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Sundown Energy v. HJSA No. 3 Limited Partnership: Another Poorly Drafted Retained Acreage Clause

Last week the Texas Supreme Court issued a per curiam opinion, without oral argument, reversing the judgment of the El Paso Court of Appeals  in Sundown Energy LP v. HJSA No. 3 Limited Partnership, No. 19-10654. The lease at issue covers 30,450 acres in Ward County. The case is another illustration of how parties fail to clearly express their intent in drafting retained acreage clauses.

The lease provides that, after the end of its six-year primary term, the lessee must release acreage not held by production unless the lessee was engaged in a “continuous drilling program:”

The obligation . . . to reassign tracts not held by production shall be delayed for so long as Lessee is engaged in a continuous drilling program on that part of the Leased Premises outside of the Producing Areas. The first such continuous development well shall be spudded-in on or before the sixth anniversary of the Effective Date, with no more than 120 days to elapse between completion or abandonment of operations on one well and commencement of drilling operations on the next ensuing well.

The lease also contains a definition of “drilling operations:”

Whenever used in this lease the term “drilling operations” shall mean: [1] actual operations for drilling, testing, completing and equipping a well (spud in with equipment capable of drilling to Lessee’s object depth); [2] reworking operations, including fracturing and acidizing; and [3] reconditioning, deepening, plugging back, cleaning out, repairing or testing of a well.

Sundown spudded in three wells before the end of the primary term, and it timely engaged in other “drilling operations” thereafter, spending some $40 million developing the lease, including drilling fourteen more wells. But the lessor contended that the continuous drilling program required the spudding of new wells, with no more than 120 days between completion of one and spudding of the next — and some of the lessee’s drilling operations to keep the continuous drilling program in effect constituted “drilling operations” other than spudding of a well. The trial court granted summary judgment for the lessee. A divided court of appeals reached the opposite result, in effect holding that “drilling operations” as used in the continuous development provision was intended to be narrower than the lease’s definition of “drilling operations” elsewhere in the lease. The Supreme Court decided this was re-writing the lease. When the parties defined “drilling operations” broadly to include reworking wells, those operations were sufficient to extend the continuous drilling program.

The lessor should have defined “drilling operations” to include only the drilling of new wells, and separately defined “reworking operations.”

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