltd., A Texas Limited Partnership, on behalf of said partnership.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the 9~ day of January, 1988, by GENE S. WALKER, General Partner of Vaqulilas Ranch Co., Ltd., A Texas Limited Partnership, on behalf of said partnership.

~ ub~in and for The State of Texas. J- 09' My Comission Expires 7- 3- "

~fI<)RA 804 usvJ Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the 9~ day of January, 1988, by EVAN B. QUIROS, General Partner of Vaquillas Ranch Co .. Ltd., A Texas Limited Partnership, on behalf of said partnership.

d.cblJ ~,J(1,,'}j Notary Public in and for The State of Texas. My COI11Ilisslon Expires '1-3-&,,9 /v,q v I~/I t5A LUi vJ Printed/stamped name of Notary. -12-

GWB2/dm 130( I)

THE STATE OF TEXAS § § COUNTY OF WEBB § ~ This instrument was acknowledged before me on the CJ day of January, 1988, by J. O. WALKER, JR .. Trustee for The Vaquillas Unproven Mineral Trust.

c~ . itA- .~fi. flu.if Notary ~ublic in a~for The State of Texas. 00 My Commission Expires: 7- 3- 6 I

LA) t>RA b>A UEN Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB § ~ This instrument was acknowledged before me on the 7'

day of January, 1988, by E. WALKER QUIROS, Trustee for the Vaquillas Unproven Mineral Trust.

~"~4~~ Notary Pu lie 1n and for The State of Texas. My Commission Expires: 7-:3- 8'9 0A tJfG,4 HI! LLEvJ Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB § n~ Thi 5 instrument was acknowledged before me on the -, day of January, 1988, by GENE S. WALKER, Trustee of the Vaquillas Unproven Mineral Trust.

~"94~," oOr"t ~Pub ie in and for The State of Texas My Commission Expires: '1- 3- 111 /""1IUi2A 1:54 LLSvJ Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the day of January, 1988, by EVAN B. QUIROS, Trustee of Vaquillas Unproven Minera 1 Trust. ~ "

- ~ !! ), a" ~y Public in and for 4J! 0,,,9-'

The State of Texas My Commission Expires: '7-3-117 Lc,[)f(,a 15", LLe:vJ Printed/stamped name of Notary.

-13-

GWB2/dm 130(1)

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the '1 ~ day of January, 1988, by J. O. WALKER, JR., Trustee of Vaquillas Proven Mineral Trust.

NOtarY ic in and for The State of Texas " My Commission Expires: 7-3- i?{ IvAM.A /2,,</ LIE vJ Prlnted/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB § yh the 9 day of January, 1988, by E. Proven Mineral Trust.

(.~~~~~~~~~~~-- otary u ic 1n and for The State of Texas My Commission Ex~es: 7-.:3- ~'l L4tJ!<A & Li..GvJ Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged the 9 'ti0 day of January, 1988, by GENE S.WALKER, Trust Proven Mineral Trust.

otary ub lC 1n an for The State of Texas My Commission Expires: 7-.3 - 'g'1 ivA iJ/2A BA LL;;;.,J Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB §

on the This instrument was acknowledged before me 9 day of

L

January, 1988, by EVAN B. QUIROS, Trustee of Vaquill as Proven Mineral Trust.

Notary Public in and for The State of Texas My COnInission Expires: 7-3- :;;J .LAuRA 8-4 LLevV Printed/stamped name of Notary.

-14-

GWB2/dm 130(1)

......

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the 'l-J-b day of January, 1988, by Iefi c. • .s"--;;l er , Attorney·in-Fact for CONO(? INC., ali aware corporation, on behalf of said corporation.

The State of Texas My Commission Expires: '7-I&" qg'

LJ e.11"" /J'la. Y' Ke. rt-

Printedlstamped name of Notary.

·15· GWB2/dm 130(1)

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.. i.J:I UD ACI" 1'00111\11: PrO>'b!t.on

• OIL, GAS AND MINERAL LEASE THIS AGltEEKENT mat. lbb,-1.~ .. _ _ _ _ _ _ .4&T ot. Novemb~L ____ R__ R. __ 'R. __ .. __ ._...lI..!!?_. ,*_11 Vaguillas Rancl!SomruillY.t.-Ltd.; Vaqui11~Jm.p.roven_MinJrral Tn,tst i ...Y!9..l!.!.+1.~!"9.Y.~!L ~~ral-1.~ust..LI!f:..t,!!!~nd thr.g.H8!L.!~f!...&rulenLPJ!r..t.~ ....-h..JLr.....IDt1.lter. Jr ~._. ___ ._. _ _ ~. Wal~r.-JlU-..!~,~~~~!!$~L~M_~"!!!J_I.. ....Q.\!ill_I!· , . ___._.'._.____ ..'

;::.~:~ 0111 ~ IrIOra) ...boN add ..... lu_ ., p..!.~o:-i~;J:D86:-~p Texa! 7804i=~===_====_~ and __G..?.!!~~.£:..z.y_~_~ox 219L..Jlo'!~!Q..lh_~~!lP_..l.1.£?_~____ ,. __ ._. ___ .• t.-. WlTNESS!:TH1 -I. ~ III ccmaW...,LlOII ot......!en Dollar"§._!lE.Q._.9,~J~~~!,-o_4....rul!Ly'~.!..\@blt;L~..QJ!§.!~.E~!!2.!L._R'-_...»oIl&r, II...! 0.00 ) In bDd paM!,. ot Lbe lO,llUII bu.ln Pf'OyIW. Illd of u.. Apft_t. of LMaw blf'lln toat.lM4, bereb, paa,ta. kuM L114 lott.o uclual....,. viii,;·L.'_ fur tb. rnupoM 01 IlIn,UaIUlla. t:XpJ.orllll'. Pr'OtPlCltill•• kDU ... u>d mIlIllI&' lor ...d. Pf'Odud.n.. 011. "" I.N! all otb ... mIr.lra", COII41Kt.1D.S p;plor.~n. noIo.le and I'toph,.1c&1 .",....,.. b,. ~a»b, COra UIl. 1'n.'Pi&;r &114, 1n&.. n.tl • - ...~:~~. au, ...tv ant! ~Ir flllld ......01 air lIIto ...bnrt.... nratl, II}'I .... pipe Una. bullcUl" ..-da "nita,. ~ ItILlD.... te _ _ U11M III _ ' - IlnIoo hIr'M tbtr.ull IIII!. 0.. , O.... r end. Urwl ludi _1IId or claim.:! b, Lutor adlac&llt alii! _ il INO 't~ to prod.\I~ "VI, tat. cer. or, kNot. t.ralI.IlJOl1. &114 _" laid llrodtlcb, ud. boaf;lll&' It. IIIIplonn. ~ toU_IN!' duenbtcl Iud hL __ H~ W _ _ _ _ _ _ _• _ _• ___ Co"II~. T...... ""..I"

6~740 acres of land~ more or less~ situated in Webb County, Texas, more fully described in Exhibit "AI] attached hereto and made a part of this Lease for all relevant purposes, including limitations upon warranty as specifically set out therein,

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irATI; or .

~ OOUIITY .,._ __ ~~L-

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=-_~ 't:r ':...bt~~ ~-iii;;;ii~...nbMrlbed to the lorqolq hl~t. UI4 KlIIIO'WIedp;!. to =- tbd _he.... aecut«l GI.. " ulld" l1li' bud al'l4 lilt&! or ofnoe., u. .. u... ___ -U7 ot _ _ ._ _ _ _ _ _ ~ __________ • A. D. 11. ____ .••

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NotaQ Publlll h~ fAd for .----~~. -----

T&1UJ'OlNr A.CKHOWLJmOMEHT

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• r i • I • ADDENDUM TO OIL AND GAS LEASE • From Vaquillas Ranch Co., Ltd. et al To Conoco Inc., Dated November 1, 1987

12. Should Lessee be prevented from complyin9 with covenants of this lease by reason of conditions or acts set forth in Paragraph '11' hereof, then Lessee agrees annually to pay to Lessor an amount equal to the delay rentals herein provided for during such period of prevention, whether same be during or subsequent to the primary term, and such payment shall be made at the end of each year of prevention either to Lessor or to the depository above named for credit to the account of Lessor.

13. This lease does not cover or Include any right or privilege of hunting or fishing on any part of the above described 1and, and Lessee agrees with Lessor that neither he nor his aSSigns or agents or employees of his assigns, will bring firearms or dogs upon the leased premises, and should this provision against hunting and fishing be violated by any agents, servants J employees or contractors of Lessee IS ass igns, any such • person so Violating same shall have no further right to enter upon the 1eased prem1 ses, and such person sha 11 be rega rded as and sha 11 be a

trespasser on the premises of Lessor and be subject to the penalties imposed upon trespassers under the laws of the State of Texas.

14. It is expressly agreed and understood that after production of .,

oil and gas in corrmercial Quantities is obtained from the leased premises, ~C'I

the minimum annual income to Lessor from payment of rentals, shut-in 0 1 )

royalty and royalty on production shall be sum of not less than Two_($2.00) Do1lars per acre on the total acreage retained and then covered by this

lease, but this proviSion shall not impair the right and privilege of Lessee, his successors and aSSigns, to release and surrender any part of

the above described leased premises as herein provided. Lessee, his successors and aSSigns, shall detennine within 90 days from the expiration of any lease year during which royalties have been paid on actual production the amount of any deficiency, and shall within said 90-day

period pay such deficiency to lessor or deposit same to Lessor's credit at

GW82/dm 124(7)

""'I JUt 1 4 ~ 69

..

". ,.

the depository hereinabove designated.

• Default in the payment of such deficiency shall not operate to terminate this lease or any part hereof. but Lessee. his successors and assigns. agrees to personally pay such deficiency to Lessor at Laredo in Webb County. Texas. together with any reasonable cost, including attorney's fees, incurred by Lessor in

collecting such deficiency if not paid within the gO-day period hereinabove provided for.

15. Nothwlthstanding any other provision herein contained. this oil.

gas and mineral lease is limited to oil. gas and sulphur and minerals produced with oil and gas. and does not include minerals other than oil. gas and sulphur and minerals produced with oil and gas. as Lessor herein excludes from the leasehold estate herein granted, and reserves unto himself. his heirs and assigns. all minerals other than Oil. gas and su1 phur and mi nera 1s that may be produced with oil and gas. but it is expressly agreed that Igas' as used herein includes gas, condensate, distillate or any other gaseous substance or any other mineral produced with oil and gas, including sulphur.

16. The right to pool under Paragraph '4' of this oil. gas and mineral lease shall be limited to lease or leases on land belonging to lessor herein, or in which lessor owns an interest in the Oil, gas and other minera 1s .

17. For the purposes of the annual rental payments due under paragraph 5, lessor and lessee agree that said payments have been timely paid and received. and that this Lease is perpetuated. without the necessity of further delay rental payments. until' the expiration of the primary term.

18. At the end of the primary tenn hereof, lessee covenants and L ()?

agrees to execute and deliver to lessor a written release of any and all portions of this lease which have not been drilled to a density of at least 40 acres for each producing 011 well and 640 acres for each producing or shut-in gas well. except that in case any rule adopted by the Railroad Commission of Texas or other regulating authority for any field on this

GWB2/dm 124(7)

• • lease provides for a spacing or proration establ1shing different units of acreage per well, then such established different units shall be held under ~e~se by - su~h production, in 1ieu of the 40 and 640-acre units above mentioned; provided, however, that if at such date lessee is engaged in

drilling or reworking operations the date for the execution and delivery of such release shall be postp~n;d a~d the entire Tease shall remain in force so long as operations on said well or wells are prosecuted with reasonable diligence, and if, after the completion or abandonment of any such well ~.) :

Lessee commences the drilling of an additional well within Ninety (90) days from the completion or abandonment of the preceding welT, or continuously conducts drilling operations in good faith and with reasonable diligence on said lease without any ces?atjon for longer than Ninety (90) days, said lease shall remain in full force and effect during such drilling operations and until the end of Ninety (90) days after the completion or abandonment of the final well, at which time Lessee shall execute and deliver to Lessor said written release, releasing all portions of the lease not then so developed. Each retained unit shall contain at least one (1) well producing or capable of producing oil or gas in paying quantities, and the acreage within a unit shall be contiguous.

If, after the date the partial release called for under this Paragraph 18 takes affect, all production from a retained unit around a well or wells

cease to produce 011 or gas in commercial or in paying quantities, Lessee

shall have one hundred eighty (180) days thereafter within which to commence operations to establish or re-establish production therein in

cormnercial or paying quantities, whether such production be from the same well bore or other wellbore. If such operations result in commercial product; on, then thi s 1ease, as it app 1; es to such uni t sha 11 conti nue until such commercial or paying production again ceases. However, if such operations do not result in commercial production, then Lessee shall have ni nety (90) days after comp 1et i on of such operati ons within whi ch to commence drilling '·or reworking operations within such unit, and this lease, as it applies to said unit, shall remain in force so long as operations on said well or for drilling or reworking of any additional well therein are prosecuted with no cessation of more than ninety {gO} consecutive days, and if they result in the production of oil or gas therein, so long thereafter

GWB2/ dm 124 (7)

• • ", . ,.

as oil or gas is produced from said unit. As to any unit upon which commercial production may periodically terminate, the above right to timely resume operations and continue this lease as to such unit shall be reoccurring right.

The stipulation above as to the size of retained tracts around wells shall never be construed as a satisfaction of Lessee's right, duty and obligation to reasonably develop the leasehold held by Canoe a or its successors or ass 19ns. After November I, 1990, Lessee agrees to dri 11 such add i tiona 1 wells on the leased premises or such portions thereof as may be in force and effect from time to time, as may be necessary to reasonable develop the same for the production of oil and/or gas as a reasonable prudent operator.

19. A portion of paragraph 3 has been deleted and the following Is in lieu thereof.

(b) on gas, including casinghead gas or other gaseous substances, produced from said land, the Lessors royalty shall be calculated and paid as follows:

a) Sales To Non-Affiliated Third Parties:

In the event Lessee enters into a gas sales contract with a non-affiliated third party, Lessor's royalty shall be one-fifth (l/5) of the gross proceeds received by Lessee from the sale of such gas.

b) Sales To Related Or Affiliated Entities For Resale:

In the event Lessee enters into a gas sales contract to sell gas to a related or affiliated entity, then Lessor's royalty shall be computed on the greater of the following: 1. One-fifth (1/5) of the gross proceeds received by Lessee or any affiliate or related entity from the sale of such gas to the first non-affiliated entity, or

2. One-fifth (1/5) of the highest price reasonably obtainable for gas by lessee and other producers or operators in the

-4-

GWB2/dm 124(7)

• • east one-fourth of Webb County, Texas, who are producing gas of like kind, quality and quantity.

In this regard, it is understood that the IIhighest price

reasonably obtainable" may be equal to, but is not necessarily, the highest price then being obtained by other producers or operators in the east one-fourth of Webb County. Texas. who are producing gas of like kind, quality and quantity.

c) Taking, Selling Or Delivery Of Gas To lessee Or Its Related Or Affiliated Entities For Use (Not For Resale): In the event Lessee takes gas for its own use, or sells or

transfers gas to a related or affiliated entity for use, then lessor's royalty shall be computed on the greater of the following:

1. One-fifth (1/5) of the highest price reasonably obtainable for gas by lessee and other producers or operators in the east one-fourth of Webb County, Texas, who are producing gas of like kind. quality and quantity.

In this regard, it is understood that the "highest price reasonably obtainable" may be equal to but is not

necessarily the highest price then being obtained by other producers or operators in the east one-fourth of Webb County, Texas, who are producing gas of like kind, quality and quantity, or

2. One-fifth (l/5) of the quarterly weighted average of the prices being paid by "purchasers" (as hereinafter defined) in the east one-fourth of Webb County, Texas, who are

purchasing gas of like kind and quality. For the purposes of calculating the average price under this Paragraph e2.

prices paid shall be those as reported in the Energy Planning Book publ ication or as reported to the State of

-5-

GWB2/dm 124(7)

• Texas for severence tax purposes. the three largest purchasers • "Purchasers II sha 11 mean based on volume of gas purchased for such calendar quarter, in the east one-fourth of Webb County. Texas. For an example of the calculation of the quarterly weighted average of such price, see Exhibit

Lessor and Lessee shall meet within eleven (11) months after the end of each calander year. At least thirty (30) days prior to such meeting, lessee should furnish to Lessor a statement or other documentation of the basis upon which royalties accrued to Lessor under the terms of the Lease for the previous calender year. Any additional royalties calculated by Lessee to be due, if any, shall be paid at such meeting. Within one (1) year from del ivery of the above referred to statement or other documentation, Lessor shall notify Lessee of any discrepancies. Failure to notify Lessee timely of any discrepancies shall constitute final acceptance of royalty payments as covered by such statements or other documentation. The first period for which Lessee shall prepare such statements or other documentation shall begin on April I, 1988 and end on December 31, 1988. Nothing in this paragraph shall preclude Lessor from claiming any royalty which Lessor is entitled to as a result of mistake in computation, overSight 1n computation, or error in computation of royalty or which may result from the subsequent disclosure of a discrepancy.

LESSOR'S royalty shall be without deduction for any costs, such as, but not limited to, costs of producing. gathering, storing, separating, treating, dehydrating, compreSSing, proceSSing, transporting and otherwise making the Oil, gas and associated substances ready for sale or use, except for a) severance and related taxes, and b) reasonable transportation expenses which may be necessary to be paid to non-affiliated third parties or entities to get Lessor's gas to a market or pOint of sale off the leased premi ses and wh1 ch sa 1e or sa 1es wi 11 result in a net pri ce equa 1 to or r" higher than if said gas had been sold at the wellhead. " I

LESSEE may submit a copy of a proposed gas sales contract to Lessor which is acceptable to Lessee and request that Lessor approve same for

-6-

GW82/dm 124(7)

". -

• roya lty computation purposes.

• Lessor sha 11 have thirty (3D) days after receipt of a gas contract to approve same. If Lessor approves same or does not timely decline to do so, then Lessor's royalty on gas sold under such gas sales contract shall be based on the gross proceeds received under said contract.

GAS contracts with a term in eXcess of three (3) years shall contain a provision for price redetermination no later than the end of the 3rd year and subsequent price redeterminations thereafter at intervals no greater than two (2) years apart.

20. Lessee agrees to fill all slu~h pits and level the same when they have ceased to be used and to restore the land to as near its original state as is practicable and to pay for damages to the surface of the land and the improvements, water wells, growing crops and livestock thereon, and to any other personal property of Lessor, Vaquillas Ranch Company, Ltd., occasioned by. arising out of, or resulting from operations by Lessee, his agents, employees or independent contractors on the land hereby leased to Lessee. Lessee also agrees. when requested in writing by Lessor. to divulge to Lessor true and correct information as requested by Lessor as to all drilling, producing and marketing operations conducted under this lease and to furnish to Lessor copies of all electric well logs taken her.eunder; provided. however, lessee shall not be obligated to release such information until it has been released to the industry.

21. Lessee hereby agrees to ensure that the two exit gates on F.M.

2895 (Forest Gate and Reynolds Gate) are guarded in an efficient and prudent manner during drilling, reworking or plugging operations and at other times as mutually agreed to by Lessee and Lessor. As to the exit gate on the north side of U.S. Highway 59, Lessee agrees to use its best efforts to work out an arrangement with other exploration companies using such gate to ensure that it is guarded in an efficient and prudent manner during drilling, reworking or plugging operations and other times as mutually agreed to by Lessee and lessor. Further, Lessee agrees to use its best efforts to work out an arrangement with TransAmerican Natural Gas Corporation or its successors or assigns to ensure that the exit gate

-7-

GWB2/dm 124(7)

• • ....

located 9 miles north of Aguilares, Texas, on F.M. 2895 is guarded in an efficient and prudent manner during drilling, reworking or plugging operations and at other times as mutually agreed to by Conoco and Lessor. In regard to gates used by lessee and ather exploration companies, Lessee agrees to pay its share of the cost of guarding such gates when such gate guards are required under this agreement. lessee shall not be obligated to furnish a gate guard on any gate which has been abandoned or is not being

used by Lessee.

22. Lessee agrees that before abandoning any well drilled on said d; 'p':)

lease for oil or gas purposes, it will notify the owner or the surface estate in person or by telephone of its intention to do so, and it will allow said owner of the surface estate a reasonable time, not exceeding

twenty-four (24) hours thereafter, within which to elect to take over the hole for the purpose of attempting to make and complete a water well. lessee agrees to consult with such surface owner as to the location of a potentia 1 water zone. without any 1iabil ity or warranty for such consultation. Upon the owner of the surface estate election, within the specified time, to attempt to complete the well as a water well and complying with all rules and regulations of the Railroad Commission of Texas and applicable statutes, Lessee will, at its expense, set all plugs to just below the designated water sand as may be required by the Railroad Commission and thereafter deliver the well to said owner of the surface estate, leaving in such well all surface casing and such intennediate casing as may have been run and set to at least the depth of the designated water sand and thereafter the owner of the surface state shall own the well and shall be responsible for all subsequent matters in connection with the well and for compliance with the applicable statutes and regulations of all regulatory agencies having jurisdiction. Lessee shall have no liability to Lessor in connection with any of the operations which may be conducted by the owner of the surface estate who shall thereafter bear all responsibility and liability with respect thereto. It is expressly understood that lessee shall not be required to furnish any additional casing or other equipment for any well plugged back at the request of the owner of the surface estate under this paragraph. Should the owner of the surface estate elect not to attempt to make a producing water well out of

-8-

GWB2/dm 124(7)

" ..

• any such hole. Lessee shall plug the well in accordance with all applicable rules. regulations and statutes.

23. It is expressly agreed and understood that for the purposes of this lease the following definitions shall apply:

"Cormnences" - A well shall be deemed corranenced on the date which the drilling bit enters the earth for the drilling of a well.

IIAbandoned ll - A well shall be deemed abandoned on the day when it is finally plugged as a dry hole.

"Completed" - A well shall be deemed completed thirty (30) days after the day the Lessee sets production casing.

24. Lessor and Lessee agree to limit the commencement of actua I Ao~ drilling during deer hunting season to 1) those wells drilled in areas which would not disturb deer hunting. and 2) offset wells. If Lessee must

commenCe a well during deer hunting season to perpetuate said lease, then Lessor will either a) not object to the drilling of such well during deer hunting season or b) agree to extend the commencement date for such well to a mutually agreeable date after deer hunting season ends. For the purposes of this paragraph "deer hunting season" shall be that period defined by State law.

25. Nothwithstanding anything contained herein to the contrary. the lessor at any time and from time to time, upon not less than ninety (90)

days notice to the holder of this lease, may elect to require the payment

of any royalties accruing to such royalty owner under this lease to be made in kindj provided that any expenses incident to the exercise of such

election shall be borne by Lessor·and such election shall be for periods of not 1es5 than twelve (12) months. Lessor shall only be allowed to take in kind when Lessee is producing for his own account. In the event of such an

election by Lessor, Lessee shall cooperate fully with Lessor in allowing Lessor to take their royalty in kind, including permitting lessor to use

lessee's wellhead equipment and, to the extent that lessee has assignable rights, the use of Lessee's purchaser'S transportation facilities in good

fa ith and not to exceed preva i1 i ng charges for s imil ar servi ces in the

industry at the time if lessee or its affiliates are transporting the gas,

-9-

GWB2/dm 124( 7)

.... . '.

., • but if Lessee has a third party contract for the transport of said gas, Lessor will be bound by said contract. Should Lessee desire to enter into a gas purchase contract having a term of more than one (1) year, then (a) Lessee shall include in such contract a provision that allows Lessor to elect to ta~e its gas in kind and be released from such contract one hundred twenty (120) days after notice, or (b) Lessor may approve of such contract in writing, in which event, Lessor may elect to take its gas in kind either at the end of such gas contact or'one (1) year after notice to Lessee, whichever happens sooner. Any equipment installed by lessor necessary to take in kind must be approved by Lessee and maintained according to Lessee's specifications.

If Lessee is unable to obtain a more favorable gas contract because of Lessor's reservation of this election to take in kind, then Lessee may elect to give notice of its intention to sign a gas contract acceptable to Lessee and request that Lessor join in signing same, and if Lessor elects to sign same, then lessor's royalty share of revenue shall be bound by such contract and Lessor may not elect to take its royalty in kind during the term of such gas purchase contract.

DATED this 91Jr day of January, 1988.

VAQUILLAS RANCH COMPANY, LTD. VAQUILLAS UNPROVEN MINERAL TRUST

BY~.~ Bti?~ge ·~~r.,ru~tee

By: g~~ hra E.

~~w eriliros By: g.

E. Wa

By:

By:

""=:--.

-10-

GWB2/dm 124(7)

• • .. , ...

VAQUILLAS PROVEN MINERAL TRUST CONOCO INC.

BY~~4 rif1BY: "':'{!fd:::=f:f¥:f1ia";;ct~--~ By: c$:Wy!'~~f(: Tr~

-11-

GWB2/dm 124(7)

' ..

,I'i : (; {'e...'

"1:j ,_,

SURVEY ABSTRACT CERTIFICATE GRANTEE ACRES

·1652 2876 1159 w. H. TAYLOR 640.0 -1661 1122 1164 CCSD & RGNG 640.0 -1663 1123 1165 CCSD & RGNG 640.0 ~ .y ~-."t63"3 . 1323 4/808 GC & SF 640.0 , -'"1634 225..7_. __ ._.4/.8.08____ GC L~F._._· ...... __ 6_59.!-96..., =-n65 1124 1166 CCSD & RGNG 640.0 ""~ -~d635_ 1797 17 TC RY; 640.0--.

- 2060 (SE/4 3329-30 .- '303 . -"---CT--&'M' -- ----r6-0":-0.· only)

-1953 (E 1/2) 1329 4527 GC & SF 320.0 1627 (pt. 1324 4683 GC L SF 160.0 only)

-1629 (pt. 1275 4682 GC & SF 264.65 only)

1662 (W 1/2) 2230 1164 CCSD & RGNG 329.31 1648 (E 1/2) 2441 1157 CCSD &- RGNG 325.75 1648 (W 1/2) 3301 1157 CCSD & RGNG 325.75 2335 3025 SCHOOL W. BROON 27.3 • 1956 (E 1/2) 2560 4526 GC & SF 327.34

The following parts of surveys are expressly eXCluded herefrom, viz. : (1) The SE 1/4 of SW 1/4, SW 1/4 of NE 1/4 (80 acs.) and N 1/2 of SW 1/4 and SW 1/4 of SW 1/4 (120 acs.) of €T & M Survey 2060. (2) The W. 3/4 of GC & SF survey 1627 described in O&G Lease to Daniel A. Pedrotti dated September 24, 1973, as amended.

(3) All of the W. 320 ~cres of Survey 1629 described and included in O&G Lease to Daniel A. Ped~otti dated September 24, 1973, as amended.

I\O~ for ,,,.t,)

• ,.{cul.tlon of roy,lty n b. p.td on gn d.~IY.,.d to In "'ardlne. vllh p.t.,r.ph 19.

lXlllllt •

'ty L"lot roy.lty ~.nd on th. "nUt of the v.l,hud ''1ln" prl"

I. .....

• or Affllh'n for UII (.nd

p.lel by till tnr .. hr,.n Yol~trlC pur~ ... n hr th. nt.nd" qUtrUt In th. un II.U,tUt of lI,bb CO\ll\~Y or tbt 1i,Iebtld IVlnu 01 'hi prln' uud by ,h. LUlOr for roYllty P')'IIMt P'o/t'P0un

C.1cul.tlon: Oet,,..lnl .ddltlon.l roytlty p')'II.nu, If ,ny.

lnlrlY 'hMlnt loot publication or II reporud to ,h. st." of Tun lor "'IlrI"" Ull purpo ....

sup 1. ,.1culiU th. v.llbUd lY'u,.

ptlet for th • .onth tor nch of th. tht .. ,,,,.n vol\,a, pureh .... for "" qultU,. fro. th. tlX ncord ••

M2Mb· J."y.,y IOA§

I. .... 1 100,000 Z.OO ZOO,86) Unit '4 eo,ooo 1.51 1Z0,800

'v.-ch" .. fC!!III '2"'p,ny ,

\lIU '2 180,821 1.62

TOllL Vnlud Tun 360,1121 TUM.lnlon

611,396/360,1121 • $1.7o/MIt"~.

llput prondun tor nllllning tvo _linIn, hI' thl. pur~h"lr t.mI tor rtlulnlng '.,,0 purch, .. r ••

"'P Z. C.lc:",ln. lb, .",Ight,d .VIr.gl prlu of thl thrll I.r,nt vohlll.tric purch .. ln hr thl qu.rtlr Ulln" IIOnthly '1.11,111 trOll sup 1.

~ Mereh 1900 M0nSb·J·oy'CY 12" Montb • hbrupry 1!1I11 Month

~ Volva' Prll::t !xnn.lon VOIUNI PrlCi !xtlnlhn VoIUIII, 'ric:, ElIuntlOn Kef S/Mcr • "Of • /ltef • "Of .s/Her • Unlud hx .. ~60,'Z1 1.70 611,~96 3PT,Uo 1,$1 617,465 nO,306 1.51S 506,083

-

Tra""alulon

UIIAoe 620,346 561,157 500,1261.n 175,195 South Cult l1Lill Ul..2.22 'WJ,IIL..£"tll.J11I'22 1,136,044 '.83l,7n 1,047,009 1,67],lS5 1,121,432 1,756,858

'v- 0' VoIUlo" Su.. of [!It$'l'IJlgn, v.lghulf "Ylr.S' hiS!

10ul. '.59

sup 3. C,I;III.te ".I,hud .V'I'IVI prln "'ltd b.,. L..... to ulc:ulu. roytlt.,. p.YII.nu on VIt dlllVlrtd to L..... or ,,,lIln .. Inc! not for ,"'1 ••

t!0n,b·J,nytcy 1911!! IConth."bruary 19M Monfh'H!Ireh 19M

Yolu.I 'rln htlnllon VolulI' PriCI Eltlnllon VotU-I Prlc-. Extrnllon "Of $IltC1 • HCf S/MCr • "Of .s/MC'

155,000 1.60 241,000 140,000 1,62 126,800 ISS,oOO l.sa 2U,900

h,. of V2'u.,,.. SUI! 2' huC! '2n.

719,700 1.60

u.p '. CPptr, .."I,hUd .... ".,' pd;, Clleul.tld In .sup Z to thl IIIhhud .... .,.g. ~"nl pd" ni;ui.t.d 'n ,up 3.

'1,60/)lC1 'I ,r.n.r 111 .... $l.S9/MCf .0 no .ddlttOMt roy.lty p.y.tI\U ' f ' rtq\l.lftd tor this qUlrt,r,

IIOUt '101",-", IIId prlu. Ulld 'n tbl. 'XI.,l • • t I "'. . d for IIlunrnlon .nd ••.,. not b.

tlH,nlvI of ICtu.1 c:~hlont,

, . ~

, , . THE STATE OF TEXAS COUNTY OF WEBB • § § § • This instrument was acknowledged before me on the 9~day of January, 1988, by J. O. WALKER, JR., General Partner of Vaquillas Ranch Co., Ltd., A Texas Limited Partnership, on behalf of said partnership,

$.-.1"

.......

:':,".. ', ".- ..•. ...

~;~.­ ,- ~.. ... .

...........

~!~ ota+Y ~600.'S-

~lC in and for i~/ . .. The State of Texas. \ :

My Coomission Expires 6A LLGvJ 7- B - '89 '. '"'......... ._...... . ~ ~..

.0A!J/?,q Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the 9Y+- day of January. 1988, by E. WALKER QUIROS, General Partner of Vaqulllas Ranch Co., Ltd •• A Texas Limited Partnership. on behalf of said partnership.

. •:!o"

.. f .

""

~h~al2~J[y otarYublic in and for i . .~~/ The State of Texas. § ~i My COlllllission Expires (;I '7-:3 - 0 9 •, ~IJ.O)RA ~ LLEW \ .. '~~':-- ..... -. Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the 't'-II- day of January, 1988, by GENE S. WALKER. General Partner of Vaquillas Ranch Co., Ltd .. A Texas Limited Partnership, on behalf of said partnership.

~~~~,,;y an NOtarYUbfc in or The State of Texas. My COlllllission Expires 7- 3-89 L4tJt<A 13-4 LLevJ Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the Cf 'I-k-

day of January, 1988, by EVAN B. QUIROS, General Partner of Vaquillas Ranch Co., Ltd., A Texas Limited Partnership, on behalf of said partnership.

~ ublic in and for The State of Texas. My Commission Expires 7-3-89 LA IJi<A &4 LLCJyj Printed/stamped name of Notary. -12-

GWB2/dm 130(!)

• .. ' .

\

'. .- - • . • THE STATE OF TEXAS COUNTY OF WEBB § § § • This instrument was acknowledged before me on the 9+L day of January, 1988, by J. O. WALKER, JR_, Trustee for The Vaquillas Unproven Mineral Trust.

~,~ ~a~{2gd}- Offi'YPu1C in ancrror The State of Texas - CIa My CORmission Expires: 7- 3-a I

LA~R.A t>,,,, LLe"J Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the g~ day of January, 1988, by E. WALKER QUIROS, Trustee for the Vaquillas Unproven Mineral Trust.

- '.

~~2ht~~ The State of Texas. 9 My Conmission Expires: '7-:3- g LlluRA BAU,£vJ Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the 9 --r/:...J day of January, 1988, by GENE S. WALKER, Trustee of the Vaquillas Unproven Mineral Trust.

Notary Pu ~in and for The State of Texas My Commission Expires: 7-3- 'i?'7 LA ORA 3,0 LLE:vJ Printed/stamped name of Notary.

THE STATE OF TEXAS § § COUNTY OF WEBB § '-f-L;

This instrument was acknowledged before me on the 9 day of January, 1988, by EVAN B. QUIROS, Trustee of Vaquillas Unproven Mineral Trust.

-.:/~ ~c~n~Y The State of Texas a My Commission Expires: 7-3-f? I JvMR/i J:3A LLevJ Printed/stamped name of Notary.

-13-

GWB2/dm 130(1)

• • -, ,.

--- 85

Co· ._

, ,

COUNTY OF WEBB • THE STATE OF TEXAS § § § .

• o~ This instrument was acknowledged before me on the ,-,-::-.:-'--0'==-, day of January, 1988, by J. O. WALKER, JR., Trustee of Vaquillas Proven Mineral Trust.

{~?/ .,- <: :; ~ j

..-"<; ~ ~~ OCk.ft---

atarYUiC'in an for The State of Texas My Coomission Expires: '7'-:3 - J?9 ~ \ .. /~ LA ORA ~ UBvJ ~"

,... - ...... Printed/stamped name of Notary.

.

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the day of 9'f1-, January, 1988, by E. WALKER QUIROS, ~: vaqu~ Proven Mineral Trust.

_' t, "," , Notary putiM in The State of Texas an~ 00 My Commi ss i on Expi res: 7- 3 - tJ f

LfiIJ/(,q 13A L1..HvJ Printed/stamped name of Notary,

THE STATE OF TEXAS § § COUNTY OF WEBB §

This instrument was acknowledged before me on the 9-tV day of January, 1988, by GENE S.WALKER, Trustee of Vaquillas Proven Mineral Trust.

}'

", ~. .~ ~~~d~~l(y The State of Texas '" . My Commission Expires! 7-3-/?9 i..JAOI2A BA U_~ vJ ' ..

-:. " Printed/stamped name of Notary_ "

THE STATE OF TEXAS § § COUNTY OF WEBB § ~'

This instrument was acknowledged before me on the 9 day of January, 1988, by EVAN B. QUIROS, Trustee of Vaquillas Proven Mineral Trust.

~uh4 ~" O~.a-=' Notary Public in and for The State of Texas OQ My Conmission Expires: 7-3-0 I

0Mi(A 80'1 LLBv.j Printed/stamped name of Notary.

-14-

GWB2/dm 130( 1)

• • .,..

,.

..

THE STATE OF TEXAS • § § • COUNTY OF WEBB §

Thi s instrument '1 cit . day of Attorney·in-Fact corporation.

The State of Texas My Commission Expires: 9-/8' -yf'

L)e//«. fl1<>. Y'A-"er27 Printed/Stamped name of Notary.

·15-

GWB2/dm 130(1)

-

RAILROAD COMMISSION OF TEXAS OFFICE OF GENERAL COUNSEL

OIL AND GAS DOCKET NO. XX-XXXXXXX

FINAL ORDER CONSOLIDATING VARIOUS FIELDS INTO A NEW FIELD CALLED THE VAQUILLAS RANCH (LOBO CONS.) FIELD AND ADOPTING FIELD RULES FOR THE VAQUILLAS RANCH (LOBO CONS.) FIELD WEBB COUNTY, TEXAS

The Commission finds that after statutory notice in the above-numbered docket heard on October 8, 1997, the presiding examiner has made and filed a report and recommendation containing findings of fact and conclusions of law, for which service was not required; that the proposed application is in compliance with all statutory requirements; and that this proceeding was duly submitted to the Railroad Commission of Texas at conference held in its offices in Austin, Texas.

The Commission, after review and due consideration of the examiner's report and recommendation, the findings of fact and conclusions of law contained therein, hereby adopts as its own the findings of fact and conclusions of law contained therein, and incorporates said findings of fact and conclusions of law as if fully set out and separately stated herein.

Therefore, it is ordered by the Railroad Commission of Texas that the following fields located in Webb County, Texas, are hereby combined into a new field called the Vaquillas Ranch (Lobo Cons.) Field (No. q3~t 5 400 ):

BALTAZAR (LOBO 6 10470) FIELD 05357400 BARNSLEY (LOBO 10900) FIELD 05791 800 BARNSLEY (LOBO) FIELD 05791 400 BONEBRAKE (LOBO 6) FIELD 10419 500 BONEBRAKE (UPPER LOBO) FIELD 10419 800 CALICHE CREEK (LOBO) FIELD 14735225 CARR (LOBO 10100) FIELD 15874 350 CARR (LOBO 8300) FIELD 15874 235 CARR (LOBO 8600) FIELD 15874 250 CARR (LOBO 8700) FIELD 15874275 CARR (LOBO) FIELD 15874200 CARR (WILCOX 8200) FIELD 15874 600 CARR (WILCOX 8300) FIELD 15874 700 CARR (WILCOX) FIELD 15874 500 CATTO (LOBO 9900) FIELD 16405400 CATTO (LOBO 10200) FIELD 16405 500

EXHIBIT A-4

OIL AND GAS DOCKET NO. XX-XXXXXXX PAGE 2

DESPARADO (LOBO 6) FIELD 24394500 DIAMONDBACK (LOBO 3) FIELD 24574400 GATO CREEK (9800) FIELD 34238400 GATO CREEK (LOBO 1) FIELD 34238 300 GATO CREEK (LOBO 1-SEGA) FIELD 34238 325 GATO CREEK (LOBO 3) FIELD 34238 350 GATO CREEK (LOBO 6 SEGMENT A) FIELD 34238 375 GATO CREEK, SE (9800) FIELD 34242 980 GATO CREEK, SE (LOBO 1) FIELD 34242 500 GATO CREEK, SE (UP. LOBO STRAY) FIELD 34242 750 HIRSCH (LOBO 9746) FIELD 41659075 JURASCHEK (LOBO) FIELD 47740 500 JURASCHEK (WILCOX 11600) FIELD 47740600 LUNDELL (LOBO 9200) FIELD 55755 180 LUNDELL (LOBO) FIELD 55755 175 MCLEAN (LOBO) FIELD 59725500 MUJERES CREEK (LOBO 1) FIELD 63668 300 MUJERES CREEK (LOBO 3) FIELD 63668400 MUJERES CREEK (LOBO 6) FIELD 63668500 MUJERES CREEK (LOBO) FIELD 63668250 MUJERES CREEK, SOUTH (LOBO) FIELD 63670500 NICHOLSON (LOBO 3) FIELD 65469020 NORDAN (LOBO) FIELD 65934500 POZO (LOBO) FIELD 72838500 RANCHO VIEJO, S. (LOBO 6) FIELD 74570 100 RANCHO VIEJO (LOBO 3) FIELD 74568680 RANCHO VIEJO (LOBO 6) FIELD 74568700 VAQUILLAS RANCH (LOBO 8100) FIELD 93215450 VAQUILLAS RANCH (UP. LOBO STRAY) FIELD 93215600 VAQUILLAS RANCH (WALKER 8300) FIELD 93215680 VAQUILLAS RANCH (WALKER 8600) FIELD 93215690 VAQUILLAS RANCH (WALKER, N.) FIELD 93215670 VAQUILLAS RANCH (WILCOX 11,100) FIELD 93215 700 VAQUILLAS RANCH (WILCOX 11,600) FIELD 93258750 VAQUILLAS RANCH (WILCOX 11,900) FIELD 93215 725 VAQUILLAS RANCH (YARSA) FIELD 93258 900 VENADA (9800) FIELD 93436 800 VENADA (LOBO) FIELD 93436300 VERGARA (LOBO 9300) FIELD 93537750 VERGARA (LOBO) FIELD 93537 500

It is further ordered that the following rules are adopted for the Vaquillas Ranch (Lobo Cons.) Field:

r

!

I

OIL AND GAS DOCKET NO. XX-XXXXXXX PAGE 3

RULE 1: The entire Lobo Formation from the Lobo Unconformity to the top of the Wills Point (Midway Shale) and including the above listed fields in Webb County, Texas, shall be designated as a single reservoir for proration purposes and be designated as the Vaquillas Ranch (Lobo Cons.) Field.

RULE 2: No gas well shall hereafter be drilled nearer than FOUR HUNDRED SIXTY SEVEN (467) feet to any property line, lease line or subdivision line and no well shall be drilled nearer than ONE THOUSAND TWO HUNDRED (1,200) feet to any applied for, permitted or completed well in the same reservoir on the same lease, pooled unit or unitized tract. The aforementioned distances in the above rule are minimum distances to allow an operator flexibility in locating a well, and the above spacing rule and the other rules to follow are for the purpose of permitting only one well to each drilling and proration unit. Provided however, that the Commission will grant exceptions to permit drilling within shorter distances and drilling more wells than herein prescribed whenever the Commission shall have determined that such exceptions are necessary either to prevent waste or to prevent the confiscation of property. When exception to these rules is desired, application therefore shall be filed and will be acted upon in accordance with the provisions of Commission Statewide Rule 37 and 38, which applicable provisions of said rule are incorporated herein by reference. Provided however, that persons who are presumed to be affected by a request for an exception to the between-well spacing requirement shall be limited to the operators and ownersllessees of tracts, lease or units within one mile or less of the proposed well.

In applying this rule the general order of the Commission with relation to the subdivision of property shall be observed.

RULE 3: The daily allowable production of gas from individual wells completed in the subject field shall be determined by allocating the allowable production, after deductions have been made for wells which are incapable of producing their gas allowables, among the individual wells in the following manner:

TEN percent (10%) of the total field allowable shall be allocated equally among the individual wells producing from this field.

NINETY percent (90%) of the total field allowable shall be allocated among the individual wells in the proportion that the deliverability of such well, as evidenced by the most recent G-10 test filed with the Railroad Commission bears to the summation of the deliverability of all proratable wells producing from this field.

It is further ordered by the Railroad Commission of Texas that the allocation formula for the Vaquillas Ranch (Lobo Cons.) Field be suspended. The allocation formula may be reinstated administratively if the market demand for gas in the Vaquillas Ranch (Lobo Cons.) Field drops below 100% of deliverability. If the market demand for gas in the Vaquillas Ranch (Lobo Cons.) Field drops below 100% of deliverability while the allocation formula is suspended, the operator shall immediately notify the Commission and the allocation formula shall be immediately

11

247

J

OIL AND GAS DOCKET NO. XX-XXXXXXX PAGE 4

reinstated. Failure to give such notice to the Commission may result in a fine (as provided for in Tex. Nat. Res. Code §86.222) for eac day the operators fail to give notice to the Commission.

Effective this d/f ~ay of , 19q9 .

COMMISSIO~ a:zON

249

<AILROAD COMMISSION OF TEXAS T;' 'TT:

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RAILROAD COMMISSION OF TEXAS OFFICE OF GENERAL COUNSEL

OIL AND GAS DOCKET IN THE VAQUILLAS RANCH (LOBO NO. XX-XXXXXXX CONS.) FIELD, WEBB COUNTY, TEXAS

FINAL ORDER AMENDING FIELD RULES FOR THE VAQUILLAS RANCH (LOBO CONS.) FIELD WEBB COUNTY, TEXAS The Commission finds that after statutory notice in the above-numbered docket heard on September 23, 2010, the presiding examiner has made and filed a report and recommendation containing findings of fact and conclusions of law, for which service was not required; that the proposed application is in compliance with all statutory requirements; and that this proceeding was duly submitted to the Railroad Commission of Texas at conference held in its offices in Austin, Texas.

The Commission, after review and due consideration of the examiner's report and recommendation, the findings of fact and conclusions of law contained therein, hereby adopts as its own the findings of fact and conclusions of law contained therein, and incorporates said findings of fact and conclusions of law as if fully set out and separately stated herein.

Therefore, it is ordered by the Railroad Commission of Texas that Rule 2 of the field rules adopted in Final Order No. XX-XXXXXXX, effective February 24, 1998, for the Vaqui/las Ranch (Lobo Cons.) Field, Webb County, Texas, is amended as hereafter set out:

RULE 2: No well shall hereafter be drilled nearer than FOUR HUNDRED SIXTY SEVEN (467) feet to any property line, lease line or subdivision line and no well shall be drilled nearer than ONE THOUSAND TWO HUNDRED (1,200) feet to any applied for, permitted or completed well in the same reservoir on the same lease, pooled unit or unitized tract. Provided, however, there is no minimum between-well spacing requirement between a well being permitted at least 660 feet from the nearest property line, lease line or subdivision line, and the other wells permitted, drilled or completed on the same lease, pooled unit or unitized tract. A well being permitted at a distance less than SIX HUNDRED SIXTY (660) feet from the nearest property line, lease line or subdivision line must be a minimum of ONE THOUSAND TWO HUNDRED (1,200) feet from any applied for, permitted or completed well in the same reservoir on the same lease, pooled unit or unitized tract, or an exception to Rule 37 must be obtained.

The aforementioned distances in the above rule are minimum distances to allow an operator flexibility in locating a well, and the above spacing rule and the other rules to follow are for the purpose of permitting only one well to each drilling and proration unit. Provided however, that the Commission will grant exceptions to permit drilling within

. '" ,~, EXHIBIT

A-5 254

OIL AND GAS DOCKET NO. XX-XXXXXXX Page 2

shorter distances and drilling more wells than herein prescribed whenever the Commission shall have determined that such exceptions are necessary either to prevent waste or to prevent the confiscation of property. When exception to these rules is desired, application therefore shall be filed and will be acted upon in accordance with the provisions of Commission Statewide Rule 37 and 38, which applicable provisions of said rule are incorporated herein by reference. Provided however, that persons who are presumed to be affected by a request for an exception to the between-well spacing requirement shall be limited to the operators and ownersllessees of tracts, lease or units within one mile or less of the proposed well.

In applying this rule the general order of the Commission with relation to the subdivision of property shall be observed.

Done this 2nd day of November, 2010.

RAILROAD COMMISSION OF TEXAS

(Order approved and signatures affixed by OGe Unprotested Master Order dated November 2,2010)

: Texas Administrati ve Code http: //info.sos.state. tx. us/pls/pu b/readtac$ex t. TacPage ?sl=R&app=9& p_ d ...

Filed 10/29/20149:51:53 AM Esther Degollado «Prev Rule Next Ru~i§~ct Clerk Texas Administrative Code ebb District 2014 cvaooo438 D4 TITLE 16 ECONOMIC REGULATION PART 1 RAILROAD COMMISSION OF TEXAS CHAPTER 3 OIL AND GAS DIVISION RULE §3.38 Well Densities

(a) Definitions. The following words and terms. when used in this section. shall have the following meanings. unless the context clearly indicates otherwise.

(I) Commission designee--Director of the Oil and Gas Division or any Commission employee designated in writing by the director or the Commission.

(2) Drilling unit--The acreage assigned to a well for drilling purposes.

(3) Proration unit--The acreage assigned to a well for the purpose of assigning allowables and allocating allowable production to the well.

(4) Substandard acreage--Less acreage than the smallest amount established for standard or optional drilling units.

(5) Surplus acreage--Substandard acreage within a lease, pooled unit, or unitized tract that remains unassigned after the assignment of acreage to each applied for, permitted, or completed well in a field , in an amount equaling or exceeding the amount established for standard or optional drilling units. Surplus acreage is distinguished from the term "tolerance acreage,"in that tolerance acreage is defined in context with proration regulation, while surplus acreage is defined by this rule only in context with well density regulation.

(6) Tolerance acreage--Acreage within a lease, pooled unit, or unitized tract that may be assigned to a well for proration purposes pursuant to special field rules in addition to the amount established for a prescribed or optional proration unit.

(b) Density requirements.

(1) General prohibition. No well shall be drilled on substandard acreage except as hereinafter provided.

(2) Standard units.

(A) The standard drilling unit for all oil, gas , and geothermal resource fields wherein only spacing rules, either special , country regular, or statewide, are applicable is hereby prescribed to be the following.

Attached Graphic

(B) The spacing rules listed in subparagraph (A) of this paragraph are not exclusive. If any spacing rule not listed in subparagraph (A) of this subsection is brought to the attention of the commission, it will b e E ] gi ven an appropriate acreage assignment. EXHIBIT

3

(c) Development to final density. An application to drill a well for oil , gas, or geothermal resource on a drilling unit composed of surplus acreage, commonly referred to as the "tolerance well," may be granted as 409

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regular when the operator seeking such permit certifies to the commission in a prescribed form the necessary data to show that such permit is needed to develop a lease, pooled unit, or unitized tract to final density, and only in the following circumstances:

(I) when the amount of surplus acreage equals or exceeds the maximum amount provided for tolerance acreage by special or county regular rules for the field, provided that this paragraph does not apply for a lease, pooled unit, or unitized tract that is completely developed with optional units and the special or county regular rules for the field do not have a tolerance provisions expressly made applicable to optional proration units;

(2) if the special or county regular rules for the field do not have a tolerance provision expressly made applicable to optional proration units, when the amount of surplus acreage equals or exceeds one-half of the smallest amount established for an optional drilling unit; or

(3) if the applicable rules for the field do not have a tolerance provision for the standard drilling or proration unit, when the amount of surplus acreage equals or exceeds one-half the amount prescribed for the standard unit.

(d) Applications involving the voluntary subdivision rule.

(I) Density exception not required. An exception to the minimum density provision is not required for the first well in a field on a lease, pooled unit, or unitized tract composed of substandard acreage, when the leases, or the drill site tract of a pooled unit or unitized tract:

(A) took its present size and shape prior to the date of attachment of the voluntary subdivision rule (§3.37(g) of this title (relating to Statewide Spacing Rule)); or

(B) took its present size and shape after the date of attachment of the voluntary subdivision rule (§3.37(g) of this title (relating to Statewide Spacing Rule)) and was not composed of substandard acreage in the field according to the density rules in effect at the time it took its present size and shape.

(2) Density exception required. An exception to the density provision is required, and may be granted only to prevent waste, for a well on a lease, pooled unit, or unitized tract that is composed of substandard acreage and that:

(A) took its present size and shape after the date of attachment of the voluntary subdivision rule (§3.37(g) of this title (relating to the Statewide Spacing Rule)); and

(B) was composed of substandard acreage in the field according to the density rules in effect at the time it took its present size and shape.

(3) Unit dissolution.

(A) If two or more separate tracts are joined to form a unit for oil or gas development, the unit is accepted by the Commission, and the unit has produced hydrocarbons in the preceding twenty (20) years, the unit may not thereafter be dissolved into the separate tracts with the rules of the commission applicable to each separate tract if the dissolution results in any tract composed of substandard acreage for the field from which the unit produced, unless the Commission approves such dissolution.

(B) The Commission shall grant approval only after application, notice, and an opportunity for hearing.

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The applicant seeking the unit dissolution shall provide a list of the names and addresses of all current lessees and unleased mineral interest owners of each tract within the joined or unitized tract at the time the application is filed. The Commission shall give notice of the application to all current lessees and unleased mineral interest owners of each tract within the joined or unitized tract. Additionally, if one or more wells on the unitized tract has produced from the field within the l2-month period prior to the application, the applicant shall include on the list all affected persons described in subsection (h)(I)(A) of this section, and the Commission shall give notice of the application to these affected persons.

(C) A Commission designee may grant administrative approval if the Commission designee determines that granting the application will not result in the circumvention of the density restrictions of this section or other Commission rules, and if either:

(i) written waivers are filed by all affected persons; or

(ii) no protest is filed within the time set forth in the notice of application.

(e) Application involving unitized areas with entity for density orders. An exception to the minimum density provision is not required for a well in a unitized area for which the commission has granted an entity for density order, if the sum of all applied for, permitted, or completed producing wells in the field within the unitized area, multiplied by the applicable density provision, does not exceed the total number of acres in the unitized area. The operator must indicate the docket number of the entity for density order on the application form.

(f) Exceptions to density provisions authorized. The Commission, or Commission designee, in order to prevent waste or, except as provided in subsection (d)(2) of this section, to prevent the confiscation of property, may grant exceptions to the density provisions set forth in this section. Such an exception may be granted only after notice and an opportunity for hearing.

(g) Filing requirements.

(I) Application. An application for permit to drill shall include the fees required in §3.78 of this title (relating to Fees and Financial Security Requirements) and shall be certified by a person acquainted with the facts, stating that all information in the application is true and complete to the best of that person's knowledge.

(2) Plat. When filing an application for an exception to the density requirements of this section, in addition to the plat requirements in §3.5 of this title (relating to Application to Drill, Deepen, Reenter, or Plug Back) (Statewide Rule 5), the applicant shall attach to each copy of the application a plat that:

(A) depicts the lease, pooled unit, or unitized tract, showing thereon the acreage assigned to the drilling unit for the proposed well and the acreage assigned to all current applied for, permitted, or completed oil, gas, or oil and gas wells in the same field or reservoir which are located within the lease, pooled unit, or unitized tract;

(B) on large leases, pooled units, or unitized tracts, if the established density is not exceeded as shown on the face of the application, outlines the acreage assigned to the well for which the permit is sought and the immediately adjacent wells on the lease, pooled unit, or unitized tract;

(C) on leases, pooled units, or unitized tracts from which production is secured from more than one field, outlines the acreage assigned to the wells in each field that is the subject of the current application;

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(D) corresponds to the listing required under subsection (g)(1)(A) of this section.

(E) is certified by a person acquainted with the facts pertinent to the application that the plat is accurately drawn to scale and correctly reflects all pertinent and required data.

(3) Substandard acreage. An application for a permit to drill on a lease, pooled unit, or unitized tract composed of substandard acreage must include a certification in a prescribed form indicating the date the lease, or the drill site tract of a pooled unit or unitized tract, took its present size and shape.

(4) Surplus acreage. An application for permit to drill on surplus acreage pursuant to subsection (c) of this section must include a certification in a prescribed form indicating the date the lease, pooled unit, or unitized tract took its present size and shape.

(5) Certifications. Certifications required under paragraphs (3) and (4) of this subsection shall be filed on Form W-lA, Substandard Acreage Certification.

(A) The operator shall file the Form W-IA with the drilling permit application and shall indicate the purpose of filing. The operator shall accurately complete all information required on the form in accordance with instructions on the form.

(B) The operator shall list the field or fields for which the substandard acreage certification applies in the designated area on the form. If there are more than three fields for which the certification applies, the operator shall attach additional Forms W-IA and shall number the additional pages in sequence.

(C) The operator shall file the original Form W-IA with the Commission's Austin office and a copy with the appropriate district office, unless the operator files electronically through the Commission's Electronic Compliance and Approval Process (ECAP) system.

(D) The operator or the operator's agent shall certify the information provided on the Form W-IA is true, complete, and correct by signing and dating the form, and listing the requested identification and contact information.

(E) Failure to timely file the required information on the appropriate form may result in the dismissal of the application.

(h) Procedure for obtaining exceptions to the density provisions.

(1) Filing requirements. If a permit to drill requires an exception to the applicable density provision, the operator must file, in addition to the items required by subsection (g) of this section:

(A) a list of the names and addresses of all affected persons. For the purpose of giving notice of application, the Commission presumes that affected persons include the operators and unleased mineral interest owners of all adjacent offset tracts, and the operators and unleased mineral interest owners of all tracts nearer to the proposed well than the prescribed minimum lease-line spacing distance. The Commission designee may determine that such a person is not affected only upon written request and a showing by the applicant that:

(i) competent, convincing geological or engineering data indicate that drainage of hydrocarbons from the particular tracts subject to the request will not occur due to production from the proposed well; and

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(ii) notice to the particular operators and unleased mineral interest owners would be unduly burdensome or expenSIve;

(B) engineering and/or geological data, including a written explanation of each exhibit, showing that the drilling of a well on substandard acreage is necessary to prevent waste or to prevent the confiscation of property;

(C) additional data requested by the Commission designee.

(2) Notice of application. Upon receipt of a complete application, the Commission will give notice of the application by mail to all affected persons for whom signed waivers have not been submitted.

(3) Approval without hearing. If the Commission designee determines, based on the data submitted, that a permit requiring an exception to the applicable density provision is justified according to subsection (f) of this section, then the Commission designee may issue the exception permit administratively if:

(A) signed waivers from all affected persons were submitted with the application; or

(B) notice of application was given in accordance with paragraph (2) of this subsection and no protest was filed within 21 days of the notice; or

(C) no person appeared to protest the application at a hearing scheduled pursuant to paragraph (4)(A) of this subsection.

(4) Hearing on the application.

(A) If a written protest is filed within 21 days after the notice of application is given in accordance with paragraph (2) of this subsection, the application will be set for hearing.

(B) If the application is not protested and the Commission designee determines that a permit requiring an exception to the applicable density provision is not justified according to subsection (f) of this section, the operator may request a hearing to consider the application.

(i) Duration. A permit is issued as an exception to the applicable density provision shall expire two years from the effective date of the permit; unless drilling operations are commenced in good faith within the two year period.

Source Note: The provisions of this §3.38 adopted to be effective November 1, 1989, 14 TexReg 5255; amended to be effective April 21, 1997,22 TexReg 3404; amended to be effective July 10,2000,25 TexReg 6487; amended to be effective June 11,2001,26 TexReg 4088; amended to be effective February 13,2002, 27 TexReg 906; amended to be effective September 1,2004,29 TexReg 8271

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HOME I mAS REGISTER I TEXAS hDHllU\TlI.ATIVE [ODE I OPEN MEETINGS I HELP I

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Figure: 16 TAC §3.38(b)(2)(A) http://info.sos.state.tx.us/fids/ 16_0003_0038- I.html

Figure: 16 TAC §3.38(b)(2)(A)

Acreage Requirement Spacing Rule I II I

(1) 150 - 300 2 I I (2) 200 - 400 4

(3) 330 - 660 10

(4) 330 - 933 20 I (5) 467 - 933 20

(6) 467 - 1200 40

(7) 660 - 1320 40

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HYPERLINKED MATERIAL

Page 1

403 S.W.2d 325 (Cite as: 403 S.W.2d 325)

Hamilton, Pope, and Griffin, JJ., dissented.

Supreme Court of Texas. West Headnotes Mildred Mitchell JONES et vir, Petitioners, v. [1] Mines and Minerals 260 79.1(5)

S. H. KILLINGSWORTH et al., Respondents.

260 Mines and Minerals No. A—10243. 260II Title, Conveyances, and Contracts Dec. 8, 1965. 260II(C) Leases, Licenses, and Contracts Rehearing Denied and Dissenting Opinion Filed April 260II(C)3 Construction and Operation of 20, 1966. Oil and Gas Leases 260k79 Rent or Royalties Action by oil, gas, and mineral lessors against 260k79.1 In General lessee's assignee and of owners of neighboring leases 260k79.1(5) k. Community to obtain judgment declaring lease terminated at ex- Leases, Unitization, or Pooling Arrangements. Most piration of primary term, to remove cloud on title, and Cited Cases to obtain title to and possession of leased premises. (Formerly 260k79(1)) The District Court, Henderson County, Jack Y. Hardee, J., entered judgment for defendants, and the Ascertainment of parties' true intention under oil, lessors appealed. The Tyler Court of Civil Appeals, gas, and mineral lease as to lessee's authority to pool Twelfth Supreme Judicial District, 379 S.W.2d 362, leased land into oil unit containing 170.86 acres would affirmed the judgment, and the lessors brought error. require consideration of all pooling provisions con- The Supreme Court, Smith, J., held that lease pooling tained in lease and rules and regulations governing clause limiting units pooled for oil to area not sub- field in which leased land was located. stantially exceeding 40 acres but permitting units to conform with size of those prescribed by govern- [2] Mines and Minerals 260 79.1(5) mental regulations if government prescribes or permits larger units did not authorize a 170.86 acre unit 260 Mines and Minerals where rule governing field provided that no proration 260II Title, Conveyances, and Contracts unit should consist of more than 80 acres but permitted 260II(C) Leases, Licenses, and Contracts operators to elect to assign an additional 80 acres, and 260II(C)3 Construction and Operation of that lease habendum clause permitting extension Oil and Gas Leases based on pooling could not be used to extend lease 260k79 Rent or Royalties beyond primary term where lands had been pooled 260k79.1 In General without authority.

260k79.1(5) k. Community Leases, Unitization, or Pooling Arrangements. Most Judgments reversed, and judgment terminating Cited Cases lease and awarding title and possession rendered. (Formerly 260k79(1))

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Page 2

403 S.W.2d 325 (Cite as: 403 S.W.2d 325)

Oil, gas, and mineral lease pooling clause limiting by lessor with those of other lessors.

units pooled for oil to area not substantially exceeding 40 acres but permitting units to conform in size with [5] Mines and Minerals 260 73.5 those prescribed by government regulations if government prescribes or permits larger units did not 260 Mines and Minerals authorize a 170.86 acre unit, where rule governing 260II Title, Conveyances, and Contracts field provided that no proration unit should consist of 260II(C) Leases, Licenses, and Contracts more than 80 acres but permitted operators to elect to 260II(C)3 Construction and Operation of assign an additional 80 acres and receive allowable Oil and Gas Leases credit of not more than 160 acres.

260k73.5 k. Term. Most Cited Cases (Formerly 260k731/2, 260k73)

[3] Mines and Minerals 260 92.79 Oil, gas, and mineral lease habendum clause de-

260 Mines and Minerals scribing term of lease as 10 years and so long there-

260III Operation of Mines, Quarries, and Wells after as oil was produced from land with which leased 260III(A) Statutory and Official Regulations land was pooled could not be used to extend term of 260k92.78 Unitization lease beyond 10-year primary term where lands had 260k92.79 k. In General; Procedure. been pooled without authority.

Most Cited Cases (Formerly 260k92.78)

[6] Mines and Minerals 260 92.79

Oil and gas well field rules adopted by Railroad 260 Mines and Minerals Commission require a proration unit of at least 80 260III Operation of Mines, Quarries, and Wells acres but permit larger units of not more than 160 260III(A) Statutory and Official Regulations acres.

260k92.78 Unitization 260k92.79 k. In General; Procedure.

[4] Mines and Minerals 260 79.1(5) Most Cited Cases

260 Mines and Minerals Railroad Commission's orders cannot compel 260II Title, Conveyances, and Contracts pooling agreements not agreed upon by parties to oil, 260II(C) Leases, Licenses, and Contracts gas, and mineral lease; the commission has no power 260II(C)3 Construction and Operation of to determine property rights.

Oil and Gas Leases 260k79 Rent or Royalties *326 John A. Pace, Edward Kliewer, Jr., Dallas, for 260k79.1 In General petitioners.

260k79.1(5) k. Community Leases, Unitization, or Pooling Arrangements. Most Ralph Shank, Prentice Wilson, Dallas, Murph Wilson, Cited Cases F. Wilbert Lasater, Ramey, Brelsford, Hull & Flock, (Formerly 260k79(1))

Frank L. McClendon, with above firm, Tyler, for respondents.

Absent express authority, oil, gas, and mineral lessee has no power to pool interests in estate retained

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Page 3

403 S.W.2d 325 (Cite as: 403 S.W.2d 325)

SMITH, Justice. this unit as though it contains only 160 acres.

ON MOTION FOR REHEARING Our opinion delivered on June 23, 1965, is with- It was stipulated that the unit owners commenced drawn and the following opinion is substituted there- drilling operations on the West Poynor Unit and for. completed a producing oil well on or about August 16, 1961, which ‘unit well’ has continued to produce oil in The question presented for our determination is paying quantities. It was agreed that ‘no well in search whether or not the lands owned by the petitioner, of oil, gas or other minerals has been drilled by S. H. Mildred Mitchell Jones, and described in an oil, gas Killingsworth and the other defendants on the lands and mineral lease executed by Mildred Mitchell Jones actually described by metes and bounds in the Long and her husband, Harry C. Jones, as lessors, to S. S. lease, and that no oil, gas or other minerals in paying Long, as lessee (later assigned to S. H. Killingsworth), quantities has been produced from any well actually on August 16, 1951, were effectively pooled into what located on the lands actually described in the Long is known as the Hunt Oil Company et al.—West lease.’ Poynor Unit. The trial court, without a jury, held that Killingsworth effectively pooled the acreage covered Although lessors contend that they are not bound by the lease in accordance with authority granted in by the terms of the Unit Declaration and the Amended the lease, and for that reason the lease did not termi- Unit Declaration, it is agreed that Killingsworth and nate on August 16, 1961, the date of the expiration of the other unit owners in the unit acted in good faith in the primary term. A take-nothing judgment rendered forming the unit, in securing a permit to drill and in against the petitioners has been affirmed by the Court drilling the well on the unit. of Civil Appeals. 379 S.W.2d 362.

The habendum clause of the Mitchell-Long lease The judgments of both the trial court and the provides that:

Court of Civil Appeals are reversed and judgment is rendered for the petitioners.

'Subject to the other provisions herein contained, this lease shall be for a term of ten (10) years from this Mildred Mitchell Jones and her husband filed this date * * * And as long thereafter as oil * * * is prosuit against S. H. Killingsworth and owners of leases duced from * * * land with which said land is pooled in the immediate vicinity of the Mitchell-Long lease. hereunder.' These owners will be referred to as ‘Hunt Petroleum Corporation.’ On July 12, 1961, at a time when the The pertinent pooling provisions of the lease are Mitchell-Long lease was in effect and was owned by to be found in the first two sentences of paragraph 4 of and the title thereto was vested in S. H. Killingsworth, the Mitchell-Long lease. These sentences read as subject to certain overriding royalty interests, Killfollows :

ingsworth, joined by the above-mentioned owners of other leases, entered into a pooling agreement estab-

‘Lessee, at its option, is hereby given the right and lishing a unit hereinafter referred to as the ‘West power to pool or *327 combine the acreage covered by Poynor Unit.’ The two tracts of land described in the this lease, or any portion thereof as to oil and gas, or Mitchell-Long lease were included within this unit either of them, with other land, lease or leases in the designation. These tracts contained, in the aggregate, immediate vicinity thereof to the extent, hereinafter 20.55 acres. It was stipulated that the created unit stipulated, when in Lessee's judgment it is necessary contained 170.86 acres. However, the parties deal with

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or advisable to do so in order properly to develop and with those Prescribed by governmental regulations.’ operate said leased premises in compliance with the (Emphasis added.) Absent this proviso, perhaps it spacing rules of the Railroad Commission of Texas, or could well be said that the lessee was given authority other lawful authority, or when to do so would, in the to pool the lessor's land for oil only in units not subjudgment of Lessee, promote the conservation of oil stantially exceeding 40 acres in area for either the and gas from said premises. Units pooled for oil purpose of complying with spacing rules or to promote hereunder shall not substantially exceed 40 acres each the conservation of oil, the two situations mentioned in area, and units pooled for gas hereunder shall not in the first sentence wherein the power to pool is left substantially exceed in area 640 acres each plus a exclusively to lessee's judgment. In order to ascertain tolerance of 10% Thereof, provided that should gov- the true intention of the parties to this lease, the Court ernmental authority having jurisdiction prescribe or should take into consideration all of the pooling propermit the creation of units larger than those specified, visions contained therin, as well as the rules and regunits thereafter created may conform substantially in ulations governing the Fairway (James Lime) Field in size with those prescribed by governmental regula- which lessors' land is located. (The rules adopted by tions.’ the Railroad Commission governing that field have the express purpose of ‘permitting only one well to [1][2][3][4][5] The issue in this case is not each eighty (80) acre proration unit.’ The field rules whether the pooling clause granted authority to pool only encourage larger units by Permitting an operator the Jones' land into an oil unit consisting of more than ‘to assign tolerance of not more than eighty (80) acres 40 acres. The issue, properly defined, is whether the of additional unassigned lease acreage to a well on an pooling clause granted authority pool the Jones' land eighty (80) acre unit and shall in such event receive into an oil unit containing 170.86 acres. The lessors allowable credit for not more than one hundred sixty take the position that authority to pool their land into (160) acres.’) It is argued that these Railroad Coman oil unit consisting of 170.86 acres was not granted mission rules provide for proration units of not less by the lease, and that the attempt to pool did not ef- than 80 acres more than 160 acres, and that by reading fectively extend the term of the lease beyond the ter- the rules into the lease contract, paragraph 4 of the minal date provided therein. We agree with the lessee lease would read: ‘the size of the units thereafter crethat the pooling provision confers authority on the ated may not be substantially less than 80 acres nor lessee to pool the lessors' land, but, we do not agree substantially more than 160 acres.’ We disagree with that the Extent to which the power to pool may be this construction of the lease *328 contract. The lesexercised is entrusted solely to the lessee's judgment. sors did not consent to enlarge an oil proration unit to The lessors' land may be pooled only to the extent any size Permitted by governmental regulations. They stipulated in the lease. The second sentence of the gave their consent to enlarge a unit of substantially 40 pooling provision provides that ‘units pooled for oil * acres, but only to the extent of the size of units Pre- * * shall not substantially exceed 40 acres each in area, scribed by the regulatory authority. The fact that the and units pooled for gas * * * shall not substantially Railroad Commission may Permit a much larger unit exceed in area 640 acres each plus a tolerance of 10% cannot be read into the lease contract when, as here, Thereof. * * *’ However, this provision must be con- the authority to create larger oil units is expressly strued in the light of the further provisions which is to limited to units of the size Prescribed by the Railroad the effect that in the event a governmental authority Commission. The Commission Prescribed a unit of 80 having jurisdiction should ‘prescribe or Permit the acres. (The field rules clearly say that there Must be a creation of units larger than those specified units proration unit of at least 80 acres, and there May be thereafter created may conform substantially in size larger units of not more than 60 acres.) It is true that

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the pooling provision contains the word ‘permit’ as (1943); Nale v. Carroll, 155 Tex. 555, 289 S.W.2d 743 well as the word ‘prescribe.’ It is not unreasonable to (1956). assume that the parties to the lease contract intended, by the use of both words, to give each a distinctly (The judgments of the trial court and the Court of different meaning. The parties obviously knew when Civil Appeals are both reversed and judgment is renthe lease contract was executed that a Permitted oil dered declaring the Mitchell Long lease terminated as proration unit could conceivably be much larger in of August 16, 1961, and the title and possession of the area than one Prescribed by governmental authority. lands described in said lease is awarded to Mildred To say that a lessee can pool lessors' land with units of Mitchell Jones. Respondents' motion for rehearing is any size Permitted by the Railroad Commission would overruled. A second motion for rehearing may be filed defeat the intention of the parties to restrict the size of within fifteen days.) the units to the size Prescribed by governmental authority . Absent express authority, a lessee has no GRIFFIN, HAMILTON and POPE, JJ., dissenting.

power to pool interests in the estate retained by the lessor with those of other lessors. See Brown v. Smith, HAMILTON, Justice (dissenting).

141 Tex. 425, 174 S.W.2d 43 (1943); Gulf Oil Cor-

I withdraw the dissenting opinion heretofore filed poration v. Marathon Oil Co., 137 Tex. 59, 152 in this cause on June 23, 1965, and file the following S.W.2d 711 (1941); Knight v. Chicago Corporation, opinion, respectfully dissenting:

144 Tex. 98, 188 S.W.2d 564 (1945). Since the lands were pooled without authority, the habendum clause in the Mitchell-Long lease cannot be used to extend I disagree with the Court's construction of the the term of the lease beyond August 16, 1961, the pooling agreement in the oil and gas lease under conterminal date of the primary term of the lease. sideration and with the application of the pooling agreement to the rules and regulations adopted by the Railroad Commission. Construing the pooling*329 [6] Killingsworth and the Hunt Petroleum Coragreement in its entirety simply means that the lessee poration contend that the pooling clause in the was given authority to pool the lessor's land with other Mitchell-Long lease created a relationship of principal land in units, the size of which are controlled by the and agent, or at least created a relationship similar to rules and regulations of the Railroad Commission.

the of principal and agent, and that performance by the lessee is to be measured by the standard of good faith. It is true that the lessee acted in good faith. It is true The applicable rules and regulations for the dethat the lessee was given authority to pool. It is equally velopment of the Fairway (James Lime) Field, in true that the permit granted by the Railroad Commis- which the pooling unit in question is located, are set sion is unquestionably valid. Even so, the acts of the out in Railroad Commission Order No. 6—45, 322. Railroad Commission cannot be said to operate ef- Rules 1 and 2 of that order are as follows: fectively to extend the restrictive terms of the lease. The orders of the Railroad Commission cannot com- ‘RULE 1: No well for oil or gas shall hereafter be pel pooling agreements that the parties themselves do drilled nearer than eighteen hundred fifty (1850) feet not agree upon. The Railroad Commission has no to any well completed in or drilling to the same respower to determine property rights. See Ryan Con- ervoir on the same lease, unitized tract or farm, and no solidated Petroleum Corp. v. Pickens, 155 Tex. 221, well shall be drilled nearer than six hundred sixty 285 S.W.2d 201 (1955); Magnolia Petroleum Co. v. (660) feet to any property line, lease line or subdivi- Railroad Commission, 141 Tex. 96, 170 S.W.2d 189 sion line; provided, however, that the Commission

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will, in order to prevent waste or to prevent the con- eighty (80) acre unit and shall in such event receive fiscation of property grant exceptions to permit drill- allowable credit for not more than one hundred sixty ing within shorter distances than herein prescribed (160) acres. whenever the Commission shall have determined that such exceptions are necessary either to prevent waste ‘Operators shall file with the Commission certior to prevent the confiscation of property. When ex- fied plats of their properties in said field, which plats ception to this rule is desired, application therefor shall set out distinctly all of those things pertinent to shall be filed and will be acted upon in accordance the determination of the acreage credit claimed for with the provisions of Commission Statewide Rules each well; provided that if the acreage assigned to any 37 and 38, which applicable provisions of said rules proration unit has been pooled, the operator shall are incorporated herein by reference. furnish the Commission with such proof as it may require as evidence that interests in and under such ‘The aforementioned distances in the above rule proration unit have been so pooled.’

are minimum distances to allow an operator flexibility in locating a well, and the above spacing rule and the The petitioner does not contend, nor does the other rules to follow are for the purpose of permitting opinion say, that the proration unit in *330 question only one well to each eighty (80) are proration unit. does not comply with the regulations of the Railroad Commission. The opinion simply assumes, without ‘In applying this rule, the general order of the giving a reason why, that the regulations of the Rail-

Commission with relation to the subdivision of prop- road Commission under which the unit in question erty shall be observed. was created were not Prescribed by governmental regulations.

‘RULE 2: The acreage assigned to the individual oil well for the purpose of allocating allowable oil The court, in discussing the provisions of the production thereto shall be known as a proration unit. regulations, does not fully cover all the size units No proration unit shall consist of more than eighty provided in said regulations. Since the authority given (80) acres except as hereinafter provided, and the two by lessor to pool is governed largely by these regulafarthermost points in any proration unit shall not be in tions, it is thought that it well be helpful to more fully excess of forty two hundred (4200) feet removed from analyze them. each other; provided, however, that in the case of long and narrow leases or in cases where because of the At the time the unit in question was formed, shape of the lease such is necessary to permit the Railroad Commission Order No. 6—45, 322 was in utilization of tolerance acreage the Commission may effect and governed the Fairway (James Lime) Field. after proper showing grant exceptions to the limita- One of the Commission's preliminary findings set out tions as to the shape of proration units as herein con- in the order, preceding the adoption of field rules, was tained. All proration units, however, shall consist of an express finding to the effect that certain observacontinuous and contiguous acreage which can rea- tions and calculations made with reference to the sonably be considered to be productive of oil. discovery well in the field had indicated that the well was producing oil in an area outside the radius of a ‘Provided, however, that operators may elect to 160-acre circle around the well. From this and other assign tolerance of not more than eighty (80) acres of findings the Commission proceeded to adopt proration additional unassigned lease acreage to a well on an rules which established a maximum proration unit of

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160 acres for which full acreage allowable credit The pooling unit in question comes squarely would be given. Thus, it was implicit that the Com- within the limits as to size with the provisions of the mission had determined that the basic drainage pattern governmental regulations just as much so as does the for the field was 160 acres or, in other words, that a 80-acre unit referred to above. 160-acre unit would be reasonably drained by a single well. This brings us to a discussion of the interpretation to be given the proviso of the pooling unit, which we The Commission order did something more. It here quote:

expressly recognized that smaller units would also be given full acreage allowable credit, if they met certain ‘* * * provided that should governmental authorrequirements . One of the provisions of the rules es- ity having jurisdiction prescribe or permit the creation tablished, in effect, that if an operator had as much as of units larger than those specified, units thereafter 80 acres in a single lease, 80 acres would then be created may conform substantially in size with those considered as the minimum proration unit, the inclu- prescribed by governmental regulations.’ sion of additional acreage, up to the total maximum of 160 acres, being optional with the operator. But an-

The first clause of the proviso governs the condiother provision, relating to distance spacing, also tion under which the lessee may create units larger established that, still without the necessity of any than those specified, *331 (40 acres), that is, when hearing or exception, any square tract of 40 acres or government authority has prescribed rules and regumore would also serve as an acceptable proration unit, lations for the creation of larger units or when govif that were all the acreage the operator possessed in ernmental authority has permitted the creation of the particular property, and if there had been no illegal larger units. Under the facts of this case the governsubdivision . The 40-acre minimum standard was mental authority has prescribed rules and regulations implicit in the rule that no well be drilled nearer than providing for the creation of larger units, but it has not 660 feet from any property line. Thus, the Commispermitted the creation of larger units. No permit was sion Order in effect recognized that, without special requested nor was one needed. As a general rule the hearing and exception, the maximum standard prora-

Railroad Commission permits the creation of units tion unit, i.e., the area which could reasonably be only as exceptions to established rules and regulations.

drained by a single well, was 160 acres, while the The last clause of the proviso governs the size of units minimum standard unit, i.e., the smallest to be alcreated under either prescribed regulations or govlowed , was 40 acres. Pickens v. Railroad Commisernmental authority permission. As said above, it is sion, 387 S.W.2d 35, 38, 39 (Tex.Sup.Ct.1965).

not questioned but that this unit was created in compliance with the established regulations and not by The court's opinion says ‘The Commission pre- permission of the Railroad Commission as an excepscribed a unit of 80 acres', inferring that all other size tion to the regulation. units provided for in said regulations were permitted by the Railroad Commission or permitted by the reg-

It has been argued before this court that since the ulations, I am not sure which. To be sure, an 80-acre first clause in said proviso uses the term ‘permit’ and unit is prescribed by the regulations. But I do not agree the second clause does not use the term, that ‘prethat it is the only unit prescribed. As shown above, the scribed’ must necessarily have a special meaning of regulations provide for units from 40 acres to 160 ‘required’ in order to leave room for permissive units acres in size.

to be formed, and since the last clause did not establish

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a size for permissive units, no authority was given to liberal interpretation should be given to the pooling form any permissive units. This reasoning seems to be provision to accomplish the purpose for which it was the basis of the court's holding. Under this line of intended, that is, to promote conservation beneficial reasoning we wonder why the parties used the term both to the lessor and the lessee. It can be reasonably ‘permit’ at all in the first clause of the proviso. It is concluded that from said pooling provision the parties fundamental that in contracts all the terms used should intended for the authority to pool to extend to any unit be given meaning if possible. Should a governmental size substantially conforming to any unit standard authority lay down rules and regulations for the crea- officially established by the Railroad Commission in tion of larger units, it is reasonable to say the gov- the exercise of its spacing proration function. ernmental authority has Prescribed. If the governmental authority allows the creation of a larger unit as This court, in construing an oil and gas lease in an exception to the prescribed rules and regulations it the recent case of Grady L. Fox et al. v. Julia Thorecan be said that governmental authority has Permitted son, 9 Tex.Sup.Ct.J. 26 (1965), used the following the creation of larger units. In fact, the term ‘permit’ is language: the universal term applied to authority granted as an exception to regular rules and regulations governing ‘* * * Another sound rule of interpretation is that the development of oil and gas fields. The fact that the language used by *332 the parties to an oil and gas word ‘permit’ is not used in the second clause of the lease will not be held to impose a special limitation on proviso does not destroy the import of the word the grant unless it is clear and precise and so une-

‘permit’ in the first clause.

quivocal in nature that it can reasonably be given no other meaning.’

This construction of the proviso allows us to give the usual and ordinary meaning to the word ‘prescribe’

The court's opinion in the instant case has given a as defined by Webster:

narrow and restricted meaning to the pooling provision in question when there is no language in said ‘prescribe (L. praescribere, praescriptum, fr.prae pooling provision which compels such construction to before—scribere to write, see scribere.) * * * be placed thereon. So long as the lessor's pooling unit is confined to the size of the pooling units authorized ‘2. To lay down authoritatively as a guide direc- by the rules and regulations of the Railroad Commistion or rule of action; to impose as a peremptory order; sion, it can reasonably be said that the unit complies in to dictate; direct; ordain; as, to prescribe regular hours size with the prescribed regulations. This would be a of study. 3. To keep within limits or bounds; to re- reasonable construction of the pooling provision rastrain ; to confine * * *. ther than a strained one.

‘Syn.—Limit, control, order, guide.’ In Texaco, Inc. v. Letterman, 343 S.W.2d 726, 732 (Tex.Civ.App.1961), the court in construing a I think that the authority granted by the lessor for pooling provision in an oil and gas lease said:

pooling necessarily had to be stated in broad and general terms because it could not be foreseen what ‘That pooling or unitizing of oil and gas leases is a the circumstances in the future might be, what the standard practice in the industry can not be quesregulations of the Railroad Commission might be nor tioned. It is equally recognized that unitization is often in what terms they might be stated. For that reason a a more feasible method of operation from an engi-

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neering and scientific point of view. Unitization can should be upheld, although the grant of power is in be said to be advantageous to both lessors and lessees. general terms, because it is subject to implied terms We think these facts lead to the conclusion that in the that will prevent arbitrary and unfair dealing, will absence of clear language to the contrary, pooling require compliance with the implied covenants in the clauses should not be construed in a narrow or limited lease for the benefit of the lessor and will impose a sense.’ rigid standard of good faith on the part of the lessee.’

And in Tiller v. Fields, 301 S.W.2d 185, 187 In construing this pooling provision of the oil and (Tex.Civ.App.1957), the court said: gas lease we should recognize that this does not only affect the litigants involved here, but affects the oil ‘Anticipatory provisions in leases for the com- industry as a whole for the simple reason that the form mittment by the lessee of such leases to unitization, of of the pooling unit used is in wide *333 use in Texas necessity must be in general terms. Neither the lessor and has been for many years. [FN1] nor the lessee has any way of knowing at the time the lease is taken the facts with respect to which it will be FN1. The form of pooling provision is in necessary for the lessee to apply his power. It is not lease forms in Walker, Cases on Oil and Gas, practicable for the lessee to await the ascertainment of Vol. 2, Second form following page 895, such facts. He knows from experience that because of publication 1948, lease form dated April, the possibility of many changes in ownership of the 1946; Stayton Texas Forms, 1960, Sec. 4026, lessor's interest as time goes on, it may be difficult to Vol. 7, p. 254; Huie, Walker and Woodward, effect an agreement if the right to unitize is not in- Oil & Gas, American Casebook Series, 1960, cluded in the lease itself. Phillips Petroleum Co. v. first form in the Appendix, p. 807, offered by Peterson, 10 Cir., 218 F.2d 926. The Texas courts, as the authors as a form ‘selected for the purwell as other courts, have recognized these basic facts, pose of acquainting the student with the and have consistently sustained the basic validity of general nature of the instruments discussed in lease pooling provisions and units formed under their the cases,’ and printed by permission of authority.’ Pound Printing & Stationery Co., Houston;

Williams, Oil & Gas Law, 1962, Vol. 4, p.

In Phillips v. Petroleum Co. v. Peterson, 218 F.2d 635, Sec. 699.7.

926, 933, (10th Cir. 1954), the court reasoned as follows : The pooling clause which we have before us for construction has been in use in Texas for many years.

‘Thus, it will be seen that unitization is a con- Tolerance type proration units have been prescribed servation measure which benefits both lessor and for various oil and gas fields in Texas for many years. lessee and tends to prevent waste of a natural resource. The result has been the creation of many pooled units *** in numerous fields which are now shadowed. The confusion, uncertainty, and possible title failure is not limited to the lessee who may have formed the unit. It ‘The practice of unitization by a power granted extends to royalty owners in the unit, overriding roythe lessee in advance, if faithfully carried out, will be alty owners, and to some extent to the purchasers of fair and profitable both to the lessor and lessee, and is production and the financial institutions which furnish vital to the oil and gas industry in the interests of the capital for the development and enjoyment of the conservation of both natural and material resources. It mineral resources. Furthermore, there is affected by

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the court's opinion the new Texas Compulsory Pool- The thrust of our opinion is that the Commission ing Act by the Legislature, Art. 6008c, ‘prescribes' certain things, and it also ‘permits' certain Rev.Civ.Stat.Ann. (1965). See discussion by Ernest E. things. The majority then tries to determine which the Smith, Tex.Law Rev. Vol. 43 pp. 1003—1021. Commission did in this instance and holds that the Commission ‘prescribed’ eighty acres but did not I think a reasonable's construction of the pooling ‘prescribe’ 160 acres. The fact is that the Commission clause does not require that we strike it down, and I passed its rules without regard to whether it was would affirm the judgments of the trial court and ‘prescribing’ or ‘permitting,’ as those terms are used Court of Civil Appeals. by the private contracting parties. The term ‘permitted ’ actually does two things: It permits but it also prohibits all that is beyond that which is permitted.

GRIFFIN, J., joins in this dissent.POPE, Justice (dis-

Every permit carries an inherent prescription, prosenting ).

scription, and prohibition of things beyond the permit.

The fault that I find with our holding in this case What the Commission did in passing its Rule 2 was to is that we are trying to fit the meaning of terms used by authorize certain units. Those units could be formed private parties to a lease into a supposed technical *334 without any further recourse to the Commission.

terminology used by the Railroad Commission in To the extent that Rule 2 was complied with, a unit making its rules and orders. This is the sequence of was authorized. To the extent that it was beyond what events. First the parties made the oil and gas lease and Rule 2 authorized, it was prohibited. To the extent that in it they provided:

it was prohibited, it was ‘prescribed,’ if we want to squeeze the Commission order into the contractual 'Units pooled for oil hereunder shall not substanmold . In my opinion the word ‘prescribed’ is more tially exceed 40 acres each in area, and units pooled applicable to the 160-acre unit than the 80-acre unit for gas hereunder shall not substantially exceed in area because the only prohibition or direction is against 640 acres plus a tolerance of 10% Thereof, provided creating a unit of more than 160 acres.

that should governmental authority having jurisdiction Prescribe or permit the creation of units larger than I respectfully dissent.

those specified, units thereafter created may conform substantially in size with those Prescribed by governmental regulations.' TEX 1966.

Jones v. Killingsworth 403 S.W.2d 325 Several years later the Commission order was passed which stated:

END OF DOCUMENT '* * * No proration unit shall consist of more than eighty (80) acres except as hereinafter provided, * * * ‘Provided, however, that operators may elect to assign tolerance of not more than eighty (80) acres of additional unassigned lease acreage to a well on an eighty (80) acre unit and shall in such event receive allowable credit for not more than one hundred sixty (160) acres.’

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Language used by parties to a contract should be Court of Appeals of Texas, given its plain grammatical meaning unless it defi-

Eastland. nitely appears that intention of the parties would thereby be defeated.

J.E. TOMLIN et ux., Appellants, v. [2] Mines and Minerals 260 73 PETROLEUM CORPORATION OF TEXAS, Appellee . 260 Mines and Minerals 260II Title, Conveyances, and Contracts No. 11–85–039–CV. 260II(C) Leases, Licenses, and Contracts June 13, 1985. 260II(C)3 Construction and Operation of Oil and Gas Leases Lessors of oil and gas lease brought declaratory 260k73 k. In General; General Rules of judgment action concerning their rights and status Construction. Most Cited Cases under the lease. The 90th District Court, Stephens (Formerly 260k73(1)) County, R.E. Thornton, J., granted lessee oil company 's motion for summary judgment, and lessors ap- Language used by parties to oil and gas lease will pealed. The Court of Appeals, McCloud, C.J., held not be held to impose special limitation on the grant that paragraph of lease which began by stating that unless it is clear and precise and so unequivocal in “each producing oil well drilled on said land * * * nature that it can reasonably be given no other meanshall hold forty (40) acres * * *” contained no refer- ing. ence to producing gas well and did not apply to acreage held by gas well, and thus, did not operate as [3] Mines and Minerals 260 73 amendment to habendum clause so as to prevent gas well from maintaining the lease in force beyond end of 260 Mines and Minerals primary term of the lease. 260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts Affirmed. 260II(C)3 Construction and Operation of Oil and Gas Leases West Headnotes 260k73 k. In General; General Rules of Construction. Most Cited Cases (Formerly 260k73(1))

[1] Contracts 95 152

95 Contracts In oil and gas lease in which specific things are 95II Construction and Operation followed by some general term, such general term must refer to things of the same kind.

95II(A) General Rules of Construction 95k151 Language of Instrument 95k152 k. In General. Most Cited Cases [4] Mines and Minerals 260 78.1(7)

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perpetuated as to only forty (40) acres around any 260 Mines and Minerals producing well, whether oil or gas.

260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts Both parties filed motions for summary judgment.

260II(C)3 Construction and Operation of The trial court granted summary judgment to PETCO, Oil and Gas Leases stating that the subject lease remains in full force and 260k78 Testing or Working effect. The Tomlins appeal. We affirm.

260k78.1 Construction, Breach, and Penalties The December 3, 1974, oil, gas, and mineral lease 260k78.1(7) k. Place or Portion consists of a printed form, together with a typed rider Developed; Pooled or Unitized Tracts. Most Cited containing five (5) additional paragraphs relating to Cases PETCO's operations under the lease. The granting clause grants PETCO the right to “(produce) oil, gas, Paragraph of oil and gas lease stating that “each and all other minerals” found in the covered 326.5 producing oil well drilled on said land * * * shall hold acres of leased land. The habendum clause states that forty (40) acres * * *” contained no reference to a *442 “(S)ubject to the other provisions herein conproducing gas well and did not apply to acreage held tained, this lease shall remain in force for a term of by gas well, and thus, did not operate as amendment to three (3) years ... (called ‘primary term’), and so long habendum clause so as to prevent gas well from thereafter as oil, gas, or other mineral is produced maintaining the lease in force beyond end of primary from said land.” Paragraph 16, one of the five paraterm of the lease. graphs contained in the typed rider, states the following :

*441 John R. Cook, Thompson & Cook, Breckenridge , for appellants. At the end of the primary term hereof each producing oil well drilled on said land by Lessee shall Frank L. Jennings, Jennings, Dies, Turner & Knight, hold 40 acres, to be designated by Lessee, and the Graham, for appellee. balance of the acreage shall be released to Lessor;

and after the primary term hereof, any acreage so held by a producing well shall be considered as McCLOUD, Chief Justice.

covered by a separate lease from any other acreage J.E. Tomlin and his wife, Betty Tomlin, lessors, held by any other producing well, so that production sued Petroleum Corporation of Texas (PETCO), lesfrom any such well shall not thereafter continue this see, seeking a declaratory judgment under the Unilease in effect as to acreage which was held by anform Declaratory Judgment Act, other producing well at the expiration of the primary TEX.REV.CIV.STAT.ANN. art. 2524–1 (Vernon term hereof. (Emphasis added)

1965) concerning their rights and status under an oil, gas, and mineral lease entered into by the parties. The Tomlins alleged that the lease terminated for failure to PETCO drilled a gas well on the premises, which produce “oil.” Alternatively, they contended that the was producing gas at the expiration of the primary lease is ambiguous and the case should be reversed term of the lease. and remanded so that parol evidence may be introduced to show that the parties intended that upon The Tomlins argue that paragraph 16 operates as expiration of the primary term, the lease would be an amendment to the habendum clause, the effect of

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which is to prevent a gas well from maintaining the lease in force beyond the end of the primary term. The Tomlins' conditionally submitted second They contend that only a producing “oil well” will point of error, seeking a remand of this case, is overhold any acreage of the lease beyond the primary term, ruled. We hold that the lease is not ambiguous. Only a with “the balance of the acreage,” including that sur- question of law is involved; no genuine issue of fact rounding a gas well, to be “released to Lessor.” We exists. Therefore, the trial court's rendition of sumdisagree . mary judgment in favor of PETCO was proper.

[1][2] In determining proper construction of a The judgment of the trial court is affirmed.

contract, the court usually examines the entire document . Language used by the parties should be given its Tex.App. Eastland 1985.

plain grammatical meaning unless it definitely appears Tomlin v. Petroleum Corp. of Texas that the intention of the parties would thereby be de-

694 S.W.2d 441 feated. Language used by the parties to an oil and gas lease will not be held to impose a special limitation on END OF DOCUMENT the grant unless it is clear and precise and so unequivocal in nature that it can reasonably be given no other meaning. Fox v. Thoreson, 398 S.W.2d 88 (Tex.1966).

[3][4] Paragraph 16 begins by stating that “each producing oil well drilled on said land ... shall hold forty (40) acres....” (Emphasis added) The provision contains no reference to a producing gas well. Where specific things are followed by some general term, such general term must refer to things of the same kind. Fleming Foundation v. Texaco, 337 S.W.2d 846 (Tex.Civ.App.—Amarillo 1960, writ ref'd n.r.e.). Phrases such as “any acreage so held by a producing well” and “any such well” refer only to any oil wells which are producing at the expiration of the primary term of the subject lease. Paragraph 16 does not apply to acreage held by a gas well. The language urged by the Tomlins as imposing a special limitation on the grant is not clear, precise, and “so unequivocal in nature that it can reasonably be given no other meaning .” Fox v. Thoreson, supra at 92.

Therefore, the habendum clause alone governs the right of the parties when a gas well is producing at the end of the primary term. Accordingly, the gas well maintains the lease in full force and effect as to all 326.5 acres.

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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039 (Cite as: 94 S.W.3d 550)

(Formerly 233k37)

Supreme Court of Texas. Construing an unambiguous lease is a question of ANADARKO PETROLEUM CORPORATION, law for the court.

Petitioner, v. [2] Appeal and Error 30 893(1)

Phillip THOMPSON, et al., Respondents.

30 Appeal and Error No. 01–0261. 30XVI Review Argued March 6, 2002. 30XVI(F) Trial De Novo Decided July 3, 2002. 30k892 Trial De Novo Opinion Denying Rehearing Jan. 30, 2003. 30k893 Cases Triable in Appellate Court Lessor sought declaration that gas lease had ter- 30k893(1) k. In general. Most Cited minated, and sought damages. The District Court, Cases Moore County, Ron Enns, J., granted partial summary judgment for lessor, and after a bench trial, awarded Appellate court reviews lease-construction quesdamages to lessor for lessee's post-termination con- tions de novo. version of gas. Lessee appealed. The Court of Appeals , Quinn, J., 60 S.W.3d 134, affirmed. After [3] Landlord and Tenant 233 593 granting lessee's petition for review, the Supreme Court, Baker, J., held that: (1) gas mining lease did not 233 Landlord and Tenant terminate when actual production ceased longer than 233II Leases and Agreements in General 60 days but well was still actually capable of pro-

233II(B) Construction and Operation ducing gas, and (2) well is “capable of production” if it 233k593 k. Intention of parties. Most Cited is capable of producing in paying quantities without Cases additional equipment or repairs.

(Formerly 233k37)

Reversed and remanded.

In construing an unambiguous lease, court's primary duty is to ascertain the parties' intent as ex-

West Headnotes pressed within the lease's four corners.

[1] Landlord and Tenant 233 611 [4] Landlord and Tenant 233 596

233 Landlord and Tenant 233 Landlord and Tenant 233II Leases and Agreements in General 233II Leases and Agreements in General 233II(B) Construction and Operation 233II(B) Construction and Operation 233k611 k. Questions of law or fact. Most 233k596 k. Ordinary or technical language.

Cited Cases

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Most Cited Cases Mining Leases (Formerly 233k37) 260k62.1 k. Premises demised and rights acquired. Most Cited Cases Court gives a lease's language its plain, grammatical meaning unless doing so would clearly defeat Mines and Minerals 260 73.1(3) the parties' intentions.

260 Mines and Minerals [5] Landlord and Tenant 233 598 260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts 233 Landlord and Tenant 260II(C)3 Construction and Operation of 233II Leases and Agreements in General Oil and Gas Leases 233II(B) Construction and Operation 260k73.1 Premises Demised and Rights 233k598 k. Construction as a whole. Most Acquired Cited Cases 260k73.1(3) k. Interest in real estate.

(Formerly 233k37) Most Cited Cases

Court examines the entire lease and attempts to A mineral lease grants a fee simple determinable harmonize all its parts, even if different parts appear to the lessee. contradictory or inconsistent, because court presumes that the parties to a lease intend every clause to have [8] Mines and Minerals 260 63 some effect.

260 Mines and Minerals [6] Landlord and Tenant 233 590 260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts 233 Landlord and Tenant 260II(C)2 Construction and Operation of 233II Leases and Agreements in General Mining Leases 233II(B) Construction and Operation 260k63 k. Term. Most Cited Cases 233k590 k. In general. Most Cited Cases (Formerly 233k37) Mines and Minerals 260 73.5

Court will not hold a lease's language to impose a 260 Mines and Minerals special limitation on the grant unless the language is 260II Title, Conveyances, and Contracts so clear, precise, and unequivocal that court can rea- 260II(C) Leases, Licenses, and Contracts sonably give it no other meaning. 260II(C)3 Construction and Operation of Oil and Gas Leases [7] Mines and Minerals 260 62.1 260k73.5 k. Term. Most Cited Cases

260 Mines and Minerals Lessee's mineral estate may continue indefinitely, 260II Title, Conveyances, and Contracts as long as the lessee uses the land for its intended 260II(C) Leases, Licenses, and Contracts purpose.

260II(C)2 Construction and Operation of

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[9] Mines and Minerals 260 63 [11] Mines and Minerals 260 78.1(8)

260 Mines and Minerals 260II Title, Conveyances, and Contracts 260 Mines and Minerals 260II(C) Leases, Licenses, and Contracts 260II Title, Conveyances, and Contracts 260II(C)2 Construction and Operation of 260II(C) Leases, Licenses, and Contracts Mining Leases 260II(C)3 Construction and Operation of 260k63 k. Term. Most Cited Cases Oil and Gas Leases 260k78 Testing or Working Mines and Minerals 260 73.5 260k78.1 Construction, Breach, and Penalties 260 Mines and Minerals 260k78.1(8) k. Extent of produc-

260II Title, Conveyances, and Contracts tion, paying quantities, and marketing. Most Cited 260II(C) Leases, Licenses, and Contracts Cases 260II(C)3 Construction and Operation of Oil and Gas Leases A typical Texas mineral lease that lasts “as long 260k73.5 k. Term. Most Cited Cases as oil or gas is produced” automatically terminates if actual production permanently ceases during the Mineral estate will automatically terminate if the secondary term.

event upon which it is limited occurs.

[12] Mines and Minerals 260 63 [10] Mines and Minerals 260 63 260 Mines and Minerals 260 Mines and Minerals 260II Title, Conveyances, and Contracts 260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts 260II(C) Leases, Licenses, and Contracts 260II(C)2 Construction and Operation of 260II(C)2 Construction and Operation of Mining Leases Mining Leases 260k63 k. Term. Most Cited Cases 260k63 k. Term. Most Cited Cases Mines and Minerals 260 73.5 Mines and Minerals 260 73.5 260 Mines and Minerals 260 Mines and Minerals 260II Title, Conveyances, and Contracts 260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts 260II(C) Leases, Licenses, and Contracts 260II(C)3 Construction and Operation of 260II(C)3 Construction and Operation of Oil and Gas Leases Oil and Gas Leases 260k73.5 k. Term. Most Cited Cases 260k73.5 k. Term. Most Cited Cases Although the habendum clause generally controls Lease's habendum clause defines the mineral es- the mineral estate's duration, other clauses may extend tate's duration. the habendum clause's term.

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260 Mines and Minerals [13] Landlord and Tenant 233 890 260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts 260II(C)3 Construction and Operation of 233 Landlord and Tenant Oil and Gas Leases 233IV Particular Kinds of Tenancies and Attrib-

260k78 Testing or Working utes Thereof 260k78.1 Construction, Breach, and 233IV(F) Termination Penalties 233IV(F)1 In General 260k78.1(8) k. Extent of produc-

233k890 k. In general. Most Cited Cases tion, paying quantities, and marketing. Most Cited (Formerly 233k93)

Cases

When a lease terminates is always a question of Completion of a gas well capable of producing in resolving the intention of the parties from the entire paying quantities but shut-in due to lack of pipe line instrument.

facilities or for other reasons is not considered “production ” and therefore does not sustain a mineral [14] Mines and Minerals 260 78.1(8) interest that lasts as long as oil or gas “is produced.”

260 Mines and Minerals [16] Mines and Minerals 260 78.1(8)

260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts 260 Mines and Minerals 260II(C)3 Construction and Operation of 260II Title, Conveyances, and Contracts Oil and Gas Leases 260II(C) Leases, Licenses, and Contracts 260k78 Testing or Working 260II(C)3 Construction and Operation of 260k78.1 Construction, Breach, and Oil and Gas Leases Penalties 260k78 Testing or Working 260k78.1(8) k. Extent of produc-

260k78.1 Construction, Breach, and tion, paying quantities, and marketing. Most Cited Penalties Cases 260k78.1(8) k. Extent of production , paying quantities, and marketing. Most Cited Gas mining lease, which contained habendum Cases clause stating that lease would remain in force as long as “gas is or can be produced,” did not terminate when A well is “capable of production” if it is capable actual production ceased longer than 60 days but well of producing in paying quantities without additional was still actually capable of producing gas, despite equipment or repairs.

cessation-of-production clause providing for 60-day period to resume operations after cessation of production ; cessation-of-production clause only applied [17] Mines and Minerals 260 78.1(8) if well holding lease became incapable of production.

260 Mines and Minerals [15] Mines and Minerals 260 78.1(8) 260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts 260II(C)3 Construction and Operation of

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Oil and Gas Leases Oil and Gas Leases 260k78 Testing or Working 260k78 Testing or Working 260k78.1 Construction, Breach, and 260k78.1 Construction, Breach, and Penalties Penalties 260k78.1(8) k. Extent of produc- 260k78.1(8) k. Extent of production , paying quantities, and marketing. Most Cited tion, paying quantities, and marketing. Most Cited Cases Cases

Gas well was still “capable of production in In the case of a marginal gas well, the standard by paying quantities” under mineral lease terms, even which paying quantities, under a mineral lease, is though there were periods during which there was no determined is whether or not under all relevant cirproduction , where the well was connected to pipeline cumstances a reasonably prudent operator would, for facilities, and there was no question that well was the purpose of making a profit and not merely for capable of producing in paying quantities. speculation, continue to operate a well in the manner in which the well in question was operated.

[18] Mines and Minerals 260 78.1(8)

[20] Mines and Minerals 260 78.1(8)

260 Mines and Minerals 260II Title, Conveyances, and Contracts 260 Mines and Minerals 260II(C) Leases, Licenses, and Contracts 260II Title, Conveyances, and Contracts 260II(C)3 Construction and Operation of 260II(C) Leases, Licenses, and Contracts Oil and Gas Leases 260II(C)3 Construction and Operation of 260k78 Testing or Working Oil and Gas Leases 260k78.1 Construction, Breach, and 260k78 Testing or Working Penalties 260k78.1 Construction, Breach, and 260k78.1(8) k. Extent of produc- Penalties tion, paying quantities, and marketing. Most Cited 260k78.1(8) k. Extent of produc- Cases tion, paying quantities, and marketing. Most Cited Cases For a gas well to produce in paying quantities, or to be capable of producing in paying quantities, there In a mineral lease involving a gas well, the term must be facilities located near enough to the well that “paying quantities” involves not only the amount of it would be economically feasible to establish a con- production, but also the ability to market the gas at a nection so that production could be marketed at a profit. profit.

[21] Mines and Minerals 260 78.2 [19] Mines and Minerals 260 78.1(8)

260 Mines and Minerals 260 Mines and Minerals 260II Title, Conveyances, and Contracts 260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts 260II(C) Leases, Licenses, and Contracts 260II(C)3 Construction and Operation of 260II(C)3 Construction and Operation of Oil and Gas Leases

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260k78 Testing or Working itable returns from the well is the test; if the quantity 260k78.2 k. Forfeiture for breach in be sufficient to warrant the use of the gas in the margeneral . Most Cited Cases ket, and the income therefrom is in excess of the actual marketing cost, and operating costs, the production Mines and Minerals 260 78.7(6) satisfies the term “paying quantities.”

260 Mines and Minerals [23] Mines and Minerals 260 78.1(8)

260II Title, Conveyances, and Contracts 260II(C) Leases, Licenses, and Contracts 260 Mines and Minerals 260II(C)3 Construction and Operation of 260II Title, Conveyances, and Contracts Oil and Gas Leases 260II(C) Leases, Licenses, and Contracts 260k78 Testing or Working 260II(C)3 Construction and Operation of 260k78.7 Actions Oil and Gas Leases 260k78.7(6) k. Judgment and 260k78 Testing or Working relief; damages. Most Cited Cases 260k78.1 Construction, Breach, and Penalties Remedy for breach of implied covenant to market 260k78.1(8) k. Extent of producproduction under oil and gas lease agreement is not tion, paying quantities, and marketing. Most Cited forfeiture or termination of lease; breach of implied Cases covenant in oil and gas lease does not automatically terminate the estate, but instead subjects breaching Gas mining lease, containing clause stating that party to liability for monetary damages, or, in ex- lease would remain in force as long as “gas is or can be traordinary circumstances, remedy of conditional produced,” did not mean lease would remain in effect decree of cancellation. only as long as gas “is produced”; “can be produced”

did not mean actual production.

[22] Mines and Minerals 260 78.1(8)

*552 Eric Anthony Hillerman,Harlow Sprouse, 260 Mines and Minerals Charles Wade Miller, Sprouse *553 Smith & Rowley, 260II Title, Conveyances, and Contracts Amarillo, J. Kyle McClain, Anadarko Petroleum 260II(C) Leases, Licenses, and Contracts Corp., David M. Gunn, Hogan Dubose & Townsend, 260II(C)3 Construction and Operation of L.L.P., Houston, for Petitioner.

Oil and Gas Leases 260k78 Testing or Working Joe L. Lovell, Lovell Lovell & Newsom, Amarillo, 260k78.1 Construction, Breach, and Donald M. Hunt, Mullin Hoard Brown Langston Carr Penalties Hunt & Joy LLP, Lubbock, J.R. Lovell, Lovell & 260k78.1(8) k. Extent of produc- Lyle, Dumas, for Respondents.

tion, paying quantities, and marketing. Most Cited Cases Justice BAKER delivered the opinion of the Court.

In this case, we decide whether a gas mining lease In determining whether gas well under mineral terminated when actual production ceased longer than lease is producing in paying quantities, test is whether sixty days. The lease expressly states that it lasts for there is a reasonable basis for the expectation of prof- one year and “as long thereafter as gas is or can be

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produced.” The lease also provides that, if production 1936. However, it is undisputed that production totally ceases for any reason, the lease “shall not terminate ceased for sixty-one days in 1981 and ninety-one days provided lessee resumes operations for drilling a well in 1985 while the gas purchaser conducted pipeline within sixty (60) days from such cessation.” The les- repairs. In 1997, Thompson sued for a declaration that sees began producing gas in 1936. However, in 1981 the lease terminated when production ceased in 1981 and again in 1985, actual production ceased longer and for conversion damages. than sixty days. The court of appeals held that these cessations terminated the lease. 60 S.W.3d 134, 141. On Thompson's motion, the trial court granted We disagree. We conclude that a well that is capable partial summary judgment that the lease terminated of production sustains this particular lease even if due to one or more cessations of production. After a actual production ceases longer than sixty days. Ac- bench trial, the court rejected Anadarko's affirmative cordingly, we reverse the court of appeals' judgment defenses of limitations, laches, quasi-estoppel, unjust and remand to the trial court for further proceedings enrichment, adverse possession, revivor, judicial esconsistent with this opinion. toppel, and promissory estoppel. Accordingly, the trial court awarded damages and attorney's fees to I. BACKGROUND Thompson.

In 1936, Thompson's and Anadarko's predecessors entered into a lease “for the purpose of mining Anadarko appealed. After considering the lease's and operating for and producing gas.” The lease al- implicit and explicit objectives, language in the lease's lows either production or the lessees' beginning drill- continuous operations clause, and other jurisdictions' ing operations to maintain the lease beyond its case law, the court of appeals construed the lease's one-year primary term. habendum clause to require actual production in paying quantities. 60 S.W.3d at 140–41. Accordingly, Two provisions in the lease are pertinent here. it affirmed the trial court's partial summary judgment The lease's “habendum clause” states: that the lease terminated when *554 actual production ceased longer than sixty days. 60 S.W.3d at 141. The This lease shall remain in force for a term of one (1) court of appeals also determined that the evidence year and as long thereafter as gas is or can be pro- supported the trial court's denying Anadarko's afduced . firmative defenses. 60 S.W.3d at 145.

The lease also has a “cessation-of-production We granted Anadarko's petition to consider clause,” which provides: whether the court of appeals properly construed the If, after the expiration of the primary term of this lease to conclude that it terminated. lease, production on the leased premises shall cease from any cause, this lease shall not terminate pro- II. APPLICABLE LAW vided lessee resumes operations for drilling a well A. LEASE CONSTRUCTION within sixty (60) days from such cessation, and this [1][2][3][4][5][6] Construing an unambiguous lease shall remain in force during the prosecution of lease is a question of law for the Court. Luckel v. such operations and if production results therefrom, White, 819 S.W.2d 459, 461 (Tex.1991). Accordingly, then as long as production continues. we review lease-construction questions de novo. See El Paso Natural Gas Co. v. Minco Oil & Gas, Inc., 8 Anadarko's predecessors began producing gas in S.W.3d 309, 312 (Tex.1999). In construing an unam-

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biguous lease, our primary duty is to ascertain the that lasts “as long as oil or gas is produced” automatparties ' intent as expressed within the lease's four ically terminates if actual production permanently corners. Luckel, 819 S.W.2d at 461; see also ceases during the secondary term. See Amoco Prod. Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368, Co. v. Braslau, 561 S.W.2d 805, 808 (Tex.1978). 372–73 (Tex.2001). We give the lease's language its plain, grammatical meaning unless doing so would [12][13] Although the habendum clause generally clearly defeat the parties' intentions. Fox v. Thoreson, controls the mineral estate's duration, other clauses 398 S.W.2d 88, 92 (Tex.1966). We examine the entire may extend the habendum clause's term. Southland lease and attempt to harmonize all its parts, even if Royalty, 496 S.W.2d at 552. When a lease terminates different parts appear contradictory or inconsistent. “is always a question of resolving the intention of the Luckel, 819 S.W.2d at 462. That is because we pre- parties from the entire instrument.” Southland Royalsume that the parties to a lease intend every clause to ty, 496 S.W.2d at 552. have some effect. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex.1996). However, we will III. ANALYSIS not hold the lease's language to impose a special lim-

A. LEASE CONSTRUCTION itation on the grant unless the language is so clear, [14] Here, we decide whether the lease terminated precise, and unequivocal that we can reasonably give when actual production ceased *555 longer than sixty it no other meaning. Fox, 398 S.W.2d at 92.

days. Both parties' arguments about what triggers the lease's termination rely upon the lease's habendum and B. OIL AND GAS LEASE PROVISIONS cessation-of-production clauses. [7][8][9] A Texas mineral lease grants a fee simple determinable to the lessee. See Texas Co. v. Davis, Anadarko contends that the habendum clause's 113 Tex. 321, 254 S.W. 304, 309 (1923). Conseplain language allows production or the capability of quently, the lessee's mineral estate may continue inproduction to sustain the lease. Thus, Anadarko ardefinitely , as long as the lessee uses the land for its gues, the court of appeals incorrectly concluded that intended purpose. Davis, 254 S.W. at 306. However, a the habendum clause requires actual production.

mineral estate will automatically terminate if the event Anadarko urges us to give the clause's “can be proupon which it is limited occurs. Gulf Oil Corp. v. Reid, duced” language its full effect. See Fox, 398 S.W.2d at 161 Tex. 51, 337 S.W.2d 267, 269 (1960).

92. According to Anadarko, the cessation -of-production clause does not contradict the [10][11] A lease's habendum clause defines the habendum clause's plain meaning, because the cessamineral estate's duration. Gulf Oil Corp. v. Southland tion-of-production clause is a savings provision that Royalty Co., 496 S.W.2d 547, 552 (Tex.1973). For only applies if the habendum clause's special limitainstance , a typical habendum clause states that the tion occurs and threatens to terminate the lease. In lease lasts for a relatively short fixed term of years other words, the cessation-of-production clause only (primary term) and then “as long thereafter as oil, gas applies if the well holding the lease becomes incapable or other mineral is produced” (secondary term). See, of production. Because the well holding the lease has e.g., Reid, 337 S.W.2d at 269 n. 1; see also 1 SMITH always been capable of production, Anadarko asks us & WEAVER, TEXAS LAW OF OIL & GAS § 4.3 to reverse the partial summary judgment that the lease (1996). In Texas, such a habendum clause requires terminated due to one or more cessations of producactual production in paying quantities. Reid, 337 tion. S.W.2d at 269–70; Garcia v. King, 139 Tex. 578, 164 S.W.2d 509, 512 (1942). Thus, a typical Texas lease

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In response, Thompson asserts that both the 372–73; Luckel, 819 S.W.2d at 461. The habendum lease's terms and existing Texas law support the court clause's plain language shows that the parties intended of appeals' conclusion that actual production is re- that a well actually produce gas, or be capable of quired to sustain the lease after the primary term. See producing gas, to sustain the lease. See Fox, 398 60 S.W.3d at 140. According to Thompson, the ces- S.W.2d at 92. This construction does not conflict with sation-of-production clause applies whenever actual our rule that Texas leases generally require actual production ceases rather than when actual production production. See Reid, 337 S.W.2d at 269–70; Garcia, and capability of production cease. Moreover, 164 S.W.2d at 512. That is because the cases in which Thompson argues, allowing the capability of produc- *556 we recognized the general rule involved leases tion to sustain the lease indefinitely would render the with typical habendum clauses that sustained the lease cessation-of-production clause meaningless. as long as oil or gas “is produced.” See Reid, 337 S.W.2d at 269 n. 1; Garcia, 164 S.W.2d at 512. Thus, Here, the habendum clause expressly states that these cases do not control how to construe a habendum the lease lasts as long as gas “is or can be produced.” clause that lasts as long as gas “is or can be produced.” For several reasons, the court of appeals rejected Anadarko's argument that capability of production Additionally, the court of appeals reasoned that sustained the lease and, instead, concluded that the allowing the ability to produce gas to prolong the lease habendum clause requires actual production. 60 would “effectively erase” the cessation-of-production S.W.3d at 140. First, citing Garcia v. King, the court clause from the lease. 60 S.W.3d at 139. But the court of appeals reasoned that the habendum clause must of appeals' analysis incorrectly assumes that the cesrequire actual production to further the lease's objec- sation-of-production clause is triggered any time active —to reap economic gain. 60 S.W.3d at 140. Sec- tual production stops. Read as a whole, the cessaond , the court of appeals construed the habendum tion-of-production clause combines a sixty-day time clause in light of the lease's continuous operations limit with a resumption of operations provision. Thus, clause, which sustains the lease so long as drilling the clause indicates the parties' intent that the cessaoperations continue “and if production results there- tion-of-production clause apply only when the cirfrom , then as long as production continues.” See 60 cumstances require the lessee “to resume operations S.W.3d at 140. The court of appeals determined that for drilling a well.” In other words, the cessathe continuous operations clause shows that the parties tion-of-production clause only applies if a well holdintended that “the continuation of actual production ing the lease ceases to be capable of producing gas. was and is necessary to prolong the life of the lessee's Indeed, in analyzing a similar cessation-of-production interest.” 60 S.W.3d at 140. And third, the court of clause, one commentator has observed: appeals relied on decisions from other jurisdictions that have interpreted similar habendum clauses. 60 The fact that the event which is designed to prevent S.W.3d at 140 (citing Greer v. Salmon, 82 N.M. 245, termination is the commencement of drilling or 479 P.2d 294 (1970); Fisher v. Grace Petroleum reworking operations gives some indication of the Corp., 830 P.2d 1380 (Okla.Ct.App.1991)). purpose of the clause and the intention of the parties . It indicates that the parties are concerned with a We disagree with the court of appeals' lease con- situation where cessation of production is of the struction. Here, neither party contends that the lease is type that is remedied by drilling or reworking opambiguous . Consequently, in construing the lease, we erations. Thus, the parties must have intended that first consider the parties' intentions as expressed in the the clause would become operative if a dry well is lease's four corners. See Yzaguirre, 53 S.W.3d at drilled or if a producing well ceases to be capable of

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producing in paying quantities. A literal application 299. Thus, the New Mexico Court relied on provisions of the clause to every temporary cessation of pro- within the lease's four corners to ascertain the duction could lead to absurd and unintended results. habendum clause's meaning.

2 KUNTZ, A TREATISE ON THE LAW OF OIL Furthermore, the court of appeals erroneously re- & GAS 416–17. lied upon an Oklahoma court of appeals opinion to support its view that the Anadarko habendum clause Construing the cessation-of-production clause to requires actual production. See Fisher, 830 P.2d at apply when a well holding the lease ceases to be ca- 1387–88. In relying on Fisher, the court of appeals pable of production—and not simply when actual overlooked the fact that the Oklahoma Supreme Court production ceases—accords with the cessa- rejected the Fisher court's approach. See Pack v. Santa tion-of-production clause's plain language. Moreover, Fe Minerals, 869 P.2d 323, 327 (Okla.1994). this construction avoids imposing an unnecessary limitation on the grant. See Fox, 398 S.W.2d at 92. In Pack, the Oklahoma Supreme Court consid- The court of appeals' construction of the cessa- ered whether a lease held by a gas well capable of tion-of-production clause would require Anadarko to production but shut-in for more than sixty days exresume drilling operations within sixty days of any pired under the cessation-of-production clause. Pack, cessation in actual production even if the existing well 869 P.2d at 325. In construing both clauses, the Okremained capable of production. Such a construction lahoma Supreme Court concluded that the cessadisregards the habendum clause's “can be produced” tion-of-production clause operates as a savings clause language, whereas our construction gives every clause and only applies when production—as defined in the some effect. See Heritage Res., 939 S.W.2d at 121. habendum clause—ceases. Pack, 869 P.2d at 328. Accordingly, the court of appeals incorrectly relied “Any other conclusion would render the habendum upon the cessation-of-production clause to hold that clause useless after the primary term expires, a conthe habendum clause requires actual production to clusion clearly not intended by the parties to the sustain the lease. lease.” Pack, 869 P.2d at 328. Thus, the Oklahoma Supreme Court's analysis supports our viewpoint The court of appeals also misplaced its reliance rather than Thompson's.

on cases from other states. See 60 S.W.3d at 140. First, in looking to other states to determine how to interpret Finally, we reject Thompson's contention that the lease here, the court of appeals disregarded our allowing the capability of production to sustain the well-established rules about how to interpret oil and lease would allow the lessees to sustain the lease ingas leases. See Heritage Res., 939 S.W.2d at 121; definitely—without actual production. Rather, the Luckel, 819 S.W.2d at 461–62; Fox, 398 S.W.2d at 92. implied duty to manage and administer the lease as a Second, the cases the court of appeals cites actually reasonably prudent operator, which encompasses the support our views about this lease. In Greer, the New implied duty to market the gas reasonably, would limit Mexico Supreme Court construed a habendum clause the lessees' ability to sustain the lease based on a well's like the one in this case in conjunction with two sav- capability of production. See Yzaguirre, 53 S.W.3d at ings clauses: a cessation-of-production clause and a 373. shut-in royalty clause. Greer, 479 P.2d at 296. The New Mexico Court held that a gas well capable of For these reasons, we hold that a well actually production would only hold the lease if the lessee paid producing or capable of producing gas sustains this *557 an annual shut-in royalty. Greer, 479 P.2d at

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particular lease under the habendum clause. We also maintained a lease even though actual production had hold that the cessation-of-production clause only ap- ceased. Hydrocarbon, 861 S.W.2d at 433–34. In this plies if the lease would otherwise terminate under the context, the Hydrocarbon court stated: habendum clause. Consequently, the court of appeals erred in holding that, under this lease, “can be pro- We believe that the phrase “capable of production in duced” means “actual production.” paying quantities” means a well that will produce in paying quantities if the well is turned “on,” and it B. CAPABILITY OF PRODUCTION begins flowing, without additional equipment or Because we conclude that actual production was repair. Conversely, a well would not be capable of not necessary to sustain the lease, we next consider producing in paying quantities if the well switch whether the 1981 and 1985 cessations terminated the were turned “on,” and the well did not flow, because lease. This depends upon whether the well holding the of mechanical problems or because the well needs leased premises was capable of production during the rods, tubing, or pumping equipment. two periods when actual production ceased longer than sixty days. According to Anadarko's brief, “[t]he Hydrocarbon, 861 S.W.2d at 433–34. evidence is undisputed here that the well was capable of production during the two periods when no pro-

[16] We approve the Hydrocarbon definition, duction was shown,” because the evidence shows that because it is consistent with existing cases that discuss the well was shut-in for pipeline repairs. In response, the difference between actual production and capabil-

Thompson contends that the well was not capable of ity of production. See Peveto, 645 S.W.2d at 771 (a production, because the well would not have produced well is capable of production if it is shut-in because if it had been “turned on.” See Hydrocarbon Mgt., Inc.

there is no available pipeline); Stanolind Oil & Gas v. Tracker Exploration, Inc., 861 S.W.2d 427, 433–34 Co. v. Barnhill, 107 S.W.2d 746, 749 (Tex.App.-Amarillo 1993, no writ).

(Tex.Civ.App.-Amarillo 1937, writ ref'd) (a well is capable of production if it is shut-in because there is [15] We have determined that “the completion of no available market); see also Davis, 254 S.W. at 309 a gas well capable of producing in paying quantities (a well is incapable of production if the lessee removes but shut-in due to lack of pipe line facilities or for the equipment and abandons all efforts to produce); other reasons is not considered production” and Pack, 869 P.2d at 327 (a well is incapable of productherefore does not sustain a mineral interest that lasts tion if the underlying mineral reserves are depleted). as long as oil or gas “is produced.” Peveto v. Starkey, Accordingly, we hold that a well is capable of pro- 645 S.W.2d 770, 771 (Tex.1982) (quoting Midwest duction if it is capable of producing in paying quanti- Oil Corp. v. Lude, 376 S.W.2d 18, 20 ties without additional equipment or repairs. (Tex.Civ.App.-Corpus Christi 1964, writ ref'd n.r.e.)); see also *558Giles v. McKanna, 200 S.W.2d 709, 712 IV. CONCLUSION (Tex.Civ.App.-Austin 1947, writ ref. n.r.e.) (noting Here, the lease's habendum clause expressly the “marked difference between the capacity to prostates that the lease lasts as long as gas “is or can be duce in paying quantities and actual production in produced.” Based on the habendum clause's plain paying quantities”). However, we have not defined meaning, we hold that a well actually producing gas or what “capable of production” means.

capable of producing gas sustains this particular lease. To be “capable of producing gas,” we conclude that a One court of appeals considered this issue in de- well must be capable of producing gas in paying ciding whether a lessee's paying shut-in royalties

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quantities without additional equipment or repairs. be facilities located near enough to the well that it Accordingly, we reverse the court of appeals' judg- would be economically feasible to establish a conment and remand to the trial court for further pro- nection so that production could be marketed at a ceedings consistent with this opinion. See profit. As we explained in Clifton v. Koontz, 160 Tex. TEX.R.APP. P. 60.2(d). Because we resolve this case 82, 325 S.W.2d 684, 691 (Tex.1959), all the relevant based on the lease-construction issue, we do not reach circumstances must be considered in determining Anadarko's affirmative defenses. whether there are “paying quantities”:

In the case of a marginal well, such as we have Justice O'NEILL did not participate in this opinion. here, the standard by which paying quantities is ON MOTION FOR REHEARING determined is whether or not under all the relevant PER CURIAM. circumstances a reasonably prudent operator would, We deny the motion for rehearing but write to for the purpose of making a profit and not merely clarify our decision.FN1 for speculation, continue to operate a well in the manner in which the well in question was operated.

FN1. JUSTICE BAKER, author of the Court's original opinion, resigned effective .... August 31, 2002, and therefore did not participate on rehearing. The term “paying quantities” involves not only the amount of production, but also the ability to [17][18][19][20][21][22] In defining “capable of market the product (gas) at a profit. Whether there is production” in our original opinion, we approved this a reasonable basis for the expectation of profitable definition from Hydrocarbon Management, Inc. v. returns from the well is the test. If the quantity be Tracker Exploration, Inc., 861 S.W.2d 427, 433–34 sufficient to warrant the use of the gas in the market, (Tex.App.-Amarillo 1993, no pet.): and the income therefrom is in excess of the actual marketing cost, and operating costs, the production satisfies the term “in paying quantities”. In the We believe that the phrase “capable of production in Hanks case, [24 S.W.2d 5, 6 (Tex. Comm'n paying quantities” means a well that will produce in App.1930, judgm't adopted)], the trial court found paying quantities if the well is turned “on,” and it that the well completed by Hanks did not produce in begins flowing, without additional equipment*559 paying quantities within the contemplation of the or repair. Conversely, a well would not be capable terms of the lease, and this Court upheld such of producing in paying quantities if the well switch finding, holding that there was no evidence showing were turned “on,” and the well did not flow, because that there were any facilities for marketing the gas of mechanical problems or because the well needs or any near-by localities or industries which might rods, tubing, or pumping equipment.

have furnished a profitable market therefor. The Court went further and pointed out the complete 94 S.W.3d 550, 557. In so doing, we did not failure of the evidence to show what the gas could overrule or otherwise call into question our prior dehave been sold for at any probable market, and that cisions regarding the proper interpretation of “prothere was no evidence “tending to show that the well duction in paying quantities.” Specifically, we did not was situated in such proximity to any prospective overrule or modify the longstanding requirement that market which would justify the construction of a for a well to produce in paying quantities, or to be pipe line for marketing same.”

capable of producing in paying quantities, there must

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Id. at 691 (quoting Hanks v. Magnolia Petroleum (holding that a lease did not terminate when an im-

Co., 24 S.W.2d 5, 6 (Tex. Comm'n App.1930, judgm't plied covenant was breached but that there would be adopted)) (citations omitted); see also Stanolind Oil & liability for damages sustained); Tex. Co. v. Davis, Gas Co. v. Barnhill, 107 S.W.2d 746, 749 113 Tex. 321, 254 S.W. 304, 308 (Tex.1923) (reiter- (Tex.Civ.App.-Amarillo 1937, writ ref'd). In the case ating that the implied covenant to explore and produce before us today, the well was connected to pipeline is not a condition subsequent that would give rise to facilities, and there was no question that it was capable the lease's termination if breached). The rationale for of producing in paying quantities even though there these holdings is to promote greater certainty about the were periods during which there was no production. continued existence of a lease:

In our original opinion in this case, we also said, [I]f reasonable diligence in performing every one of the lessee's exploring, developing, producing, and we reject Thompson's contention that allowing the marketing operations was the test, neither lessor nor capability of production to sustain the lease would lessee could at any time have clearly or certainly allow the lessees to sustain the lease indefinite- known whether the estate granted was alive or ly—without actual production. Rather, the implied ended. Such a test must inevitably diminish—if not duty to manage and administer the lease as a rea- destroy—the value of the rights of all parties desonably prudent operator, which encompasses the rived from a mineral lease. implied duty to market the gas reasonably, would limit the lessees'*560 ability to sustain the lease W.T. Waggoner Estate, 19 S.W.2d at 30–31. based on a well's capability of production.

We meant in our original decision that, as a prac-

94 S.W.3d at 557–58. But we did not intend to tical matter, a lessee will not sustain a lease based on a imply that the remedy for breach of an implied cove- well's capability of production without actual producnant to market production would be forfeiture or ter- tion of the well because the payment of damages for mination of a lease because we have consistently held the failure to reasonably market the gas would be a that breach of an implied covenant in an oil and gas strong incentive to connect the well to facilities that lease “does not automatically terminate the estate, but would permit actual production. And, in an extraorinstead subjects the breaching party to liability for dinary case, when damages would not furnish an admonetary damages, or in extraordinary circumstances, equate remedy, a court could conditionally order terthe remedy of a conditional decree of cancellation.” mination if a connection and actual production were Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 not commenced within a reasonable time. See id. at (Tex.1989); see also Rogers v. Ricane Enters., Inc., 32. 884 S.W.2d 763, 767–68 (Tex.1994); Stanolind, 107 S.W.2d at 748 (holding that “the failure of the lessee [23] Finally, the motion for rehearing contends further to develop the property is, under the holdings that several decisions of this Court and other courts of the courts, a breach of an implied covenant, the compel a different result in this case. We disagree. The usual remedy for which is an action in damages”); cases on which Thompson and the other Respondents W.T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, rely are distinguishable because they involved dif- 19 S.W.2d 27, 32 (Tex.1929) (refusing “to treat as a ferent lease provisions, different facts, or both. The limitation or as a condition subsequent the implied leases at issue in many of the cases said that the lease covenant for reasonable development of premises would remain in effect as long as oil or gas “is proleased for the mining of oil and gas”); Mon–Tex Corp. duced.” See Haby v. Stanolind Oil & Gas Co., 228 v. Poteet, 118 Tex. 546, 19 S.W.2d 32, 34 (Tex.1929) F.2d 298, 301 (5th Cir.1955); Samano v. Sun Oil Co.,

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621 S.W.2d 580, 581 (Tex.1981); Francis v. Pritchett, 278 S.W.2d 288, 289 (Tex.Civ.App.-El Paso 1955, Justice O'NEILL, Justice SMITH and Justice writ ref'd); Sunray DX Oil Co. v. Texaco, Inc., 417 WAINWRIGHT did not participate in the decision on S.W.2d 424, 426–27 (Tex.Civ.App.-El Paso 1967, rehearing. writ ref'd n.r.e.); Woodson Oil Co. v. Pruett, 281 S.W.2d 159, 162 (Tex.Civ.App.-San Antonio 1955, Tex.,2002.

writ ref'd n.r.e.); Hall v. McWilliams, 404 S.W.2d 606, Anadarko Petroleum Corp. v. Thompson 607 (Tex.Civ.App.-Austin 1966, writ ref'd n.r.e.);

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup.

Wainwright v. Wainwright, 359 S.W.2d 628, 629 Ct. J. 1039 (Tex.Civ.App.-Fort Worth 1962, writ ref'd n.r.e.). But in this case, the lease said “is *561 or can be pro-

END OF DOCUMENT duced.” As we explained in our original opinion, “can be produced” does not mean actual production.

Only two decisions relied on by Thompson and the other Respondents involved leases that contained a “can be produced” provision. Davis, 254 S.W. at 305; Hanks, 24 S.W.2d at 7, affirming Hanks v. Magnolia Petroleum Co., 14 S.W.2d 348, 349 (Tex.Civ.App.-Eastland 1929). But the facts were very different from the facts in the case before us today. In Davis, the lessee abandoned all operations on the lease after the wells it had drilled ceased to produce , and there was no production for about fourteen years. 254 S.W. at 305. There was also evidence that the lessee had expressly released the lease. Id. This Court held the lease had terminated. Id. at 309. In Hanks, the lessee drilled a successful well and then capped it. 24 S.W.2d at 5. The court held that there was no evidence that the well could produce in paying quantities because “[t]he record is wholly devoid of evidence showing that there were any facilities for marketing the gas or any nearby localities or industries which might have furnished a profitable market therefor,” and “[n]o attempt was made to show what the gas could have been sold for at any probable market, nor was there any evidence tending to show that the well was situated in such proximity to any prospective market which would justify the construction of a pipe line for marketing same.” Id. at 6. As noted above, that is not the situation in this case.

Accordingly, we deny the motion for rehearing.

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445 S.W.3d 878 (Cite as: 445 S.W.3d 878)

30XVI(F) Trial De Novo 30k892 Trial De Novo 30k893 Cases Triable in Appellate Court of Appeals of Texas, Court El Paso.

30k893(1) k. In general. Most Cited CHESAPEAKE EXPLORATION, L.L.C., Chesa-

Cases peake Operating, Inc., Anadarko Petroleum Corporation , and Swepi, L.P., Appellants, v. The standard of review for construction of an ENERGEN RESOURCES CORPORATION, Kaiser unambiguous oil and gas lease is de novo. Francis Oil Company, Pride Energy Company, Crown Oil Partners, IV, L.P., Crump Energy Partners, L.L.C., [2] Mines and Minerals 260 73 Dalton H. Cobb, Jr., Michael B. Cobb, Bill Hightower, and Hightower Exploration, L.L.C., Appellees. 260 Mines and Minerals 260II Title, Conveyances, and Contracts No. 08–13–00266–CV. 260II(C) Leases, Licenses, and Contracts Oct. 1, 2014. 260II(C)3 Construction and Operation of Oil and Gas Leases Background: Plaintiff oil companies brought action 260k73 k. In general; general rules of against defendant oil companies after each side re- construction. Most Cited Cases quested that the other cease operations in 560–acre portion of section that had been pooled with an The primary duty of the court in interpreting an 80–acre portion of another section. The District Court, oil and gas lease is to ascertain the parties' intent as Ward County, Bob Parks, J., entered summary judg- expressed within the four corners of the lease. ment in favor of plaintiffs. Defendants appealed.

[3] Mines and Minerals 260 73 Holding: The Court of Appeals, Yvonne T. Rodriguez , J., held that retained acreage clauses confirmed 260 Mines and Minerals that production anywhere on certain section, or land 260II Title, Conveyances, and Contracts pooled with it, was sufficient to maintain the leases as 260II(C) Leases, Licenses, and Contracts to the entirety of the section. 260II(C)3 Construction and Operation of Oil and Gas Leases Affirmed. 260k73 k. In general; general rules of construction. Most Cited Cases West Headnotes In seeking to ascertain the parties' intent, the court [1] Appeal and Error 30 893(1) must attempt to harmonize all parts of the oil and gas lease, even if different parts of the lease appear con-

30 Appeal and Error tradictory or inconsistent.

30XVI Review

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[4] Mines and Minerals 260 73 part of the pooled acreage would be treated as if such drilling operations were upon or such production was 260 Mines and Minerals from the land described in the lease whether the well 260II Title, Conveyances, and Contracts or wells be located on the land covered by this lease or 260II(C) Leases, Licenses, and Contracts not, ensured that production anywhere on a pooled 260II(C)3 Construction and Operation of unit maintained the lease in effect as to all lands cov-

Oil and Gas Leases ered by the lease, both within and outside the unit, 260k73 k. In general; general rules of unless the lease expressly provided otherwise, and the construction. Most Cited Cases plain, grammatical language of the retained acreage clause did not expressly provide for rolling termination of proration units as they ceased to exist.

Construing the oil and gas lease to give effect to all of its provisions honors the parties' intent that every clause has some effect and in some measure evidences [6] Mines and Minerals 260 78.1(7) their agreement; accordingly, the court should not strike down any part of the lease, unless there is an 260 Mines and Minerals irreconcilable conflict wherein one part of the lease 260II Title, Conveyances, and Contracts destroys in effect another part thereof. 260II(C) Leases, Licenses, and Contracts 260II(C)3 Construction and Operation of [5] Mines and Minerals 260 78.1(7) Oil and Gas Leases 260k78 Testing or Working 260k78.1 Construction, Breach, and 260 Mines and Minerals Penalties 260II Title, Conveyances, and Contracts 260k78.1(7) k. Place or portion 260II(C) Leases, Licenses, and Contracts developed; pooled or unitized tracts. Most Cited Cases 260II(C)3 Construction and Operation of Oil and Gas Leases 260k78 Testing or Working A habendum clause referring to “said land” ex-

260k78.1 Construction, Breach, and tends the lease as to all the leased property while Penalties production of oil or gas occurs anywhere on the 260k78.1(7) k. Place or portion property during the second term; thus, in the absence developed; pooled or unitized tracts. Most Cited Cases of anything in the lease to indicate a contrary intent, production on one tract will operate to perpetuate the lease as to all tracts described therein and covered Retained acreage clauses in oil and gas lease did thereby.

not provide for rolling termination of non-producing proration units, and instead, the leases confirmed that production anywhere on certain section, or land [7] Mines and Minerals 260 73 pooled with it, was sufficient to maintain the leases as to the entirety of the section, where the habendum 260 Mines and Minerals clauses in both leases provided for continuation be- 260II Title, Conveyances, and Contracts yond the primary term as long as oil, gas, or other 260II(C) Leases, Licenses, and Contracts mineral was produced from said land or land with 260II(C)3 Construction and Operation of which said land was pooled, and pooling clause, which Oil and Gas Leases stated that drilling operations and production on any 260k73 k. In general; general rules of

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445 S.W.3d 878 (Cite as: 445 S.W.3d 878)

construction. Most Cited Cases This case involves the construction of two oil and gas leases executed in 1976 (hereinafter, “the 1976 When an oil and gas lease terminates is always a leases”) and their effect on a 640–acre section of land question of resolving the intention of the parties from covered by the leases—Section 25. Section 25 was the entire instrument; however, Court of Appeals will pooled with an adjacent section of land not covered by not hold the lease's language to impose a special lim- the 1976 leases—Section 18–to form two pooled gas itation on the grant unless the language is so clear, units. One of the pooled units continues to produce to precise, and unequivocal that Court can reasonably this day, but the other ceased producing completely in give it no other meaning. 1988 when its well was plugged and abandoned. That particular well was completed in March 1979, and its operator designated all of Section 25 as the well's [8] Mines and Minerals 260 78.1(7)

proration unit in paperwork filed with the Texas Railroad Commission (hereinafter, “RRC”). Ap-

260 Mines and Minerals proximately two months thereafter, continuous de-

260II Title, Conveyances, and Contracts velopment ended on the leased premises. The leases 260II(C) Leases, Licenses, and Contracts provide that when continuous development ends, the 260II(C)3 Construction and Operation of lease terminates as to all acreage except for:

Oil and Gas Leases 260k78 Testing or Working [E]ach proration unit established under ... [the] rules 260k78.1 Construction, Breach, and and regulations [of the RRC ...] upon which there Penalties exists (either on the above described land or on 260k78.1(7) k. Place or portion lands pooled or unitized therewith) a well capable of developed; pooled or unitized tracts. Most Cited Cases producing oil and/or gas in commercial quantities ....

The primary legal consequence of pooling is that production and operations anywhere on the pooled The issue is whether, under the above-quoted unit are treated as if they have taken place on each “retained acreage” clause, the 1976 leases remain in tract within the unit; additionally, production from the effect as to all of Section 25, as urged by Plainpooled gas unit provides the lessors with an economic tiffs–Appellees FN1 *880 (hereinafter “Energen”), or benefit in the form of royalty income.

only as to an 80–acre portion of Section 25, as urged by Defendants–Appellants FN2 (hereinafter, “Chesa-

*879 Shannon H. Ratliff, Lisa A. Paulson, Ratliff Law peake”). On cross-motions for summary judgment, the Firm, PLLC, Austin, William E. Berry, Jr., Cotton, trial court ruled in favor of Energen and against Bledsoe, Tighe & Dawson, P.C., for Appellees. Chesapeake. We affirm.

Jane M.N. Webre, Scott, Douglass & McConnico, FN1. Appellees are Energen Resources LLP, Austin, for Appellants. Corporation, Kaiser Francis Oil Company, Pride Energy Company, Crown Oil Partners, Before McCLURE, C.J., RIVERA (Not Participat- IV, L.P., Crump Energy Partners, L.L.C., ing), and RODRIGUEZ, JJ. Dalton H. Cobb, Jr., Michael B. Cobb, Bill Hightower, and Hightower Exploration, OPINION L.L.C. We refer to Appellees collectively as YVONNE T. RODRIGUEZ, Justice. Energen, for we see nothing that requires us

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to distinguish among them. from Section 18. As mentioned earlier, the designated proration unit for the Cadenhead No. 2 Well included FN2. Appellants are Chesapeake Explora- all of Section 25. Each lease also contains a provision tion, L.L.C., Chesapeake Operating, Inc., requiring termination if the leased premises are not Anadarko Petroleum Corp., and SWEPI, L.P. continuously developed as set forth in the leases' We refer to Appellants collectively as “continuous development” clauses. Those clauses Chesapeake because, again, we see nothing provide in relevant part: that requires us to distinguish among them.

[12]D. Lessee shall continuously develop the above FACTUAL AND PROCEDURAL BACK- described land by commencing operations for the GROUND drilling of a well on or before the expiration of the The 1976 leases cover acreage located in Ward primary term of this lease and thereafter shall allow County, Texas, including the aforementioned Section not more than sixty (60) days to elapse between the 25 of Block 1, W & NW Ry. Co. Survey. Each lease completion or abandonment of one well and the contains a “pooling” clause, which states in pertinent commencement of the next until the above depart : scribed land is drilled to the density necessary to obtain the maximum allowable per well under the rules and regulations of the Railroad Commission of 5. Lessee is hereby granted the right to pool or Texas (or other governmental authority having juunitize this lease, the land covered by it or any part risdiction), or this lease shall terminate as to all of thereof with any other land, lease, leases, mineral the above described land ....

estates or parts thereof for the production of oil, gas, or any other minerals. ... Drilling operations and production on any part of the pooled acreage shall As indicated earlier, after the Cadenhead No. 2 be treated as if such drilling operations were upon or Well was completed in March 1979, no additional such production was from the land described in this wells were drilled on the leased premises. The Calease whether the well or wells be located on the denhead No. 2 well was subsequently plugged back land covered by this lease or not. The entire acreage and recompleted in a shallower field in 1984. Four pooled into a unit shall be treated for all purposes ... years later, it was abandoned. as if it were included in this lease.

Through subsequent transactions not relevant to Pursuant to this provision, an 80–acre portion of this appeal, Energen and Chesapeake acquired their Section 25 was pooled with a 560–acre portion of respective interests in Section 25. In 2011, Energen Section 18 to form a 640–acre pooled gas unit named drilled a well on the 560–acre portion of Section 25 the Cadenhead No. 1 Pooled Gas Unit. This pooled that had been pooled with the 80–acre *881 portion of unit's well, the Cadenhead No. 1 Well, was drilled and Section 18 and obtained a permit to drill another well. completed on the 560–acre portion of Section 18 in Chesapeake too obtained a permit to drill a well on the 1978, and it has continually produced gas in com- 560–acre portion of Section 25. Each party requested mercial quantities since then. The next year, the Ca- that the other cease operations. Neither did, and the denhead No. 2 Well was completed on Section 25. present action ensued. This well was included in a 640–acre pooled gas unit named the Cadenhead No. 2 Pooled Gas Unit, which In the trial court, both parties agreed with the consisted of 560 acres from Section 25 and 80 acres principle that production anywhere on the pooled

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premises is sufficient to maintain the entire lease un- “to maintain the lease[s] in effect throughout the less the lease provides otherwise. They disagreed, secondary term—not just at the moment that continhowever , on whether the retained acreage clause in uous development ends.” In so arguing, Chesapeake each lease provided otherwise. Chesapeake argued the takes the position that the proration unit designated for retained acreage clause provided otherwise because it the Cadenhead No. 2 Well was retained only while the applied “equally to ‘all’ of the lands under lease, even well was producing, and when it ceased to produce in if pooling has occurred and even as to pooled lands.” 1988, the proration unit reverted to the lessors and was According to Chesapeake, the clause expressly pro- no longer subject to the 1976 leases. We disagree. vides for continuous and automatic termination, i.e., “rolling” termination, of proration units as they cease Standard of Review to produce. Thus, when the proration unit for the Ca- [1] The trial court's summary judgment concerns denhead No. 2 Well ceased to exist in 1988, the 1976 the construction of an unambiguous oil and gas leases terminated as to the 560–acre portion of Section lease.FN3 The standard of review is therefore de novo. 25 on which that well had been drilled, irrespective of See Tex. Mun. Power Agency v. Pub. Util. Comm'n of continued production from the Cadenhead No. 1 Tex., 253 S.W.3d 184, 192 (Tex.2007) (reviewing Pooled Gas Unit. grant of summary judgment de novo ); Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 Energen urged a different construction. Accord- (Tex.2002) (reviewing lease-construction questions ing to Energen, the retained acreage clause did not de novo ). provide for “rolling” termination because the clause operated once and only once—when continuous de- FN3. The parties agree the lease is not amvelopment ceased. Under Energen's interpretation, all biguous, and we do not hold otherwise. The acreage included in a designated proration unit was parties also agree the resolution of this appeal retained if a well capable of producing in commercial hinges on the law, not on disputed facts. quantities existed on the leased premises or on acreage pooled with the leased premises when continuous Applicable Law development ended. Thus, “[b]ecause the Cadenhead [2][3][4] The primary duty of the court in inter-

No. 2 Well was then capable of producing in compreting an oil and gas lease is to *882 ascertain the mercial quantities, the lease was preserved as to its parties' intent as expressed within the four corners of designated proration unit, all of Section 25, a portion the lease. Luckel v. White, 819 S.W.2d 459, 461 of which had previously been pooled with Section (Tex.1991). In seeking to ascertain the parties' intent, 18.”

the court must attempt to harmonize all parts of the lease, even if different parts of the lease appear con-

In essence, both parties agreed the retained tradictory or inconsistent. Id. at 461–62. Construing acreage applied, but disagreed on its scope and tem- the lease to give effect to all of its provisions honors poral application. the parties' intent that every clause has some effect and in some measure evidences their agreement. Luckel, THE RETAINED ACREAGE CLAUSE DOE 819 S.W.2d at 462. Accordingly, the court should not NOT PROVIDE FOR “ROLLING” TERMINA- strike down any part of the lease, unless there is an TION irreconcilable conflict wherein one part of the lease In one issue, Chesapeake argues the trial court destroys in effect another part thereof. Id.

erred in concluding the 1976 leases did not require “rolling” termination of non-producing proration units

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445 S.W.3d 878 (Cite as: 445 S.W.3d 878)

Discussion pooled gas units serve to maintain the 1976 leases as [5] When read in harmony with other portions of to the entirety of Section 25. However, they agree the the leases, the retained acreage clauses do not provide answer to their dispute lies in the proper interpretation for “rolling” termination of non-producing proration of the retained acreage clauses, which control the units as argued by Chesapeake. Instead, the language termination of the leases after cessation of continuous of the 1976 leases confirms that production anywhere development. “Retained acreage clauses were origion Section 25, or land pooled with it, is sufficient to nally drafted to prevent the lessee from losing those maintain the leases as to the entirety of Section 25. portions of a lease that had productive wells located thereon if the rest of the lease terminated ... [but] ...

[6] The habendum clauses in both leases provide [t]he term has expanded its meaning to include clauses for continuation beyond the primary term “as long ... that require the release of all acreage that, at the end of as oil, gas, or other mineral is produced from said land the primary term, is not within a drilling, spacing, or or land with which said land is pooled.” Under Texas proration unit.” Bruce M. Kramer, Oil and Gas Leases law, a habendum clause referring to “said land” ex- and Pooling: A Look Back and A Peek Ahead, 45 tends the lease as to all the leased property while TEX. TECH L.REV. 877, 881 n. 28 (2013). production of oil or gas occurs anywhere on the property during the second term. Ridge Oil Co., Inc. v. [7] Here, the leases' retained acreage clauses, in Guinn Invs., Inc., 148 S.W.3d 143, 149 (Tex.2004). conjunction with the continuous development clauses, Thus, “in the absence of anything in the lease to in- provide that the lessee's failure to continuously dedicate a contrary intent, production on one tract will velop the *883 leased premises terminates the leases operate to perpetuate the lease as to all tracts described as to all unproductive acreage except for: therein and covered thereby.” Mathews v. Sun Oil Co., 425 S.W.2d 330, 333 (Tex.1968). [E]ach proration unit established under ... [the] rules and regulations [of the RRC ...] upon which there Concordant with this general principle, the lease's exists (either on the above described land or on pooling clauses provide that: “Drilling operations and lands pooled or unitized therewith) a well capable of production on any part of the pooled acreage shall be producing oil and/or gas in commercial quantities treated as if such drilling operations were upon or such .... production was from the land described in this lease whether the well or wells be located on the land cov- When a lease terminates “is always a question of ered by this lease or not.” Accorded its plain, gram- resolving the intention of the parties from the entire matical meaning, this clause ensures that production instrument.” Thompson, 94 S.W.3d at 554. “However, anywhere on a pooled unit maintains the lease in effect we will not hold the lease's language to impose a as to all lands covered by the lease, both within and special limitation on the grant unless the language is outside the unit, unless the lease expressly provides so clear, precise, and unequivocal that we can reaotherwise . Key Operating & Equip., Inc. v. Hegar, sonably give it no other meaning.” Thompson, 94 435 S.W.3d 794, 798 (Tex.2014); Scott v. Pure Oil S.W.3d at 554. Co., 194 F.2d 393, 395 (5th Cir.1952); Texaco, Inc. v. Lettermann, 343 S.W.2d 726, 733 The plain, grammatical language of the retained (Tex.Civ.App.-Amarillo 1961, writ ref'd n.r.e.).

acreage clause does not expressly provide for rolling termination of proration units as they cease to exist.

As indicated earlier, Chesapeake and Energen Instead, the plain, grammatical language shows that disagree on whether operations conducted within the

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the parties intended the leases to continue as to each designated proration unit if the unit had a well capable But this construction is belied by the plain, exof producing gas in commercial quantities when con- press language of the retained acreage clauses. The tinuous development ceased. That the parties chose to language in these clauses makes clear that: (1) proramaintain the lease as to each proration unit when tion units, as recognized by the state agency having continuous drilling stopped based on the ability of that regulatory jurisdiction over oil and gas development, unit's well to produce gas, rather than actual produc- are the portions of the leased premises maintained tion, indicates they did not intend the retained acreage after continuous development ceases; and (2) each clause to be triggered any time actual production proration unit is maintained, not by the existence on stops. To conclude otherwise would promote uncer- the unit of a producing well, but by the existence on tainty about the continued existence of a lease. the unit of a well capable of producing in paying Moreover, adopting the construction urged by Ches- quantities. The use of the specific regulatory term in apeake imposes an unnecessary limitation on the kind the retained acreage clause merely serves to identify and character of the estate the parties chose to convey, with reasonable certainty the *884 property that rei .e., an expansive one maintained by production from mains under lease when continuous development any part of pooled lands unless limited by language so ceases. In other words, the term “RRC-designated clear, precise, and unequivocal that no other conclu- proration unit” functions as a mere descriptor in the sion could be reached. That type of language is absent clause, not as a normative one in the sense that it from the retained acreage clauses. prescribes what ought to be the outcome based on the application of RRC regulations. If the parties to the Chesapeake contends that the retained acreage 1976 leases had wished to provide for continual reclauses must be read to modify the habendum clauses linquishment of non-producing proration units, so that to require “rolling” termination of non-producing a proration unit would no longer be subject to the lease proration units, as designated by the Texas Railroad once production had ceased on that particular unit, Commission, such that production from a pooled unit they could have done so by including such language. will not maintain the leases as to proration units that But they did not, and it is not within our purview to ceased to exist. It makes two arguments in support of rewrite the leases and alter the parties' contract. See this construction, one of which finds no support in the Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, leases, and the other of which finds no support in 162 (Tex.2003) (“But we may neither rewrite the Texas case law. parties' contract nor add to its language.”).

Chesapeake first argues that “[t]he parties' use of [8] Chesapeake also argues that the parties to the a specific regulatory term—[RRC-designated] prora- 1976 leases could not have intended for production on tion unit—to define the extent to which the 1976 a single unit to maintain the entire lease indefinitely leases would be maintained after continuous devel- after continuous development ceased. Although this opment” signals their intent “that the leases would argument has some equitable appeal, it is refuted by only be maintained as to lands within proration units language of the lease, as demonstrated above. Morefor so long as such proration units existed.” Chesa- over, maintaining the leases during the secondary term peake thus asserts that because “[p]roration units are to acreage outside of producing proration units but designed on a well-by-well basis and only exist for so within a pooled unit would not be novel. “The primary long as the well for which the proration unit is desig- legal consequence of pooling is that ‘production and nated produces [,]” the proration unit for the Caden- operations anywhere on the pooled unit are treated as head Well No. 2 ceased to exist when it was plugged. if they have taken place on each tract within the unit.’

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” Hegar, 435 S.W.3d at 798. Additionally, production acreage clause, operated independently upon each from the pooled gas unit provides the lessors with an tract and that production on one 160–acre tract would economic benefit in the form of royalty income. not maintain the lease as to *885 another 160–acre Granted, the lessors could have achieved an additional tract on which production had ceased. 522 S.W.2d at economic benefit by expressly stating that production 707–08. The retained acreage clause there provided on each proration unit is required to maintain the that upon the lessee's failure to comply with the conleases as to each of those units during the secondary tinuous drilling program, the lease terminated as to the term. However, they failed to do so. Absent proof of entire premises except as to “the gas and gas rights ... fraud or mutual mistake, neither of which was pled by in 160 acres ... around each well theretofore completed the parties, we are not at liberty to rewrite the eco- as a gas well, down to and including the sand from nomic bargain struck by the parties to the 1976 leases. which such well produced gas.” Id. at 705. When See Eagle Life Ins. Co. v. G.I.C. Ins. Co., 697 S.W.2d continuous drilling ceased in 1954, four wells were 648, 651 (Tex.App.-San Antonio 1985, writ ref'd producing oil. Id. at 705. The two oil wells at issue n.r.e.) (“Courts are not at liberty to rewrite the contract ceased producing in 1968. Id. Relying on the between the parties without pleading and proof of habendum clause, the appellants argued that continued fraud or mutual mistake.”). Accordingly, we decline production from an oil well was sufficient to maintain Chesapeake's invitation to construe the retained the lease as to the oil wells even though those wells acreage clauses—decades after the fact—as expressly were not located on the same 160–acre tract of land on stating “that the leases would only be maintained as to which the producing well was located. Id. at 705–06. lands within proration units for so long as such prora- The court disagreed, concluding that, “[i]n light of the tion units existed” in the absence of clear, precise, and provisions of this lease discussed above, it is evident unequivocal language to that effect. See Lettermann, that the well must be producing oil, or gas, at the date 343 S.W.2d at 732 (“[I]n the absence of clear language that lessee ceases permanent drilling operations reto the contrary, pooling clauses should not be con- quired in paragraph 6, as amended, and the mineral strued in a narrow or limited sense.”). (oil or gas) produced as of that date determines the acreage and mineral rights therein which said well will Chesapeake next argues that “Texas case law di- hold under the lease.” Id. at 708 [Emphasis added].

rectly on point confirms that the 1976 leases terminated as to the disputed acreage.” In support of this Nafco is distinguishable in that there is no indiargument , Chesapeake relies chiefly on Nafco Oil & cation the lease in that case contained a pooling Gas, Inc. v. Tartan Res. Corp., 522 S.W.2d 703 clause. Nafco is also distinguishable because the re- (Tex.Civ.App.-Corpus Christi 1975, writ ref'd n.r.e). tained acreage clause there expressly required actual According to Chesapeake, Nafco stands for the prop- production on each 160–acre tract when continuous osition that “even where a retained acreage provision development ceased. But significantly, the Nafco is silent as to whether a lease terminates as to a re- court did not construe the retained acreage clause there tained tract once the retained tract's well stops pro- to mean it operated continuously over the life of the ducing later in the life of the lease, the fee simple lease. Rather, as the italicized language quoted above determinable nature of an oil and gas leases requires demonstrates, the Nafco court construed that clause to courts to imply such an intent ....” But Chesapeake's mean it operate once and only once—“at the date that reliance on Nafco is misplaced. Although Nafco is lessee ceases permanent drilling operations ....” That distinguishable, the court's opinion in that case actu- interpretation comports with ours. ally supports our conclusion. In Nafco, the court held that the habendum clause, as modified by the retained Like Nafco, the court's opinion in Humphrey v.

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Seale, 716 S.W.2d 620 (Tex.App.-Corpus Christi Seale court construed that clause to mean it operates 1986, no writ), supports our conclusion. In Seale, the once and only once—when the initial release of court held that, in the absence of language in the re- acreage occurred after continuous drilling ceased. tained acreage clause calling for a continual relinquishment on non-producing lease acreage, the gen- Chesapeake argues Seale does not support our eral rule provides that production anywhere on the conclusion because termination of the lease under the leased premises maintains the lease. 716 S.W.2d at retained acreage clause there “was not automatic but 622. The retained acreage clause there provided that rather required an affirmative action by the lessee,” upon the lessee's failure to comply with the continuous and thus, it was not surprising that “the [c]ourt dedrilling program, the lease terminated as to the entire clined to imply a continuing release obligation that premises except as to “forty (40) acres designated as a would effectuate ‘rolling’ lease termination.” But that well block around such producing well, and said well was not the reason why the Seale court declined to block designation shall be filed of record immediately construe the retained acreage clause in that case to after said block has been designated by Lessee ....” Id. mean it operated continuously over the life of the at 621. When appellant acquired his interest in the lease. Rather, the court declined to construe the clause leased premises in April 1982, two of the wells in in that manner because the clause did not provide for dispute were no longer producing, but the other dis- rolling termination in clear, precise, and unequivocal puted well continued to produce until appellant ceased language. As the court was quick to note, “[i]f the operations on it when he filed suit. Id. The appellees parties to the lease had wished to provide for a contook “the position that 40 acres was retained around tinual relinquishment of nonproducing acreage, so that the well only while a well produced, and upon the a 40–acre tract would no longer be subject to the lease cessation of production of a particular well, the 40 once production had ceased on that particular 40–acre acres surrounding that well reverted to the landowner tract, it would have been simple to include such lanand was no longer subject to the ... [l]ease.” Seale, 716 guage.” Seale, 716 S.W.2d at 622. S.W.2d at 621 The court disagreed, concluding:

For the foregoing reasons, Chesapeake has not [The retained acreage clause] does not require the shown the trial court erred in concluding that the 1976 lessee to relinquish additional acreage from the leases failed to provide for rolling termination of lease after the initial release is accomplished non-producing proration units. ‘within 180 days of the first oil well.’ As all three of the 40–acre tracts are under the same lease and lease CONCLUSION terms, production on one will keep the lease in ef-

The trial court's order granting Energen's motion fect for all.

for summary judgment is affirmed.

Seale, 716 S.W.2d at 622 [Emphasis added].

Tex.App.–El Paso,2014. Chesapeake Exploration, L.L.C. v. Energen Resources *886 The retained acreage clause in Seale, like Corp.

the one in Nafco, is not identical to the ones here. 445 S.W.3d 878 However, that difference is immaterial because the Seale court, like the Nafco court, did not construe the END OF DOCUMENT retained acreage clause there to mean it operated continuously over the life of the lease. Rather, as the italicized language quoted above demonstrates, the

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sors-in-interest of Maria Eva U. Ramirez and El Only the Westlaw citation is currently available. Refugio, Ltd. (collectively “Ramirez”) for a primary term of five years. After the expiration of the primary term, the acreage the lessee is entitled to hold is gov-

SEE TX R RAP RULE 47.2 FOR DESIGNATION erned by paragraph 18 of the lease, which provides in AND SIGNING OF OPINIONS.

part as follows:

MEMORANDUM OPINION At the end of five years after the expiration of the primary term hereof, Lessee covenants and agrees to Court of Appeals of Texas, execute and deliver to Lessor a written release of San Antonio.

any and all portions of this lease which have not CONOCOPHILLIPS COMPANY and Kaiser-Francis been drilled to a density of at least forty (40) acres Oil Company, Appellants for each producing oil well and three hundred and v.

twenty (320) acres for each producing or shut-in gas Maria Eva U. RAMIREZ and El Refugio, Ltd., Apwell from depths above 5,000 feet from the surface pellees.

of the ground and 640 acres for each producing or shut-in gas well from depths below 5,000 feet from No. 04-05-00488-CV. the surface of the ground except that in case any rule June 28, 2006. adopted by the Railroad Commission of Texas or other regulating authority for any field on this lease From the 49th Judicial District Court, Webb County, provides for a spacing or proration establishing Texas, Trial Court No. 2005-CVQ-000823-D1; Ma- different units of acreage per well, then such estabnuel R. Flores, Judge Presiding. lished different units shall be held under this lease Michael V. Powell, Chrysta L. Castaneda, Locke by such production, in lieu of the units above men- Liddell & Sapp L.L.P., Dallas, Adolfo Campero, Jr., tioned.... Campero & Becerra, P.C., Laredo, for Appellant.

In short, paragraph 18 provides that, at the end of Ricardo E. Morales, Person, Whitworth, Borchers & five years after the expiration of the primary term, the Morales, L.L.P., Laredo, for Appellee. lessee is entitled to hold 640 acres for each gas well drilled below 5,000 feet unless the Railroad Commis-

Sitting: SARAH B. DUNCAN, Justice KAREN sion has “adopted” a rule “for” the field in which the ANGELINI, Justice SANDEE BRYAN MARION, gas well is drilled; if the Railroad Commission has Justice. “adopted” a rule “for” a field, the lessee is entitled to the acreage specified in that rule.

MEMORANDUM OPINION Opinion by SARAH B. DUNCAN, Justice. The parties agree the lease's primary term expired *1 On February 10, 1975, the predeces- on February 10, 1980; and, five years later, on Febsor -in-interest of ConocoPhillips and Kaiser-Francis ruary 10, 1985, two wells were producing gas from a Oil Company (collectively “Conoco”) leased 1053 depth greater than 5,000 feet: the Serafin No. 1 gas acres in Zapata County from the predeces- well and the Serafin No. 4 gas well. The parties further

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agree that the Railroad Commission “adopted” a rule “for” the field in which the Serafin No. 4 gas well was No well shall be drilled on less, but may be drilled; and that field rule entitles Conoco to 176 acres drilled on more, acreage than that hereafter surrounding the Serafin No. 4 gas well. But the parties prescribed as the proper amount for all oil disagree on whether the Railroad Commission and gas fields wherein only spacing rules, “adopted” a rule “for” the field in which the Serafin either special or statewide, are applicable No. 1 gas well was drilled. Ramirez argues the Rail- ... 467-1200 [feet] ... 40 [acres]. road Commission “adopted” two rules-statewide Rules 37 FN1 and 38 FN2-“for” this field and, under 16 TEX. ADMIN. CODE § 3.38(b)(1), these rules, the lessee is entitled to only forty acres adopted effective Jan. 1, 1976 (repealed around the well. Conoco argues statewide rules are not and replaced 1989) (current version at 16 “adopted” “for” a field and therefore do not trigger the TEX. ADMIN. CODE § 3.38(b)(1)

“except clause” in paragraph 18; accordingly, Conoco (Tex.R.R. Comm'n, Well Densities)

argues, it is entitled to 640 acres around the well. The (hereinafter cited as Former Rule trial court rendered judgment in Ramirez's favor, rul-

38(b)(1)).

ing that Conoco is entitled to only forty acres around the Serafin No. 1 gas well in accordance with the *2 “To regulate oil and gas production, the Railstatewide rules. Conoco appealed. Because we agree road Commission of Texas has adopted general rules with Conoco that statewide rules are not “adopted”

applicable throughout the State....” R. R. Comm'n of “for” a field, we reverse the trial court's judgment and Tex. v. WBD Oil & Gas Co., 104 S.W.3d 69, 70 render judgment in Conoco's favor.

(Tex.2003). However, “because these general rules cannot adequately address the widely varying condi-

FN1. Rule 37, the Statewide Spacing Rule, tions found in the thousands of oil and gas reservoirs provides in relevant part:

in Texas, the Commission may issue orders with detailed regulations for a specific field, which the The distances mentioned in subsection (a) Commission calls field rules.” Id. Because the general [-1200 feet between wells and 467 feet rules apply statewide, they must be promulgated in between any well and a property line-] are accordance with the rulemaking provisions of the minimum distances to provide standard Texas Administrative Procedure Act; field rules, on development on a pattern of one well to the other hand, apply to a specific field and a specific each 40 acres in areas where proration group of operators and must therefore be adopted units have not been established. under the adjudication provisions of the TAPA. See id.

at 71. These differences make clear that a statewide 16 TEX. ADMIN. CODE § 3.37(b) (2006) rule is not a field rule. FN3 Accordingly, we hold that, (Tex.R.R. Comm'n, Statewide Spacing because statewide Rule 37(b) and Former Rule Rule). Because this part of statewide Rule 38(b)(1) were not “adopted” “for” the field in which 37 remains unchanged since 1985, we cite the Serafin gas well No. 1 was drilled, they are not to the current rule. field rules and therefore do not trigger the “except”

clause in paragraph 18.

FN2. In 1985, Texas Railroad Commission Rule 38, Well Densities, provided in relevant FN3. See, e.g., Browning Oil Co. v. Luecke, part: 38 S.W.3d 625, 633 n. 5 (Tex.App.-Austin

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2000, pet. denied) (“Field rules are special following a formal adjudicative proceeding-a type of rules that modify the Railroad Commission's proceeding that indisputably did not occur before [statewide regulations affecting] well spac- statewide Rule 37(b) and Former Rule 38(b)(1) were ing, density, prorationing, and casing re- applied to the field in which the Serafin No. 1 gas well quirements for designated fields to deal with was drilled. In short, although these statewide rules differences in reservoir conditions.”); Sea- apply to the field in which the Serafin No. 1 gas well gull Energy E & P, Inc. v. R.R. Comm'n of was completed, these rules were not “adopted” “for” Tex., 99 S.W.3d 232, 235-36 the field. Accordingly, the “except” clause in para- (Tex.App.-Austin 2003, pet. granted) (dis- graph 18 does not apply as a matter of law; and parol tinguishing statewide and field rules). evidence from Ramirez's expert is irrelevant.

Ramirez makes three arguments to the contrary. FN4. See Nat'l Union Fire Ins. Co. v. CBI First, she argues paragraph 18 is ambiguous and points Indus., Inc., 907 S.W.2d 517, 521 (Tex.1995) to the testimony of her expert that it was the Railroad (per curiam). Commission's policy for a proration analyst to “adopt” statewide rules “for a particular field when the field is *3 Ramirez next argues that paragraph 18 is indiscovered and application is made to the [Commis- consistent with and trumped by the statewide rules. sion] by the operator.” However, parol evidence is not However, the statewide rules merely establish miniadmissible to vary the terms of an unambiguous con- mum spacing and density requirements. See 16 TEX. tract FN4; and a contract is ambiguous only if it is ADMIN. CODE § 3.37(b) (“The distances mentioned susceptible to more than one reasonable interpretation. in subsection (a) [-1200 feet between wells and 467 See Universal C.I.T. Credit Corp. v. Daniel, 150 Tex. feet between any well and a property line-] are min- 513, 243 S.W.2d 154, 157 (1951). In light of the imum distances to provide standard development on a longstanding distinction in Texas jurisprudence be- pattern of one well to each 40 acres in areas where tween statewide and field rules, we hold paragraph 18 proration units have not been established.”); Former is unambiguous: it clearly provides that, if the Rail- Rule 3.38(b)(1) (“No well shall be drilled on less, but road Commission does not “adopt” a rule “for” a field, may be drilled on more, acreage than that hereafter the lessee is entitled to 640 acres around a gas well prescribed as the proper amount for all oil and gas drilled below 5,000 feet; if the Railroad Commission fields wherein only spacing rules, either special or does “adopt” a rule “for” a field, the lessee is entitled statewide, are applicable ... 467-1200 [feet] ... 40 to the acreage specified in that rule. Ramirez's ambi- [acres]”). Paragraph 18, on the other hand, establishes guity argument, as well as her interpretation of para- the acreage the lessee is entitled to hold five years graph 18 and her expert's testimony, also erroneously after the expiration of the primary term. Indeed, if we equates the quite different concepts of “adoption” and were to construe statewide Rule 37(b) and Former “application.” To “adopt” means “to accept formally Rule 38(b)(1) as determining the amount of acreage and put into effect,” while to “apply” means “to put the lessee is entitled to hold five years after the expiinto operation or effect.” WEBSTER'S NINTH NEW ration of the primary term, it would render the part of COLLEGIATE DICTIONARY 58, 97 (1984). Under paragraph 18 that applies in the absence of a field rule Texas law, an operator's application for a permit does meaningless. The statewide rules would always connot cause the Railroad Commission to “adopt” trol. statewide rules; rather, the Commission promulgates statewide rules through a formal rule-making proce-

Ramirez also argues the drafters intended paradure . The Commission “adopts” specific field rules graph 18 to protect against the remote contingency

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“that spacing or proration rules by a governing body Tex.App.-San Antonio,2006. may not exist at the time Paragraph 18 is triggered,” so ConocoPhillips Co. v. Ramirez that a lessee could hold the entire acreage with just one Not Reported in S.W.3d, 2006 WL 1748584 well. However, this construction of paragraph 18 (Tex.App.-San Antonio) ignores its plain language and structure: the first proviso states the general rule (in the absence of a field END OF DOCUMENT rule, the lessee will hold 640 acres around a gas well drilled deeper than 5,000 feet), while the second proviso states the exception (if a field rule is adopted, the lessee will hold the acreage specified in the field rule). Under Ramirez's construction, the structure of paragraph 18 is turned on its head: the first clause would never apply, while the second “except” clause would state both the general rule (fields governed by the statewide rules) and the exception (fields governed by field rules). This construction would be not only nonsensical but contrary to general rules of construction . Cf. Knight v. Chicago Corp., 144 Tex. 98, 188 S.W.2d 564, 566-67 (1945) (“Immediately following the above clause and in the same sentence is a proviso introduced by the words ‘provided, however,’ which are followed by the restrictive provisions. That proviso must be construed as a limitation or restraint upon the authority defined in the clause immediately proceeding it.... The parties undertook only to restrict the powers defined and not to enlarge thereon. To hold otherwise would be to make a restriction upon a power cover a broader field than the power itself.”).

In sum, although statewide Rule 37(b) and Former Rule 38(b)(1) apply to the field in which the Serafin No. 1 gas well was drilled, they were not “adopted” “for” this field. Accordingly, pursuant to the plain language of paragraph 18, Conoco is entitled to hold 640 acres surrounding the Serafin No. 1 gas well. The trial court therefore erred in ruling to the contrary. Therefore, we reverse the trial court's judgment to the extent it declares that, as of February 10, 1985, Conoco held forty acres located around the Serafin No. 1 gas well and render judgment that, as of February 10, 1985, Conoco held 640 acres located around the Serafin No. 1 gas well.

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