The San Antonio Court of Appeals recently decided a case illustrating the new kinds of issues that can arise from the drilling of horizontal wells.
In Springer Ranch v. Jones, Alice Burkholder owned a ranch, 8,545 acres in La Salle and Webb Counties. She signed a single oil and gas lease on the ranch in 1956 that has been maintained by produciton. When she died, Alice left the ranch to her husband for life, and thereafter in three separate tracts to her three children. In effect, by her will she partitioned the ranch, surface and minerals, into three tracts, subject to the oil and gas lease. Alice’s husband died in 1990, and thereafter the three children signed a contract agreeing on how royalties on production from the lease should be divided among them. The contract provided that all royalties under the lease “shall be paid to the owner of the surface estate on which such well or wells are situated, without reference to any production unit on which such well or wells are located.”
The lessee drilled a horizontal well located partly on one of the ranch tracts, now owned by Springer Ranch, and partly under a different tract now owned by Rosalie Sullivan. The surface location of the well was on the Springer Ranch tract. Springer Ranch argued that, because the surface location was “situated on” its property, it should receive all royalties from the well. Rosalie Sullivan argued that royalties from the well should be allocated between the two tracts based on each tract’s part of the productive lateral of the well. The trial court agreed with Ms. Sullivan, and the court of appeals affirmed. It construed the parties’ agreement to to allocate royalties on the basis of the percentage of the productive interval of the wellbore on each party’s tract, not on the basis of the well’s surface location.
Springer Ranch challenged the formula adopted by the trial court for allocating production between the two tracts. That formula was proposed by Ms. Sullivan’s expert, who measured the total length of the wellbore from its first to last take point and the portion of that length on each tract. Springer Ranch argued that the formula should be based on the entire length of the wellbore on each tract, and not just the productive portions. The court of appeals disagreed. It noted that Springer Ranch did not offer any evidence of any other basis for determining how much production was obtained from the parts of the well on each tract, and that the testimony supporting Ms. Sullivan’s allocation method was sufficient evidence to support the trial court’s judgment.
This kind of situation often arises where a portion of a tract subject to a lease is burdened by a non-participating royalty interest. If a well drilled on the lease is partly located on the tract burdened by the NPRI, there must be some method of allocating production to the NPRI tract for purposes of paying royalties. Most operators use the method adopted by the court in the Springer Ranch case, although I have seen no case law approving such a method. Note that the Springer Ranch case is based on the parties’ express agreement as to how production should be allocated. In most cases, there will be no express agreement.
It should also be noted that the Springer Ranch case has nothing to do with the “allocation well” controversy, which arises when an operator drills a horizontal well crossing from one lease to another without pooling the two leases together. In Springer Ranch, there was no dispute that the lessee had the right to drill the well.