Is Your Acreage Safe?

Is Your Acreage Safe?

By Miguel Suazo and Chelsea Allen

Though acreage release clauses are common in most oil and gas leases today, they continue to be a source of headaches – and sources of undesired acreage loss – even for experienced operators. A recent Texas case, Hardin-Simmons University v. Hunt Cimarron LP, No. 07-15-00303-CV, is just the latest example. The case turned on whether Hunt’s whole leasehold was held by a limited number of wells, despite a lack of production on the remaining acreage of its lease. The outcome of the case boiled down to lease construction – that is, specifically, to the interpretation of certain lease clauses, each of which affected the meaning of the lease.

Hunt-Cimmaron held a lease with a five-year primary term. The lease contained both a Pugh clause (see our earlier article on Pugh clauses here), and a retained acreage clause (check back soon for an upcoming article with more specifics on retained acreage clauses), as well as reworking provisions. The construction of the reworking provision was particularly at issue in this case. Hardin-Simmons asserted both that the lease had terminated and that Hunt-Cimmaron had failed to file the requisite acreage release. Ultimately, the appellate court agreed, reversing lower court decisions to the contrary. The Texas Court of Appeals in the Seventh District at Amarillo ruled that because Hunt-Cimarron failed to meet the all-important “production in paying quantities” requirement, except on a limited number of wells, its lease terminated by its own terms as to all the non-productive acreage. In addition, it found that Hunt failed to file the release of acreage.

From a legal perspective, this case reiterates a cautionary tale about how the various clauses in an oil and gas lease work together and sometimes, even against each other. Hardin-Simmons argued that either the reworking clause in the lease did not apply, and therefore did not save Hunt’s lease, or, that even if it did apply, it applied only to (and therefore saved) only productive acreage. While the court decided that Hardin’s arguments failed “as to the non-applicability of the reworking clause found in paragraph 6,” it agreed that Hardin was correct that “even if paragraph 6 did apply, it did not extend the primary term of the lease—but, instead, only extended the overall term of the lease as it pertained to ‘producing acreage’ relevant to the well being reworked.” This is because the reworking clause provided that “paragraph 6 … provides that, in the event of reworking operations, ‘this lease shall remain in force in accordance with its terms,’…specifically including the Pugh clause and retained acreage clause.” The result was that even if the reworking provision applied, the other clauses still operated and had their intended effect on the lease.

To be successful, operators must remain attentive to lease deadlines and know that there is simply no substitute for diligent drilling operations and production in paying quantities. While understanding the meaning and impact of all of the provisions in a lease is essential and difficult but nevertheless critical. Unfortunately, lease language can be tricky and legal decisions and developments can potentially have an impact on how a given lease will be interpreted. Whether a lessor or lessee, you should be sure to check with an attorney about the potential implications of the language in your lease. Our energy and natural resource lawyers at the Suazo Legal Group are always available to assist you with drafting and understanding your lease.

FOR LEGAL ASSISTANCE RELATED TO OIL AND GAS LEASES, AND ALL OTHER BUSINESS AND ENERGY LAW MATTERS, CONTACT MIGUEL SUAZO at (512)-991-4788 or mas@suazolegalgroup.com.

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