Sutton v. SM Energy Co.

421 S.W.3d 153, 181 Oil & Gas Rep. 1190, 2013 WL 5989445, 2013 Tex. App. LEXIS 13859
CourtCourt of Appeals of Texas
DecidedNovember 13, 2013
DocketNo. 04-12-00772-CV
StatusPublished
Cited by5 cases

This text of 421 S.W.3d 153 (Sutton v. SM Energy Co.) is published on Counsel Stack Legal Research, covering Court of Appeals of Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Sutton v. SM Energy Co., 421 S.W.3d 153, 181 Oil & Gas Rep. 1190, 2013 WL 5989445, 2013 Tex. App. LEXIS 13859 (Tex. Ct. App. 2013).

Opinion

OPINION

Opinion by:

SANDEE BRYAN MARION, Justice.

SM Energy Company (“SM”), appellee and plaintiff below, filed a declaratory judgment action seeking a declaration that a 1966 oil and gas lease terminated with respect to approximately 18,000 acres of an original 40,000-acre premises; that appellants’ overriding royalty interests (“ORRIs”) carved out of assignments of the lease were extinguished; and that SM was not obligated to pay appellants royalties based on their claimed ORRIs following execution of a new lease executed on the same 18,000 acres in 2010. Appellants filed counterclaims and a request for declaratory relief, and raised certain affirmative defenses. SM moved for summary judgment on its request for declaratory relief and on appellants’ counterclaims and affirmative defenses. Without stating its grounds, the trial court granted SM’s motion for summary judgment. We affirm.

BACKGROUND

This appeal, as well as an earlier appeal to this court, has its genesis in a 1966 lease under which Sutton Producing Corporation leased approximately 40,000 acres from Briscoe Ranch for the purpose of oil and gas exploration and production. See SM Energy Co. v. Sutton, 376 S.W.3d 787 (Tex.App.-San Antonio 2012, pet. denied) (“Sutton I”). Less than two months after executing this lease, Sutton Producing Corporation assigned its interest in the 1966 lease to Kenoil Corporation and three individuals, but reserved for itself a 5.46875% ORRI. This assignment contained the following savings provision that extended the ORRI to any new leases:

Said [ORRI] is to apply to all amendments, extensions, renewals or new leases taken on all or a part of the lease [156]*156premises within one year after termination of the present lease.

In 1978, Kenoil Corporation assigned its leasehold interest to a third party and reserved an additional ORRI of 2.00%. This assignment also contained a savings provision that extended the ORRI to any new leases:

[The ORRI] is to apply to all amendments, extensions and renewals of the lease or any part of it or to a new lease taken by the Assignee herein or his heirs and assigns on the same lease premises or any part thereof within twelve (12) months after termination of the present lease.

Over the years, drilling and production operations continued under the 1966 lease, which was amended several times. In March 2000, Crimson Energy Company L.P. (“Crimson”), a successor lessee under the 1966 lease and SM’s predecessor, released about 22,000 of the original 40,000 acres under the 1966 lease back to Briscoe Ranch. Briscoe Ranch and Crimson also amended the 1966 lease as to the remaining 18,000 acres. The amendment required Crimson to complete certain requirements by December 31, 2000 and contained a continuous drilling provision that provided in part as follows:

If at any time after December 31, 2003, Lessee fails to commence the actual drilling operations for any well within the time interval as set forth above, or to diligently prosecute the same, or any other termination or forfeiture of condition or provision becomes effective under this lease, then this lease shall automatically terminate as to all of the lease premises, save and except only the acreage included within each well tract as defined under this amendment and Lessee shall release all depths below the base of the deepest formation from which Lessee is then currently producing oil or gas under each well tract.

In 2007, the parties again amended the lease, which contained a continuous drilling provision that provided in part as follows:

If at the expiration of the primary term and any extensions thereof, any acreage leased herein has not been perpetuated by and ascribed to a well tract as stated herein, and Lessee is then engaged in drilling operations on a well on the leased premises, or Lessee has done so within ninety (90) days prior to the expiration of the primary term and Lessee shall have notified Lessor by written or electronic form of its intent to conduct continuous development, this lease shall remain in force and effect as to the leased premises so long as Lessee shall commence the actual drilling of an additional well or wells within one-hundred twenty (120) days after completion of the preceding well. ... If any such additional drilling on any well drilled hereunder being continued at the expiration of the primary term or thereafter in accordance with the terms of this paragraph results in production, then this lease shall remain in full force and effect as to the well tract ascribed to each well herein according to the appropriate acreage set out in this lease.

In its motion for summary judgment on its declaratory judgment claim, SM contended it completed the drilling of the Briscoe E 1272 well on the approximately 18,000 acres on October 5, 2008. SM also contended that because the price of natural gas sharply decreased in the second half of 2008, it stopped drilling wells under the 1966 lease after completion of the Bris-coe E 1272 well. However, under the continuous drilling provision, in order for the 1966 lease to remain in effect, SM was required to “commence the actual drilling of an additional well or wells within one-[157]*157hundred twenty (120) days” of completing the Briscoe E 1272 well, or by February 5, 2009. In an affidavit attached to the motion, SM’s landman, Mark Cody, attested SM did not want the 1966 lease to terminate and, in late 2008, asked Briscoe Ranch to allow the lease to remain in effect even if the continuous drilling requirement was not met. According to Cody, Briscoe Ranch refused. No other wells were drilled on the land.

Cody also attested that in late 2009, SM drilled a successful Eagle Ford well on land not part of the 1966 lease. Based on this new find and changed economics, SM contacted Briscoe Ranch about again leasing the 18,000 acres. On May 1, 2010, Briscoe Ranch and SM entered into a new lease for this land (“the 2010 lease”). SM alleged it did not commence drilling another well on the 18,000 acres until May 1, 2010, well past the 120-day continuous drilling deadline of February 5, 2009; thus, the 1966 lease terminated on February 5, 2009. Therefore, SM concludes, because the 1966 lease was not amended, extended, or renewed and no new lease was executed within one year of February 5, 2009, appellants’ ORRIs expired and the two savings provisions did not operate to burden the 2010 lease with appellants’ ORRIs.

In their response to SM’s motion for summary judgment, appellants expressly did not contest the termination of the 1966 lease or the existence of the 2010 lease. Instead, they contest SM’s contention that the 1966 lease terminated on February 5, 2009. Appellants acknowledge both the 1966 lease and the 2007 amendment contain a continuous drilling provision. However, they contend the continuous drilling clause in the 2007 amendment does not state what happens when continuous drilling ceases; therefore, “nothing happened” on February 5, 2009, and the 1966 lease remained in existence because “operations” continued under the habendum clause until the new lease was executed in 2010, at which time the 1966 lease finally terminated.

TERMINATION OF 1966 LEASE

The parties do not dispute that the mineral estate subject to the 1966 lease was past its primary term.

Free access — add to your briefcase to read the full text and ask questions with AI

Related

Cite This Page — Counsel Stack

Bluebook (online)
421 S.W.3d 153, 181 Oil & Gas Rep. 1190, 2013 WL 5989445, 2013 Tex. App. LEXIS 13859, Counsel Stack Legal Research, https://law.counselstack.com/opinion/sutton-v-sm-energy-co-texapp-2013.