Nearly two years after the petition for review was filed with the Texas Supreme Court in the case of Endeavor Energy Resources, LP & Endeavor Petroleum, LLC vs. Discovery Operating, Inc. & Patriot Royalty and Land, LLC, et al., and after the filing of multiple briefs by the appellants and appellees, that body has disposed of Endeavor’s petition for review of the 11th Court of Appeals decision in favor of Discovery and Patriot – the Court also declined to review another case relating to a different retained acreage provision (XOG Operating, LLC v. Chesapeake Exploration, LP). In Endeavor, the appellate body had agreed with the lower court in its interpretation of a retained acreage clause in Endeavor’s prior oil and gas lease that tied the surface acreage to be kept after the partial lease termination occurred to the assignment of acreage as to a proration unit per the Texas Railroad Commission (“RRC”) field rules (or in this instance, the RRC’s special field rules for the Spraberry (Trend Area) Field in Districts 7C and 8).
The continuous development program obligation, and the retained acreage provision, were reflected in Provisions 17 and 18 of the Endeavor leases, respectively:
The proration units corresponding to the wells that were drilled under the auspices of the Endeavor leases were each assigned eighty acres. The special field rules for the Spraberry (Trend Area) Field provide that the regular/default number of acres a well may hold in a proration unit is eighty acres; however, such units containing sufficiently productive wells may receive up to eighty additional “tolerance” acres, for a maximum potential total of one-hundred and sixty acres. It was upon this distinction that Endeavor relied on its assertion that, even though it had only actually assigned eighty acres to each of its proration units under the leases, as a matter of right it should have been able to retain the acreage “required to comply with the applicable rules and regulations of the [RRC] for obtaining the maximum producing allowable…” (emphasis supplied). However, Provision 18 in the lease tied the surface acreage to be retained at the moment of partial lease termination to a given proration unit “assigned to a well.” The 11th Court of Appeals observed that “assigned” as used in this context is a bit of a term of art, and in this particular field assignment of acreage is achieved by the filing of a required certified form featuring a plat of the surface acreage assigned as it relates to the leased land (for reference, here is a blank Form P-16). Ultimately, the appellate court held that Endeavor was able to retain the acreage it had actually assigned to the proration units – being eighty acres – even though it perhaps may have been able to hypothetically assign more acreage if production had merited the inclusion of additional tolerance acreage.
Those of us in the industry were intrigued when the Texas Supreme Court granted review on this case which had come out in Discovery’s favor at all stages, especially given the recent multiple cases related to retained acreage provisions generally (e.g., XOG) – I know at the time I thought “wouldn’t it be great if we could have some sort of bright-line rule on this issue?” Predictably, it seems that courts are generally going to treat these on case-by-case basis, based on analysis of the actual lease provisions and the circumstances of the situation giving rise to the dispute. As a result, I would argue that the focus on drafting your client’s retained acreage provision (if you choose to try your hand at it), or scrutinizing and understanding this provision in a prepared lease that comes across your desk, is one of the most important parts of negotiating and preparing a lease, and should be of paramount concern. The consequences for failing to accurately articulate your client’s desired aims and wishes, as well as not clearly understanding the basis by which the acreage to be retained will be calculated, have the potential to be extremely punitive and result in an unintentional and avoidable loss of more lease acreage than necessary when the lease is partially terminated.
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