Endeavor Energy Res., L.P. v. Discovery Operating, Inc.

• Decision Date: 13 April 2018
• Docket Number: No. 15-0155,15-0155
• Citation: 554 S.W.3d 586
• Parties: ENDEAVOR ENERGY RESOURCES, L.P. and Endeavor Petroleum, L.L.C., Petitioners, v. DISCOVERY OPERATING, INC. and Patriot Royalty and Land, L.L.C., Respondents
• Court: Texas Supreme Court

554 S.W.3d 586

ENDEAVOR ENERGY RESOURCES, L.P. and Endeavor Petroleum, L.L.C., Petitioners,

v.DISCOVERY OPERATING, INC. and Patriot Royalty and Land, L.L.C., Respondents

No. 15-0155

Supreme Court of Texas.

Argued January 9, 2018

Opinion delivered: April 13, 2018

Rehearing Denied September 28, 2018

Scott A. Brister, Hunton Andrews Kurth LLP, April E. Lucas, Joe Edward Lea Jr., McGinnis, J. Derrick Price, Lochridge & Kilgore, L.L.P, Austin, TX, C. H. (Hal) Brockett Jr., Brockett & McNeel LLP, Midland, TX, David M. Gunn, Erin H. Huber, Beck Redden LLP, Houston, TX, for Petitioners.

David W. Lauritzen, Joseph A. Baker, Charles Christopher Aycock, Rick G. Strange, Cotton Bledsoe Tighe & Dawson, P.C., John A. "Jad" Davis Jr., Davis, Gerald & Cremer, P.C., Midland, TX, Andrew (Drew) P. Mouton, Reina Cisneros, Mouton & Mouton, P.C., John T. Ferguson, Weaver & Ferguson, P.C, Big Spring, TX, Jill Christine Pennington, Law Office of Garrett W. Pennington, PLLC, Round Rock, TX, Ryan D. Clinton, Davis Gerald & Cremer, P.C., Austin, TX, for Respondents.

James V. Hammett Jr., Attorney at Law, Lampasas, TX, for Amicus Curiae Browning Oil Company, Inc.

Michael E. McElroy, McElroy, Sullivan, Miller, Weber, Pamela Stanton Baron, Attorney at Law, Austin, TX, for Amicus Curiae J.E. and L.E. Mabee Foundation.

Brandon Durrett, Melanie L. Fry, Dykema Cox Smith, San Antonio, TX, Garrett Pennington, Law Office of Garrett W. Pennington, PLLC, Round Rock, TX, for Amicus Curiae Pennington Resources, LLC.

Angela Nichole Doyle Staples, Tall City Exploration, LLC, Midland, TX, for Amicus Curiae Permian Basin Petroleum Association.

Alexander C. Schoch, Railroad Commission of Texas, Austin, TX, for Railroad Commission of Texas.

Rex H. White Jr., Law Offices of Rex H. White, Jr., Austin, TX, for Texas Independent Producers and Royalty Owner's Association.

Cory Pomeroy, Texas Oil & Gas Assoc'n, Austin, TX, for Amicus Curiae Texas Oil and Gas Association.

Justice Boyd delivered the opinion of the Court.

This case involves competing claims to mineral-lease interests in two tracts of land in Martin County. Discovery Operating, Inc., which has drilled producing wells on both tracts, bases its claim on leases acquired directly from the mineral-estate owners. Endeavor Energy Resources, L.P., and Endeavor Petroleum, L.L.C., (collectively, Endeavor) bases its claim on prior leases with the same owners covering land that includes the two tracts at issue. Endeavor never drilled on those two tracts, and the parties agree that Endeavor's leases' terms have expired. But the leases include "retained-acreage clauses," which provide that the leases would continue after they expired as to a certain number of acres associated with each of the wells Endeavor drilled on adjacent tracts. The issue is whether the acreage Endeavor retained under the retained-acreage clauses includes the two tracts at issue. The trial court and court of appeals held that it does not. We agree and affirm.

I.Background

Between 2004 and 2007, Endeavor acquired mineral leases involving two adjoining tracts. The leases relevant to this dispute cover all (approximately 640 acres) of a tract we will call "section 4,"¹ and the northern half (approximately 320 acres) of a tract we will call "section 9."² Section 4 sits immediately north of section 9. Endeavor completed two wells in section 9, both located in the section's northeastern quarter (approximately 160 acres), which we will call well #1 and well #2. Although the lease covered the entire northern half of section 9, Endeavor did not drill in or develop section 9's northwestern quarter. Endeavor also completed two wells in section 4, both in that section's southeastern quarter (approximately 160 acres), which we will call well #3 and well #4. Although the lease covered all of section 4, Endeavor did not drill wells in section 4's southwestern quarter.

After completing the wells, Endeavor filed certified proration plats with the Texas Railroad Commission (the Commission). For well #1, the plat designated a proration unit of 81.21 acres consisting of the northern half of section 9's northeastern quarter. For well #2, the plat designated 81.21 acres consisting of the southern half of section 9's northeastern quarter. The designated proration units did not include any of section 9's northwestern quarter:

For well #3, Endeavor's plat designated 81.0 acres consisting of the northern half of section 4's southeastern quarter. For well #4, the plat designated 81.0 acres consisting of the southern half of section 4's southeastern quarter. The designated proration units did not include any of section 4's southwestern quarter:

The leases at issue include two clauses that permit Endeavor to retain certain interests after the leases' primary terms expire. The first, which we refer to as the continuous-development clause, provides that the leases "shall remain in full force and effect as to all proration units" after the primary terms expire if Endeavor, as the lessee or "operator," is "then engaged in drilling or reworking operations" and so long as Endeavor maintains "a continuous drilling program." If Endeavor is not engaged in such operations when the primary terms expire, the leases will automatically terminate "as to each proration unit" on which there is no well "producing oil or gas in commercial quantities." The second clause, which we refer to as the retained-acreage clause, provides that once the leases expire and the operator does not maintain the required continuous-drilling program, the leases "shall automatically terminate as to all lands and depths covered herein, save and except " certain lands within certain governmental proration units "assigned to" a producing well. (Emphasis added.)

After Endeavor's leases' primary terms expired, Patriot Royalty and Land, LLC, reviewed the leases and the certified proration plats Endeavor had filed with the Commission. Based on those documents, Patriot concluded that Endeavor's leases had terminated as to section 4's southwestern quarter and section 9's northwestern quarter—the lands Endeavor did not include in the proration units designated in its filed plats and on which it had not engaged in any drilling or development operations. Patriot approached the owners of section 4 and section 9, obtained leases covering both of those quarters, and then assigned the leases to Discovery. Discovery successfully drilled two wells in each quarter.

When Endeavor discovered that Discovery had drilled wells on section 4's southwestern quarter and section 9's northwestern quarter, it objected to Discovery's assertion of any leasehold interest in those quarters. Relying on the leases' retained-acreage clauses, it asserted that the applicable governmental proration unit for each of its two wells in section 9's northeastern quarter covered 160 acres, and thus each proration unit included half of section 9's northwestern quarter as well as half of section 9's northeastern quarter. Endeavor also asserted that the applicable governmental proration unit for each of its two wells in section 4's southeastern quarter also covered 160 acres, and thus each proration unit included half of section 4's southwestern quarter as well as half of its southeastern quarter. In short, based on the retained-acreage clauses, Endeavor asserted that its leases remained in effect as to the entire southern half of section 4 and the entire northern half of section 9, so Discovery's leases were invalid.

As explained, however, Endeavor had previously filed plats with the Commission assigning proration units of only 81.21 or 81.0 acres to each of the four wells, and those proration units did not include the lands described in Discovery's leases (section 4's southwestern quarter and section 9's northwestern quarter). Endeavor asserted that it had mistakenly failed to assign 160 acres to each well, consistent with the applicable "governmental proration unit." Relying on this assertion, Endeavor filed new proration plats with the Commission, assigning 160 acres to each well, which included the acreage described in Discovery's leases.

Also relying on the retained-acreage clauses, Discovery asserted that the lands within the governmental proration units assigned to Endeavor's producing wells included only the 81.21 and 81.0 acres that Endeavor had assigned as proration units in its plat filings before the leases' primary terms expired. Relying on this construction of the retained-acreage clauses, Discovery filed this trespass-to-try-title action against Endeavor. The Elrods and the Haggard Trust intervened as plaintiffs in support of Discovery's position. Because of this litigation, the Commission declined to take any action with regard to Endeavor's request to amend its plat filings.

After stipulating to most of the relevant facts, both sides filed summary-judgment motions. Agreeing with Discovery's construction of the retained-acreage clauses, the trial court granted Discovery's motion and denied Endeavor's. In its order, the trial court held that (1) Endeavor's leases had terminated as to the disputed acreage, (2) Discovery's leases were valid, and (3) Discovery held record title to, ownership of, and the exclusive right to possession of the leasehold interests. The court of appeals affirmed, holding that Endeavor's leasehold interests survived only as to the acreage in the proration units it assigned to its wells in the plats it filed with the Commission. 448 S.W.3d 169, 178 (Tex. App.—Eastland 2014). We granted Endeavor's petition for review.

II.Mineral Leases

Endeavor's rights to the disputed acreage derive solely from its mineral leases from the Elrods and the Haggard Trust. Like all mineral leases, Endeavor's leases memorialize the parties' contractual agreements. But unlike many other types of contracts, mineral leases are subject to extensive governmental regulation. As a result, mineral leases often include particular types of terms and clauses through which the...