Modern oil and gas leases often contain provisions that have come to be known as “retained acreage” clauses. Such clauses require the lessee to release acreage not assigned to a producing well at the end of the primary term, or at the end of a continuous drilling program conducted after the primary term. One commentator has said that the purpose of a retained acreage clause is to “replace the lessor’s need to utilize the implied covenant of reasonable development as the sole means to see that its acreage is fully developed.” Bruce M. Kramer, Oil and Gas Leases and Pooling: a Look Back and a Peek Ahead, 45 Tex. Tech L. Rev. 877, 881 (2013).
There is no standard form of retained acreage clause. Lawyers representing lessors have developed their form of the clause, and the clause is often one of the most heavily negotiated provisions of an oil and gas lease.
Two court opinions have recently construed retained acreage clauses.
In ConocoPhillips Company v. Vaquillas Unproven Minerals, Ltd., 2015 WL 4638272 (Tex.Ct.App.-San Antonio Aug. 5, 2015), the lease provided that, at the end of the lessee’s continuous drilling program,
Lessee covenants and agrees to execute and deliver to Lessor a written release of any and all portions of this lease which have not been drilled to a density of at least 40 acres for each producing oil well and 640 acres for each producing or shut-in gas well, except that in case any rule adopted by the Railroad Commission of Texas or other regulating authority for any field on this lease provides for a spacing or proration establishing different units of acreage per well, then such established different units shall be held under this lease by such production, in lieu of the 40 and 640-acre units above mentioned.
The RRC, upon application of a company, may establish special “field rules” that govern spacing and proration of wells located in a particular field. The field rules establish how far wells must be from each other and from lease boundaries (spacing) and the standard size for “proration units” to be assigned by the operator to each well in the field. The number of acres assigned to a proration unit determines how much oil or gas may be produced from the well each month — its “allowable.”
The wells drilled by ConocoPhillips on the Vaquillas lease provided the following spacing rule:
No well shall hereafter be drilled nearer than 467 feet to any property line, lease line or subdivision line and no well shall be drilled nearer than 1,200 feet to any applied for, permitted or completed well in the same reservoir on the same lease, pooled unit or unitized tract.
The field rules did not provide for the size of proration units. But Rule 38 of the RRC statewide rules provides that, if the field rules for a gas field do not provide for proration unit sizes but only for well spacing rules, the standard proration size for a field with a spacing rule of 467-1200, like the one quoted above, is 40 acres per well. Vaquillas therefore claimed that the gas wells drilled by ConocoPhillips could hold only 40 acres for each well, as provided in the applicable field rules. ConocoPhillips argued that, since the field rules did not have proration unit sizes, the lease allowed it to retain 640 acres for each gas well.
The court of appeals agreed with Vaquillas. It held that ConocoPhillips could retain only 40 acres around each gas well.
In Endeavor Energy Resources v. Discovery Operating, 448 S.W.3d 169 (Tex.App.–Eastland 2014), Endeavor drilled and completed four wells on a lease of 960 acres in Martin County. The oil and gas lease provided that, after the end of the continuous drilling program, the lease would terminate
as to all lands and depths covered herein, save and except those lands and depths located within a governmental proration unit assigned to a well producing oil or gas in paying quantities and the depths down to and including 100 feet below the deepest productive perforations, with each such governmental proration unit to contain the number of acres required to comply with the applicable rules and regulations of the Railroad Commission of Texas for obtaining the maximum producing allowable for the particular well.
The Endeavor wells were governed by the field rules for the Spraberry (Trend Area) Field, which provided:
The acreage assigned to an individual well shall be known as a proration unit. The standard drilling and proration units are established hereby to be 80 acres. No proration unit shall consist of more than 80 acres except as hereinafter provided. …. Nothwithstanding the above, operators may elect to assign a tolerance of not more than 80 acres of additional unassigned lease acreage to a well on an 80 acre unit and shall in such event receive allowable credit for not more than 160 acres.
Endeavor contended that it had earned 4 X 160 = 640 acres of the lease by drilling its four wells — 160 acres for each well. The appellees argued that each well held only 80 acres under the retained acreage clause. Endeavor had filed plats of its proration units, as required by the RRC, and designated 80-acre proration units for each well. The court agreed with the appellees; the lease terminated except as to proration units “assigned” to each well by Endeavor. Endeavor could have assigned 160-acre proration units, but chose not to do so.
These cases illustrate problems that arise when retained acreage clauses are not clearly drafted. A large part of the problem results from making the size of retained acreage tracts dependent upon RRC field rules. Especially in the era of horizontal wells, field rules have become quite complex and are difficult for anyone other than the oil company attorneys who drafted them to understand. It is my opinion that field rules are being drafted with retained acreage clauses in mind. Recently, I have had occasion to advise concerning a retained acreage clause that provides for retained acreage in “the amount of acreage that is prescribed to be assigned to a well under such Special Field Rules.” The applicable field rules provide that:
The standard drilling and proration units are established hereby to be 160 acres. ….An operator shall be permitted to form optional drilling and fractional proration units of 80 acres, with a proportional acreage allowable credit for a well on fractional proration units.
The lessee argues that the amount of acreage “prescribed” by these field rules is 160 acres. But the field rules “permit” 80-acre proration units. The landowner argues that “prescribed” means the minimum acreage that can be assigned to a proration unit.
Because of the confusion and complexity inserted into retained acreage clauses by reference to field rules, I have endeavored to eliminate reference to field rules in my retained acreage clauses. The lessor and lessee should agree up front how much acreage can be held by a well, regardless of the field rules. Such negotiations require some familiarity with the fields in the area and the well spacing being used by operators in those fields, as well as the applicable field rules.