Oil and Gas Lawyer Blog
Texas courts are very reluctant to hold that oil and gas lease provisions are ambiguous. The same holds true for deeds and wills. These instruments affect title to land, and if an instrument is ambiguous it inserts uncertainty into land titles and results in litigation over the parties’ intent using extrinsic evidence, usually before a jury. Such litigation often ends up with each party testifying as to what they meant in the instrument, leaving a jury with little go to on. Or the instrument in question is so old that no person is alive who could testify as to the parties’ intent.
The meaning of a contract, deed or lease is a “question of law,” meaning it is decided by a judge, not a jury, based solely on the “four corners” of the instrument. Only if an instrument is ambiguous can outside evidence of the parties’ intent be considered, and then the meaning of the contract is a fact question that may be submitted to a jury. Courts bend over backwards to avoid holding that an instrument is ambiguous. It is often the case that an appellate court will hold that the language of an instrument is unambiguous even though the court does not agree on the meaning!
But in Endeavor Energy Resources v. Energen Resources, the Supreme Court reached the conclusion, after eighteen pages of reasoning, that it was impossible to tell from the language in the lease what the parties intended, and that it was ambiguous. The Court remanded the case to the trial court to admit evidence of the parties’ intent.
The clause in question is a retained-acreage clause. A retained acreage clause typically provides that, after the end of the primary term, the lease remains in force as long as wells are drilled continuously, with no more than an agreed number of days between the completion of one well and the commencement of the next well. When those continuous operations case, the lessee must release acreage not developed.
John Quin owned the minerals in 11,300 acres in Howard County. In 2006 he leased the minerals to OGX Resources, to later conveyed the lease to Endeavor. The lease provided that, after the end of the three-year primary term, the lessee could keep the lease in force as long as no more than 150 days elapse between the completion of one well and the commencement of the next well. The lease also allowed the lessee to “bank” days:
Lessee shall have the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between the completion of one well and the drilling of a subsequent well.
Endeavor drilled 12 wells on the lease. On November 2, 2015, after 310 days had elapsed without commencing the 13th well, Quinn signed a lease of the unearned acreage to Energen. Two days later, Energen sued Endeavor to get a release of the unearned acreage. On November 12, Endeavor commenced its 13th well.
Energen and Quinn argued that Endeavor had 186 days from completion of the 12th well to commence the 13th well–150 days plus 36 unused days from the preceding gap between the 11th and 12th well. But Endeavor argued that, because many of its prior wells had been commenced less than 150 days after the completion of the previous well, it could accumulate or bank all of those days, giving it 377 days to begin the thirteenth well. Energen argued that banked days from the previous hiatus between wells could be used only to extend the time to drill “the next” well, and not later wells.
The Court carefully examined and parsed the language, discussing each party’s arguments. It looked at other retained-acreage clauses that allow banking. It considered surrounding facts and circumstances “from a utilitarian standpoint bearing in mind the particular business activity sought to be served.” Still, the Court was unable to ascertain the parties’ intent.
This case is before us after years of litigation precisely because the parties did not carefully state their agreement in unmistakable terms. Certainly there were many ways the agreement could have been stated more clearly, but that observation gets us nowhere. … The surrounding circumstances of this Lease, when considered in conjunction with the parties’ chosen language, do not point to an objectively correct understanding of the disputed provision. Both sides’ readings of the provision are reasonable.
So the litigation will continue. A good lesson for oil and gas practitioners on the perils of ambiguity.