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Texas Oil and Gas Lease Decision from the Texas Court of Appeals

An interesting case involving a Texas oil and gas lease was decided recently by the Texas Court of Appeals in El Paso. The case was Community Bank of Raymore v. Chesapeake Exploration LLC and Anadarko Petroleum Corporation. The issue was whether the lessee’s right to extract minerals found deeper than the stratum or level below the deepest producing well in a particular unit terminated when the lease’s primary term expired.

The oil and gas lease in question covered 16,000 acres, split into four blocks, located in Loving County, Texas. In Block 2 of the leased area, Chesapeake Exploration drilled 13 wells, the deepest of which was at 5,672 feet when the primary term of the lease expired on January 26, 2010. Community Bank of Raymore (“CBR”) requested that Chesapeake release its mineral rights below the depth of the deepest well, but Chesapeake refused. CBR file suit for breach of the lease.

CBR argued that the Pugh clause applied, which terminates an oil and gas lease at the end of the primary term as to any portion of the leased land which is not being produced. Chesapeake disagreed, relying on the continuous development clause, saying the Pugh clause was thus never triggered because Chesapeake developed Block 2 and paid royalties from existing wells in that block. Chesapeake said that its continued development of Block 2 was “sufficient to maintain the undeveloped, deep-lying formations beyond the primary term and satisfy the lease’s continuous development requirement.”

The trial court decided for Chesapeake and said that “there has been no partial termination of the [lease]” and that the “[lease] . . . remains valid and in effect as to all of the Leased Lands in Block 2 . . . so long as [Chesapeake] engages in a continuous development program with no lapse in the time period provided.”

The Texas Court of Appeals, in a decision written by Justice Yvonne Rodriguez and joined by Chief Justice Ann Crawford McClure and Justice Guadalupe Rivera, affirmed the decision of the trial court. The Court of Appeals reasoned that the Pugh clause never sprung into life, because that clause has no effect until either the end of the primary lease term or the conclusion of the continuous development program. No cessation of the continuous development had occurred, so the Pugh clause never applied. The Court of Appeals found no merit in CBR’s contention that at the end of the primary lease term, the lease’s severance clause was triggered. The severance clause in this particular lease did not apply, again due to the continuous development clause.

This is an interesting case for mineral owners because it shows the interplay between the Pugh clause and the continuous development clause, which, because of the language of this lease, overrode the Pugh clause. It will be interesting to see if this case goes to the Texas Supreme Court, and if so what will be decided, as it could be a significant case for both oil and gas lease lessors and lessees in Texas.

It is critical to remember that the decision in this case was based on the precise language of this particular lease. There is no such thing as a “standard oil and gas lease” in Texas, therefore, the results may differ if this question comes up in connection with your lease. If you are ever presented with this kind of question in connection with your mineral interests, it is wise to seek the input of an experienced Texas oil and gas attorney.

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