HJSA No. 3, Ltd. P'ship v. Sundown Energy LP

• Decision Date: 16 August 2019
• Docket Number: No. 08-18-00113-CV,08-18-00113-CV
• Citation: 587 S.W.3d 864
• Parties: HJSA NO. 3, LIMITED PARTNERSHIP, Appellant, v. SUNDOWN ENERGY LP, SMC 2000 LP, PGP Holdings 1, LLC, Smith Allen Oil & Gas, LLP, Transmountain Exploration LLC, Fortune Natural Resources Corporation, Texas Heat of the Permian Basin, Inc., Whiting Oil and Gas Corporation, Eagle Rock Acquisition Partnership II, LP, Odyssey Royalties, LLC, Horizon Royalties LLC, Pinecone Resources LLC, Brenda Dorman Faught, and Lena Renee Brigman, Appellees.
• Court: Texas Court of Appeals

587 S.W.3d 864

HJSA NO. 3, LIMITED PARTNERSHIP, Appellant,

v.SUNDOWN ENERGY LP, SMC 2000 LP, PGP Holdings 1, LLC, Smith Allen Oil & Gas, LLP, Transmountain Exploration LLC, Fortune Natural Resources Corporation, Texas Heat of the Permian Basin, Inc., Whiting Oil and Gas Corporation, Eagle Rock Acquisition Partnership II, LP, Odyssey Royalties, LLC, Horizon Royalties LLC, Pinecone Resources LLC, Brenda Dorman Faught, and Lena Renee Brigman, Appellees.

No. 08-18-00113-CV

Court of Appeals of Texas, El Paso.

August 16, 2019

OPINION

YVONNE T. RODRIGUEZ, Justice

Appellant HJSA No. 3, Limited Partnership appeals partial summary judgment granted against it on the interpretation of a contractual provision in an oil and gas lease. In his first three issues, HJSA contends: the trial court erred in concluding as a matter of law that the unambiguous terms of the contract allowed Appellees to maintain the lease under the continuous-drilling-program provision of Paragraph 7(b) by conducting "drilling operations" as that term is defined in Paragraph 18 of the lease, instead of deferring to the specific obligations of Paragraph 7(b); in its fourth issue, HJSA contends the trial court erred as a matter of law in striking portions of an affidavit by the attorney who negotiated the original lease because the stricken portions informed, rather than varied or contradicted, the terms of the lease; and in its fifth and final issue, HJSA contends the trial court's construction of the lease leads to an absurd result. For the following reasons, we reverse the decision of the trial court and remand the cause to that court for further proceedings.

BACKGROUND

This case involves the interpretation of a continuous-drilling program in an oil and gas lease and whether the provision operated as a special limitation. Appellant HJSA No. 3, Limited Partnership is a successor in interest to a mineral estate underlying a 30,450-acre tract of land in Ward County, Texas. From 1925 until 2000, the entire tract was held by a fixed-term lease to Gulf Production Co., whose successor was Chevron U.S.A., Inc. The terms of the lease provided it would terminate automatically on August 4, 2000. In 1995, the prior mineral-estate owners negotiated a top lease with Penwell Energy, Inc. Appellee Sundown Energy LP and its co-appellees are the successors in interest to the Penwell Energy lease. The effective date for the top lease was August 4, 2000—the day the Chevron lease terminated—and like the prior lease it covered the entire 30,450-acre tract.

The lease provided Sundown with a six-year grace period during which the lease would be maintained as to the entire tract provided oil and gas was being produced in paying quantities from anywhere on the leased premises. But at the end of the six years the lease could be maintained only if there was production in paying quantities from each individual tract or if Sundown was engaged in a "continuous drilling program." The relevant language from the lease is as follows:

7. Reassignment Obligations: Continuous Drilling

(a) This lease shall continue for so long as oil and gas is produced from the Leased Premises in paying quantities, subject to the reassignment provisions set forth below. In the period from the Effective Date until the sixth anniversary of the Effective Date, production of Oil and Gas in paying quantities from anywhere on the Leased Premises shall extend the entire lease without any reassignment obligation. After the sixth anniversary of the Effective Date, and subject to the provisions of Paragraph 7(b), Lessee shall reassign to Lessor or Lessor's designee, all of Lessee's operating rights in all tracts of the lease not then held by production , retaining only the right to remove equipment and the nonexclusive right to continue to use the surface of the reassigned tract in connection with Lessee's operations on the remainder of the Lease. As used in this Paragraph 7(a), a tract of the Lease is held by production so long as a well is producing Oil and/or Gas in paying quantities from the tract (subject to the provisions of Paragraphs 3.10, 6 and 12); provided, however[ ] that the Chevron Producing Area and the 3-B Producing Area shall each separately constitute single tracts, and the tracts of land that can be held outside the Producing Areas by production from a single well shall be limited in area and depth as follows (the Production Units):

...

(b) The obligation in Paragraph 7(a) above 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 obligation to reassign tracts not held by production provided in Paragraph 7(a) above shall be deemed to be effective upon the cessation of the last continuous drilling operation, unless Lessee is not conducting drilling operations on the sixth anniversary of Effective Date, in which event such reassignment obligation shall be deemed to be effective upon the expiration of the sixth anniversary of Effective Date. Within one hundred twenty (120) days after the sixth anniversary of Effective Date or after the cessation of continuous drilling operations, whichever occurs later, Lessee shall designate Production Units in writing in recordable form and deliver same to Lessor, with an adequate legal description and with the producing stratum or strata defined with particularity by reference to Lessee's well logs. [Emphasis added].

The lease also provided that in the event of a temporary cessation of production the lease could be maintained by "commenc[ing] drilling operations as defined herein" within ninety days if the operations subsequently resulted in restoration of production in paying quantities. This temporary cessation clause stated it was subject to the reassignment obligations of Paragraph 7. The term "drilling operations," is defined in Paragraph 18 of the lease:

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

The lease was executed, and Sundown began drilling the first new well in February 2006. In total, Sundown spudded-in¹ and drilled fourteen development wells from February 2006 to March 2015. But on January 29, 2016, HJSA sent a letter to Sundown notifying it that the lease had terminated as to certain portions of the leased property due to its failure to engage in a continuous drilling program as defined in the lease. It asserted that from July 2007 through July 2013, Sundown had on five separate occasions² allowed 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, thereby failing to maintain the lease as to the areas not held by production. HJSA contended Paragraph 7 of the lease required Sundown to spud-in and drill a new well outside of the producing areas within 120 days of completion or abandonment of a spudded-in and drilled well. Sundown countered that while no new wells had been spudded-in during the periods described by HJSA, it had conducted reworking and reconditioning operations on existing wells. Because Paragraph 18's definition of drilling operations included reworking and reconditioning, they contended their actions had maintained the lease.

HJSA filed suit in May 2016. Each side filed motions for summary judgment and partial summary judgment and a hearing on the motions was held in November 2017. The trial court granted partial summary judgment to Sundown, finding that the unambiguous terms of the lease allowed Sundown to maintain the lease by conducting drilling operations as that term was defined in Paragraph 18 of the lease, and that Sundown's reworking and reconditioning of existing wells had maintained the contested areas of the leased premises. We granted HJSA's petition for permissive appeal.

DISCUSSION

Construction of the Oil and Gas Lease

The subject of this dispute is whether the term "drilling operations" as used in Paragraph 7(b) of the lease is modified in the specific context of that paragraph. HJSA contends references in Paragraph 7(b) to "continuous drilling program," "continuous development well," "spudded-in," and "next ensuing well," all clarify that in the context of Paragraph 7(b), Sundown was required to spud-in a new well in a non-producing area within 120 days of completion or abandonment of a prior well to maintain the lease in the areas not held by production. Sundown argues the definition in Paragraph 18 controls and should be plugged-in to paragraph 7(b). Under that reading, the actions taken by Sundown during the alleged lapses maintained the lease as to the entire tract.

Standard of Review

We review a trial court's grant of summary judgment de novo. Provident Life and Acc. Ins. Co. v. Knott , 128 S.W.3d 211, 215 (Tex. 2003). The construction of an unambiguous contract is a question of law, which we also review de novo. Anderson Energy Corp. v. Dominion Okla. Tex. Expl. & Prod., Inc. , 469 S.W.3d 280, 287 (Tex.App.—San Antonio 2015, no pet.) (citing MCI Telecomms. Corp. v. Tex. Utils. Elec. Co. , 995 S.W.2d 647, 650–51 (Tex. 1999) ). A contract is unambiguous if, as worded, it can be given a clear and definite legal meaning so that it can be construed as a matter of law. Id. , (citing Gilbert Tex. Contr., L.P. v. Underwriters at Lloyd's London , 327 S.W.3d 118, 133 (Tex. 2010) ); see also ...