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Mzyk v. Murphy Exploration & Production Company-USA

Court of Appeals of Texas, Fourth District, San Antonio

June 28, 2017

Helen A. MZYK, Karnes S4 Minerals, L.P., and Karnes S4 Management, L.L.C., Appellants
v.
MURPHY EXPLORATION & PRODUCTION COMPANY-USA, Appellee

         From the 81st Judicial District Court, Karnes County, Texas Trial Court No. 14-04-00083-CVK Honorable Donna S. Rayes, Judge Presiding

          Sitting: Sandee Bryan Marion, Chief Justice Rebeca C. Martinez, Justice Luz Elena D. Chapa, Justice

          MEMORANDUM OPINION

          Luz Elena D. Chapa, Justice

         Helen A. Mzyk, Karnes S4 Minerals, L.P., and Karnes S4 Management, L.L.C. appeal the trial court's take-nothing summary judgment on Mzyk's breach of contract claim against Murphy Exploration & Production Company-USA.[1] Mzyk argues that after producing wells were drilled on an adjacent lot, her mineral lease with Murphy triggered Murphy's obligation to drill an offset well, pay compensatory royalties, or release the lease. We affirm the trial court's judgment.

         Background

         On March 2, 2011, Mzyk and Murphy executed a mineral lease regarding approximately 241 acres of land Mzyk owned in Karnes County. The lease had a primary term of three years. Paragraph 6 of the lease required Murphy to drill an offset well or wells as a reasonably prudent operator would under the same or similar circumstances if certain conditions were satisfied. Specifically, Paragraph 6 of the mineral lease provides:

6. Drainage; Offset, Protection. If after the date of this lease any new well or wells is drilled and produces oil or gas in paying quantities on adjacent lands not owned by Lessor, and not pooled with lands covered hereby, which are being explored and developed for oil and gas by a third party or by Lessee under a different lease, and not pooled with lands covered hereby and within four hundred sixty seven feet (467') from said lands, Lessee agrees to drill such offset well or wells on said lands (or attempt to complete for production any existing offset well or wells drilled by Lessee on said lands) as a reasonably prudent operator would drill under the same or similar circumstances; provided, however, Lessee shall not be required to offset any such gas well on adjacent lands unless the gas therefrom is being marketed. It is provided, however, that, in lieu of drilling an offset to any such oil or gas well, Lessee shall have the option of: (a) paying Lessor, as compensatory royalty, a sum equal to the royalties which would be payable under this lease on the production from such well had same been drilled and produced under this lease, and, as long as Lessee elects to pay such royalty in lieu of drilling an offset well, it will be considered that oil or gas is being produced from said lands as to the number of acres of said lands adjacent to the offset well as would be ascribed to a well on said lands within the meaning of Subparagraph 2(c) hereof; or (b) deliver to Lessee a release of this lease as to the number of acres of said lands adjacent to the offset well as would be ascribed to a well on said lands within the meaning of Subparagraph 2(c) hereof. To be in compliance with the provisions of this Paragraph 6, Lessee shall either commence the drilling of an offset well on said lands within six (6) months from the date of first production from the well on the adjacent land, or within said six (6) month period deliver to Lessee a release of acreage; and Lessee's failure to timely commence such well or deliver a release shall constitute an election by Lessee to pay compensatory royalty in lieu of drilling a well on said lands. Compensatory royalty shall be calculated and paid to Lessor based on production from the well on the adjacent lands commencing with production after 7:00 o'clock A.M. on the first day of the sixth calendar month after first production from such well and continue thereafter until production from such well ceases or an offset well is completed on said lands by Lessee. Should Lessee drill an offset well on said lands pursuant to the provisions of this paragraph, whether completed as a dry hole or a producer of oil or gas, Lessee's obligations under the provisions of this paragraph shall be deemed fulfilled.

(emphasis added).

         After the lease was executed, two or three new wells were drilled on an adjacent landowner's property, these wells were located within 467 feet of Mzyk's property and produced in paying quantities, and Mzyk's property was not pooled with the adjacent property. Laterals of the new wells run directionally away from Mzyk's property and, consequently, the wells caused no drainage from the mineral estate of Mzyk's property. During the primary lease term, Murphy determined drilling on Mzyk's property would not be profitable and a reasonably prudent operator would not have drilled or operated any well on Mzyk's property. Because no wells on Mzyk's property were drilled during the primary term of the lease, the lease expired on March 2, 2014.

         The following month, Mzyk sued Murphy, alleging Murphy failed to drill an offset well or deliver a release of the acreage. Mzyk claimed Murphy breached the lease, and she sought $11 million in compensatory royalties and her attorney's fees. After generally denying Mzyk's allegations, Murphy filed a traditional motion for partial summary judgment requesting that the trial court construe Paragraph 6 of the lease. Mzyk filed a cross-motion for partial summary judgment and argued Paragraph 6 entitles her to compensatory royalties.

         The trial court granted Murphy's motion and construed Paragraph 6 as requiring Murphy to drill an offset well only if "a reasonably prudent operator would drill an offset well, which means that substantial drainage was occurring from the neighboring wellbore(s) in question; and a reasonably prudent operator would have a reasonable expectation of producing gas and condensate in paying quantities from the prospective offset well." The trial court further determined Paragraph 6 required Murphy to pay compensatory royalties only if Murphy had the obligation to drill an offset well and "failed to either drill such offset well or release the Lease within six months of the date Murphy's obligation to drill an offset well accrued." The trial court denied Mzyk's cross-motion for partial summary judgment.

         Murphy thereafter filed a traditional and no-evidence motion for summary judgment challenging the breach element of Mzyk's breach of contract claim. Specifically, Murphy argued:

[Mzyk was] required . . . to prove that there was substantial draining from the productive portion of a wellbore within 467 feet of their lease line and that a reasonably prudent operator would have drilled on the lease. . . . Because [Mzyk has] no evidence to support any of these elements, the Court should grant Murphy's motion for no-evidence summary judgment.

         Murphy also argued its evidence conclusively established no reasonably prudent operator would have drilled an offset well and no drainage was occurring. Murphy further argued "[Mzyk has] no evidence that an offset well drilled on the Lease would have produced in ...


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