On September 16, 2020, the Texas Supreme Court heard oral arguments in the case of Endeavor Energy Resources L.P. v. Energen Resources Corp. and John Thomas Quinn, 18-1187. The two issues on appeal are (1) whether the court of appeals properly construed the retained-acreage clause to limit carryover days extending the lease’s 150-day drilling requirement from one term only to the next and, (2) if so, whether the language in the lease is so “clear, precise and unequivocal” to enforce it as a special limitation on the grant. Under the continuous drilling clause, mineral interests or undeveloped acreage would revert to the landowner unless the lease operator undertook continuous development operations. Under the lease the operator “shall have the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between the completion of one well and the drilling of a subsequent well.”
The Texas Supreme Court has heard and decided significant retained-acreage cases in recent years – XOG Operating, LLC v. Chesapeake Exploration Limited Partnership, 15-0935 (https://www.txcourts.gov/media/1441369/150935.pdf), and Endeavor Energy Resources, L.P. v. Discovery Operating, Inc., 15-0155 (https://www.txcourts.gov/media/1441368/150155.pdf), for example. The Energen case that was recently argued involves a slightly different issue, but the crux of the case is still about deciding what an operator must do in order to maximize the lease acreage retained for as long as possible. Because the stakes are high in these cases, and because the results often turn on seemingly small differences in lease language, answers that can be reliably applied to future disputes are elusive.
Here, the 118th District Court in Howard County held that earned days could only carry forward to the next 150-day term, and unused days could not be carried forward to succeeding 150-day terms, and the Eastland Court of Appeals affirmed. The relevant portion of the lease provides:
If this lease is extended as to non-dedicated acreage beyond the expiration of the primary term hereof, this lease shall terminate as to non-dedicated acreage one hundred fifty (150) days after the expiration of the primary term unless during such one hundred fifty (150) day period Lessee has commenced operations for the drilling of a well in which case this lease shall be extended as to the dedicated and nondedicated acreage so long as operations for the drilling of a subsequent well are commenced within one hundred fifty (150) days after the completion of the preceding well. This lease shall terminate as to all non-dedicated acreage any time a subsequent well is not commenced within one hundred fifty (150) days from the completion of a preceding well. … Lessee shall have the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between completion of one well and the drilling of a subsequent well.
It will be interesting to see how the Court decides this issue and how its reasoning will impact other continuous development leases, or other similar provisions, in the future.
Oral argument before the Texas Supreme Court can be viewed at this link:
http://www.texasbarcle.com/CLE/SCPlayer5.asp?sCaseNo=18-1187&bLive=&k=&T=
Briefs filed in the case can be found and viewed at this link: