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Hamilton v. ConocoPhillips – The first appellate opinion on Production Sharing Agreements

In Hamilton v. ConocoPhillips, the Corpus Christi Court of Appeals construed a Production Sharing Agreement – to my knowledge the first appellate court to do so.

A Production Sharing Agreement is an agreement between mineral owners and an operator to allow the operator to drill a horizontal well whose lateral will be located partly on the leased premises and partly on other lands. Generally, such agreements provide that the allocation will be based on the number of productive lateral feet of the well on each tract crossed by the well. If a well crosses Tract A and Tract B, and 60% of the productive lateral is on Tract A, then the parties agree that the royalty owners in Tract A will be paid royalty on 60% of the production from the well. Such an agreement is a form of combining multiple tracts to produce from a single well–essentially a form of pooling with a different method of allocation.

In Hamilton, Lloyd Hamilton owned a mineral interest in the original Hamilton Ranch in DeWitt County, covering some 5,000 acres, which the Hamilton family leased to Burlington Resources Oil & Gas (now a subsidiary of ConocoPhillips). After the lease was signed the family partitioned the land and Lloyd received a separate surface tract, subject to the lease. The family then signed a Production Sharing Agreement allowing Burlington to drill wells located partly on the Ranch.

The dispute arose when Burlington chose a surface location for a production sharing well on Lloyd’s surface. He contended that the Production Sharing Agreement did not give Burlington the right to locate the well pad on his property. Lloyd lost his argument in the trial court and the court of appeals confirmed, holding that the language in the Production Sharing Agreement granted Burlington the right to locate the well on Lloyd’s land.

The interesting part of the opinion to me is this statement from the court’s opinion:

There is no dispute that the lease grants Burlington the right to explore for and produce oil and gas on the Hamilton Ranch. The parties further agree that the lease, standing alone, does not allow Burlington to drill a horizontal sharing well.

The position of operators in Texas is that a standard oil and gas lease gives the lessee the right to drill a horizontal well located partly on the leased premises, without forming a pooled unit and without a Production Sharing Agreement. Such a well is commonly referred to as an allocation well. Whether that is the case is much in dispute. But, unless the Hamilton lease expressly prohibited allocation wells, it appears that in this case Burlington conceded that it had no such right absent a Production Sharing Agreement.

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