Retained Acreage Clauses

I recently ran across an excellent article explaining the relationship between retained acreage clauses in oil and gas leases and density and proration rules promulgated by the Texas Railroad Commission:  “Fun New Ways for Density and Proration Rules to Bust Your Lease: Retained Acreage Clauses and ‘Governmental Authority’ Language in the Wake of Three Recent Texas Cases,” by Brandon Durrett, of Dykema Cox Smith.  You can view it here: 140_Durrett – Fun New Ways  Brandon summarizes the history of case law construing lease language that adopts RRC spacing rules as the basis for limiting pooled units and designation of acreage that can be held under an oil and gas lease.

At the time of Brandon’s article the Texas Supreme Court had denied petitions in two cases dealing with retained acreage clauses, Endeavor Energy Resources v. Discovery Operating and XOG Operating v. Chesapeake. Since then, the Supreme Court changed its mind and agreed to hear the cases and they were recently argued.

I have previously written that it is a mistake to adopt RRC field rules as the basis for retained acreage clauses. These two recent cases are Exhibit A for that argument.

I have also been re-thinking how retained acreage clauses should work in the new world of horizontal wells and production sharing agreements. Logically, the amount of acreage earned by a horizontal well should depend on the length of its lateral; the longer the lateral, the more acreage drained by the well. Also, if multiple horizontal wells are drilled with close spacing, it makes sense to group those wells into one “production unit” for purposes of designating retained acreage.  Counsel for companies and landowners should spend some time negotiating a workable retained-acreage clause rather than relying on clauses designed in the world of vertical wells.