Daily Development for Friday, February 9, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

OIL AND GAS;  LEASES; ESTABLISHMENT OF SUBSURFACE BOUNDARIES:  In determining each party's rights in an oil and gas lease, the court must look to the intent of the parties as expressed in a written agreement rather than either party's contention of what the parties intended; consequently, a claim boundary set at100 feet below the deepest producing interval as obtained in the test well, is established based upon a specific drill site, rather than an entire formation.   EOG Res., Inc. v. Wagner & Brown, Ltd., 202 S.W.3d 338 (Tex. App. 2006): 

In this case, both parties sought a declaration of the proper construction of certain language defining EOG's ownership interests in several oil and gas leases.  In 1984, Longhorn Oil and Gas Company (Longhorn) owned rights in two oil and gas leases covering minerals located under a tract of land in Corpus Christi, Texas.  Longhorn hired REH Energy, Inc. (REH) to explore this prospect and executed a Farmout Agreement (the Agreement) under which REH could earn an assignment of a portion of Longhorn's interests in the leases by drilling a test well and drilling and completing a producing well.  The assignment was limited to100 feet below the deepest producing interval as obtained in the test well and reserved all rights below that depth to Longhorn. 

REH fulfilled its obligations under the Agreement and earned an assignment of the interest in the leases.  In 2002, after Longhorn was acquired by Wagner & Brown, Ltd. (W&B) and REH was acquired by EOG Resources, Inc. (EOG), a dispute arose when EOG sought to drill a second well.  In researching title, EOG discovered two unrecorded assignments from Longhorn to REH in 1985 that lowered the boundary line established by the Agreement by 50 feet. 

The parties executed the Correction of Assignments of Oil and Gas Leases and Recognition of Reversionary Interests (theCorrection) and changed the language in the 1985 assignments to conform to the language in the original Agreement.  In addition, the Correction specified that the deepest producing interval was measured at a depth of 9,679 feet to 9,729 feet subsurface.  According to EOG, Well #1's deepest producing interval is located in the subsurface geologic formation known as the Morris Sand. 

In October of 2002, EOG drilled Well #2 into the Morris Sand, and the well began producing at depths between 10,230 feet and 10,266 feet subsurface due to geological faulting and a structural dip in the Morris sand formation.  EOG contended that because Well #1 produced from an entire underground formation, its ownership interests should follow the formation to its deepest part, plus 100 feet.  EOG sent W&B a notice of election to participate in the completion of Well #2 and reduced W&B's participating interest from approximately 18% to 4% based on its perception of the boundary line establishing each party's ownership interest.  The following month, W&B sought a declaratory judgment of the proper construction of the Agreement and the Correction establishing the boundary line. 

The parties filed competing summary judgment motions, and the trial court ruled in favor of W&B and limited EOG's interest in the leases to those depths lying between the surface and a subsurface depth of 9,829 feet.  On appeal, EOG argued that when the parties executed the Correction, they intended the phrasedeepest producing interval to mean an entire formation rather than a specific vertical depth.  W&B countered that the Correction did nothing more than correct the 50-foot error in the 1985 assignments.  The appellate court looked to the intent as it was expressed in the Correction and agreed with W&B.  EOG asserted that as used in the industry, the termdeepest producing interval supported its position; however, the court noted that EOG was ignoring the qualifying language as obtained in the test well that followed that term in the Agreement.  Also, the court stated that the parties could have used terms such as formation, horizon, field, reservoir or stratigrahpic lay
er to express the intent described by EOG, but the parties chose not to use such language. 

Thus, the court overruled EOG's issues on appeal and held that the trial court did not err in granting summary judgment in favor of W&B and denying EOG's motion.

Comment: This strikes the editor as a valuable discussion of the language of oil and gas leases, although of course he lacks the expertise to know whether the result is predictable.  Even if predictable, the case may be valuable precedent because the outcome is clear, and the court makes its reasoning quite express. 

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