Austin, TX (Law Firm Newswire) September 13, 2019 – Court determines defendant’s reworking of existing wells did not constitute “continuous drilling operations” under terms of an agreement.
Contracts involving the right to conduct drilling operations on another’s property can be very complex. Often, these leases require operators to use the land continuously and profitably; otherwise, the rights conferred by the contract will lapse. This is precisely what happened in a recent case between the owners of a mineral estate and the company owning the rights to drill on the land.
The case was between HJSA No. 3, L.P. (HJSA) and Sundown Energy, L.P. (Sundown). HJSA owned the rights to a mineral estate underlying a large tract of land in Ward County, Texas. Through a contract, HJSA allowed Sundown to engage in drilling operations on the property. The agreement provided for a six-year grace period during which the lease could be maintained as long as oil and gas were being produced in paying quantities. After the six years was up; however, the lease could only be maintained if Sundown was engaged in a “continuous drilling program.”
In a section entitled “Reassignment Obligations: Continuous Drilling,” the lease explained that “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 lease also explained that if production suddenly ceased, the lease could be maintained by commencing drilling operations, which the lease defined as “actual operations for drilling, testing, completing and equipping a well; reworking operations, including fracturing and acidizing; and reconditioning, deepening, plugging back, cleaning out, repairing or testing of a well.”
Sundown began drilling in 2006. Between 2006 and 2015, Sundown started to drill 14 wells. However, on January 29, 2016, HJSA sent Sundown a letter explaining that it had terminated the lease due to Sundown’s failure to engage in continuous drilling. HJSA noted that from July 2007 to July 2013, there had been numerous times that Sundown allowed more than 120 days to pass between abandoning one well and starting another.
Sundown responded that while it did not begin to drill any new wells over that period, the lease allowed for it to maintain the lease by reworking and reconditioning existing wells. Sundown claimed that because it was in the process of reworking and reconditioning, it maintained the lease. The trial court agreed with Sundown, and HJSA appealed.
The appellate court reversed the lower court’s decision, holding that the lease required Sundown to engage in continuous drilling operations, which required a new well be started within 120 days of a well being abandoned. Contrary to Sundown’s position, the court explained that the lease could not be maintained by merely reworking or reconditioning existing wells.
In coming to this conclusion, the court took a detailed look at the contractual language, specifically the clause stating that Sundown could allow “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 court explained that the term “continuous drilling operations” when used in conjunction with “the next ensuing well” referred to the drilling of new wells. Sundown’s attempt to read-in the definition of “continuous drilling,” which included the reworking and reconditioning language, was unavailing as it was not the most natural reading of the lease.
Austin oil and gas attorney, Gregory D. Jordan, notes that continuous-use or continuous-drilling provisions are common in leases to ensure that operators use the land efficiently. He explains that while a landowner’s interests and the operator’s interests may align during times of high oil prices, when oil prices are low operators may wish to defer drilling. However, many landowners prefer to have continuous production, or at least development of the property. Thus, continuous-drilling provisions are a compromise by which an operator can maintain the lease even if there is inadequate production as long as they develop the property for future use. However, continuous-use clauses are frequently the subject of contention because there is often a significant amount at stake and, unfortunately, oil and gas leases are often not as artfully drafted as they should be.
The Law Offices of Gregory D. Jordan is an Austin trial law firm that represents businesses and landowners in Texas oil and gas cases. Contact the Law Offices of Gregory D. Jordan at http://www.theaustintriallawyer.com./
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