Court of Appeals of Texas, Eighth District, El Paso
HJSA NO. 3, LIMITED PARTNERSHIP, Appellant,
SUNDOWN ENERGY LP, SMC 2000 LP, PGP HOLDINGS 1, LLC, SMITH ALLEN OIL & GAS, LLP, TRANSMOUNTAIN EXPLORATION LLC, FORTUNE NATURAL RESOURCES CORPORATION, TEXAS HEAT OF THE PERMIAN BASIN, INC., WHITING OIL AND GAS CORPORATION, EAGLE ROCK ACQUISITION PARTNERSHIP II, LP, ODYSSEY ROYALTIES, LLC, HORIZON ROYALTIES LLC, PINECONE RESOURCES LLC, BRENDA DORMAN FAUGHT, and LENA RENEE BRIGMAN, Appellees.
from the 143rd District Court of Ward County, Texas (TC#
McClure, C.J., Rodriguez, and Palafox, JJ.
T. RODRIGUEZ, JUSTICE
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.
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
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
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].
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.
lease was executed, and Sundown began drilling the first new
well in February 2006. In total, Sundown
spudded-in 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
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.
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.
of the Oil and Gas Lease
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.
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).
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.
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
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.
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,
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
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)).
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).