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Chalk Up A Win for the Texas Mineral Owner Over Continuous Development

The Texas Court of Appeals in El Paso, in HJSA No. 3, Ltd. P’ship v. Sundown Energy LP,  issued a decision siding with the landowner on the interpretation of an oil and gas lease regarding the meaning of “continuous development“.

The oil and gas lease contained two paragraphs related to drilling:

7(b). 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.

18. 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 mineral owner and lessor argued that paragraph 7 (b) meant what it said and that there must be no more than 120 days between completion or abandonment on one well and commencement of drilling on the next well. The lessee/oil company argued that paragraph 18 modified paragraph 7(b) and that any activities described in paragraph 18 were sufficient to meet the standard of paragraph 7(b). In other words, the oil company claimed that reworking and reconditioning existing wells constituted activities that met the definition of continuous development in paragraph 7(b).

The majority of the Court determined that 7(b) controlled over paragraph 18 and (wonder of wonders) meant what it said. In other words, the Court held that the lessee was indeed required to commence drilling on a new well within 120 days of completion or abandonment of the previous well.

It’s good to see the plain language of an oil and gas lease enforced despite the often strained interpretations urged by oil companies in an effort to avoid their obligations.