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Limited Partnership v. Sundown Energy LP

Court of Appeals of Texas, Eighth District, El Paso

August 16, 2019


          Appeal from the 143rd District Court of Ward County, Texas (TC# 16-05-23886-CVW)

          Before McClure, C.J., Rodriguez, and Palafox, JJ.



         Appellant HJSA No.3, Limited Partnership appeals partial summary judgment granted against it on the interpretation of a contractual provision in an oil and gas lease. In his first three issues, HJSA contends: the trial court erred in concluding as a matter of law that the unambiguous terms of the contract allowed Appellees to maintain the lease under the continuous-drilling-program provision of Paragraph 7(b) by conducting "drilling operations" as that term is defined in Paragraph 18 of the lease, instead of deferring to the specific obligations of Paragraph 7(b); in its fourth issue, HJSA contends the trial court erred as a matter of law in striking portions of an affidavit by the attorney who negotiated the original lease because the stricken portions informed, rather than varied or contradicted, the terms of the lease; and in its fifth and final issue, HJSA contends the trial court's construction of the lease leads to an absurd result. For the following reasons, we reverse the decision of the trial court and remand the cause to that court for further proceedings.


         This case involves the interpretation of a continuous-drilling program in an oil and gas lease and whether the provision operated as a special limitation. Appellant HJSA No. 3, Limited Partnership is a successor in interest to a mineral estate underlying a 30, 450-acre tract of land in Ward County, Texas. From 1925 until 2000, the entire tract was held by a fixed-term lease to Gulf Production Co., whose successor was Chevron U.S.A., Inc. The terms of the lease provided it would terminate automatically on August 4, 2000. In 1995, the prior mineral-estate owners negotiated a top lease with Penwell Energy, Inc. Appellee Sundown Energy LP and its co-appellees are the successors in interest to the Penwell Energy lease. The effective date for the top lease was August 4, 2000-the day the Chevron lease terminated-and like the prior lease it covered the entire 30, 450-acre tract.

         The lease provided Sundown with a six-year grace period during which the lease would be maintained as to the entire tract provided oil and gas was being produced in paying quantities from anywhere on the leased premises. But at the end of the six years the lease could be maintained only if there was production in paying quantities from each individual tract or if Sundown was engaged in a "continuous drilling program." The relevant language from the lease is as follows:

         7. Reassignment Obligations: Continuous Drilling

(a) This lease shall continue for so long as oil and gas is produced from the Leased Premises in paying quantities, subject to the reassignment provisions set forth below. In the period from the Effective Date until the sixth anniversary of the Effective Date, production of Oil and Gas in paying quantities from anywhere on the Leased Premises shall extend the entire lease without any reassignment obligation. After the sixth anniversary of the Effective Date, and subject to the provisions of Paragraph 7(b), Lessee shall reassign to Lessor or Lessor's designee, all of Lessee's operating rights in all tracts of the lease not then held by production, retaining only the right to remove equipment and the nonexclusive right to continue to use the surface of the reassigned tract in connection with Lessee's operations on the remainder of the Lease. As used in this Paragraph 7(a), a tract of the Lease is held by production so long as a well is producing Oil and/or Gas in paying quantities from the tract (subject to the provisions of Paragraphs 3.10, 6 and 12); provided, however[] that the Chevron Producing Area and the 3-B Producing Area shall each separately constitute single tracts, and the tracts of land that can be held outside the Producing Areas by production from a single well shall be limited in area and depth as follows (the Production Units):
(b)The obligation in Paragraph 7(a) above to reassign tracts not held by production shall be delayed for so long as Lessee is engaged in a continuous drilling program on that part of the Leased Premises outside of the Producing Areas. The first such continuous development well shall be spudded-in on or before the sixth anniversary of the Effective Date, with no more than 120 days to elapse between completion or abandonment of operations on one well and commencement of drilling operations on the next ensuing well. The obligation to reassign tracts not held by production provided in Paragraph 7(a) above shall be deemed to be effective upon the cessation of the last continuous drilling operation, unless Lessee is not conducting drilling operations on the sixth anniversary of Effective Date, in which event such reassignment obligation shall be deemed to be effective upon the expiration of the sixth anniversary of Effective Date. Within one hundred twenty (120) days after the sixth anniversary of Effective Date or after the cessation of continuous drilling operations, whichever occurs later, Lessee shall designate Production Units in writing in recordable form and deliver same to Lessor, with an adequate legal description and with the producing stratum or strata defined with particularity by reference to Lessee's well logs. [Emphasis added].

         The lease also provided that in the event of a temporary cessation of production the lease could be maintained by "commenc[ing] drilling operations as defined herein" within ninety days if the operations subsequently resulted in restoration of production in paying quantities. This temporary cessation clause stated it was subject to the reassignment obligations of Paragraph 7. The term "drilling operations," is defined in Paragraph 18 of the lease:

Whenever used in this lease the term 'drilling operations' shall mean: actual operations for drilling, testing, completing and equipping a well (spud in with equipment capable of drilling to Lessee's object depth); reworking operations, including fracturing and acidizing; and reconditioning, deepening, plugging back, cleaning out, repairing or testing of a well.

         The lease was executed, and Sundown began drilling the first new well in February 2006. In total, Sundown spudded-in[1] and drilled fourteen development wells from February 2006 to March 2015. But on January 29, 2016, HJSA sent a letter to Sundown notifying it that the lease had terminated as to certain portions of the leased property due to its failure to engage in a continuous drilling program as defined in the lease. It asserted that from July 2007 through July 2013, Sundown had on five separate occasions [2] allowed more than 120 days to elapse between completion or abandonment of operations on one well and commencement of drilling operations on the next ensuing well, thereby failing to maintain the lease as to the areas not held by production. HJSA contended Paragraph 7 of the lease required Sundown to spud-in and drill a new well outside of the producing areas within 120 days of completion or abandonment of a spudded-in and drilled well. Sundown countered that while no new wells had been spudded-in during the periods described by HJSA, it had conducted reworking and reconditioning operations on existing wells. Because Paragraph 18's definition of drilling operations included reworking and reconditioning, they contended their actions had maintained the lease.

         HJSA filed suit in May 2016. Each side filed motions for summary judgment and partial summary judgment and a hearing on the motions was held in November 2017. The trial court granted partial summary judgment to Sundown, finding that the unambiguous terms of the lease allowed Sundown to maintain the lease by conducting drilling operations as that term was defined in Paragraph 18 of the lease, and that Sundown's reworking and reconditioning of existing wells had maintained the contested areas of the leased premises. We granted HJSA's petition for permissive appeal.


         Construction of the Oil and Gas Lease

         The subject of this dispute is whether the term "drilling operations" as used in Paragraph 7(b) of the lease is modified in the specific context of that paragraph. HJSA contends references in Paragraph 7(b) to "continuous drilling program," "continuous development well," "spudded-in," and "next ensuing well," all clarify that in the context of Paragraph 7(b), Sundown was required to spud-in a new well in a non-producing area within 120 days of completion or abandonment of a prior well to maintain the lease in the areas not held by production. Sundown argues the definition in Paragraph 18 controls and should be plugged-in to paragraph 7(b). Under that reading, the actions taken by Sundown during the alleged lapses maintained the lease as to the entire tract.

         Standard of Review

         We review a trial court's grant of summary judgment de novo. Provident Life and Acc. Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003). The construction of an unambiguous contract is a question of law, which we also review de novo. Anderson Energy Corp. v. Dominion Okla. Tex. Expl. & Prod., Inc., 469 S.W.3d 280, 287 (Tex.App.-San Antonio 2015, no pet.)(citing MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 650-51 (Tex. 1999)). A contract is unambiguous if, as worded, it can be given a clear and definite legal meaning so that it can be construed as a matter of law. Id., (citing GilbertTex. Contr., L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118, 133 (Tex. 2010)); see also Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996)("An ambiguity does not arise simply because the parties advance conflicting interpretations of the contract."). A contract is ambiguous only if it is subject to more than one reasonable interpretation after applying the relevant rules of construction, which creates a fact issue on the parties' intent. In re D. Wilson Const. Co., 196 S.W.3d 774, 781 (Tex. 2006). In determining whether a contract is ambiguous, we consider the contract as a whole in light of the circumstances present when the contract was entered. Columbia Gas Transmission Corp., 940 S.W.2d at 589; Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. CBI Industries, Inc., 907 S.W.2d 517, 520 (Tex. 1995). If we determine the contract is not ambiguous, our primary duty as a reviewing court is to give effect to the written expression of the parties' intent. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994).

         Parol evidence is inadmissible for the purpose of creating an ambiguity. CBI Indus., Inc., 907 S.W.2d at 520. Only where a reviewing court has first determined a contract is ambiguous may it consider the parties' interpretation and admit extraneous evidence to determine the true meaning of the instrument. Id. A "patent" ambiguity is one that is apparent from the face of the contract. Fox v. Parker, 98 S.W.3d 713, 719 (Tex.App.-Waco 2003, pet. denied)(citing CBI Indus., Inc., 907 S.W.2d at 520). A "latent" ambiguity arises when a contract that appears unambiguous is applied to its subject matter and an ambiguity appears. Id. If either a patent or latent ambiguity is found, the court's duty is to determine the true intentions of the parties, and parol evidence may be reviewed to determine that intent. Id.

         Applicable Law

         Mineral leases are contracts, and their terms define the parties' respective rights and duties. Endeavor Energy Res., L.P. v. Discovery Operating, Inc., 554 S.W.3d 586, 595 (Tex. 2018). Texas has a strong public policy favoring freedom of contract, and courts must respect and enforce the terms of a contract that the parties have agreed on unless there are compelling reasons not to do so. Phila. Indem. Ins. Co. v. White, 490 S.W.3d 468, 471 (Tex. 2016). When construing contract provisions, controlling effect must be given to specific provisions over general provisions. Young Mens Christian Ass'n of Greater El Paso v. Garcia, 361 S.W.3d 123, 127 (Tex.App.-El Paso 2011, no pet.).

         Generally, a mineral lease's habendum clause divides a lease's duration into two parts: a primary term and a secondary term. Endeavor Energy Res., L.P., 554 S.W.3d at 597 (citing Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002)). Usually, the primary term will last for a fixed period of time; the secondary term will then continue the lease after the primary term for only so long as oil and gas continue to be produced. Id. The lease will automatically terminate if production permanently ceases during a secondary term. Id. But as long as one portion of the leased tract, no matter how small, is producing oil or gas, the lease will continue as to the entire tract. Id.

         Lessors typically do not desire that an operator be allowed to maintain an entire tract by producing from a small area of a large tract; the lessor's priority is usually to have the operator fully develop the leased area and thus maximize his royalty payments. Endeavor Energy Res., L. P, 554 S.W.3d at 597 An operator, on the other hand, may want to delay drilling or production for any number of reasons convenient to it, such as superior market conditions for the minerals being extracted Id. Continuous-development clauses permit a balancing of these competing interests by "permit[ing] a lease to be preserved under certain circumstances even though there is no production after the expiration of the primary term during continuous drilling operations, whether on the same or different wells" [Emphasis in orig] Id, (quoting 8 Howard R Williams & Charles J Meyers, Oil and Gas Law: Manual of Oil and Gas Terms 951, § 617 (LexisNexis Matthew Bender 2017)) Generally, these clauses continue the lease beyond the expiration of the primary term if production results from the operations being engaged in by the lessees when the primary term expires, provided the development efforts are continuous with no gap Id, (citing Rogers v Osborn, 152 Tex 540, 261 S.W.2d 311, 315 (1953)(Wilson, J, concurring)).

         Continuous-development clauses frequently work together with retained-acreage clauses. Endeavor Energy Res., L.P., 554 S.W.3d at 597. "While a habendum clause generally extends the entire lease so long as some production is occurring on the lease, and a continuous-development clause further extends the entire lease so long as the operator remains engaged in the required development efforts, a retained-acreage clause typically divides the leased acreage such that production or development will preserve the lease only as to a specified portion of the leased acreage." Id., at 597-98. If a lessor wants to have its entire leasehold acreage developed, a retained-acreage clause is the ideal choice to accomplish that goal. Id., at 598. Retained-acreage clauses are as various as the oil and gas leases they are found in, and the effect of a particular retained-acreage clause depends entirely on the terms freely chosen by the parties. Id.

         A forfeiture cuts short the natural limit of a leasehold interest, and generally arises from the failure to comply with a condition subsequent. Endeavor Energy Res., L.P., 554 S.W.3d at 606 n.14. Forfeitures are disfavored in Texas, and contracts are construed to avoid them. Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768, 774 (Tex. 2009). A special limitation, by contrast, provides that a lease will automatically terminate upon the happening of a stipulated event. Endeavor Energy Res., L.P., 554 S.W.3d at 606. The event may be, among other things, a cessation of production or failure to commence drilling or reworking operations. Id. While we will construe contracts to avoid forfeitures, a special limitation does not result in a forfeiture-it results in a termination of all or part of the lease under its own terms. Id. We will not find that the contract's language creates a special limitation, however, "unless the language is so clear, precise, and unequivocal that we can reasonably give it no other meaning." Thompson, 94 S.W.3d at 554 (citing Fox v. Thoreson, 398 S.W.2d 88, 92 (Tex. 1966)).

         We acknowledge the well-recognized canon of construction that "technical words are to be interpreted as usually understood by persons in the business to which they relate, unless there is evidence that the words were used in a different sense." Exxon Corp. v. Emerald Oil & Gas Co., L.C., 348 S.W.3d 194, 211 (Tex. 2011)(citing Barrett v. Ferrell, 550 S.W.2d 138, 142 (Tex.Civ.App.-Tyler 1977, writ ref'd n.r.e.)). Courts should harmonize all the provisions of a contract so that none are rendered meaningless. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005).


         Special ...

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