An Unusual Way To Hold an Oil and Gas Lease

Originally published by Charles Sartain.

Co-author Chance Decker

Here is what we believe is an unusual situation: A gas unit is formed. The gas well ceases to produce. Another gas well produces from an oil unit, but the lease at issue is not included in the oil unit. Is the lease perpetuated by production from the second gas well?

In Yarbrough v. ELC Energy, LLC The answer is, in Texas, Yes.  Read on for why, and decide for yourself  if this result makes sense.

The history

• 1980 – Ms. Yarbrough signs a mineral lease for a term of five years and as long thereafter as operations (including production) are conducted.
• 1982 – The Yarbrough tract is pooled into the Ben Irwin Gas Unit.
• 1983 – The Ben Irwin well is drilled within the unit boundary and produces as a gas well
• 1984 – The Acme Brick well is drilled within the boundaries of the Ben Irwin Gas Unit but not on the Yarborough lease. The well is classified as an oil well and then reclassified as a gas well.
• Soon thereafter – The tract on which the Acme Brick well is drilled is pooled into a 40 acre oil unit located entirely within the boundaries of the gas unit. The Yarborough tract is not within the boundaries of the oil unit.
• 1987 – The Ben Irwin well ceases to produce.
• Through 2015 – The Acme Brick well produces gas. The production is never attributed to the gas unit or to the Yarbrough lease.
• 2015 – ELC proposes a new gas well on the Yarbrough tract.

The dispute

Yarbrough alleged her lease expired in 1987 when the Ben Irwin well ceased to produce. She argued that production from the Acme Brick well could not hold her tract because: (1) the Acme Brick well was located within the oil unit and (2) no production from the Acme Brick well was ever attributed to the gas unit or the Yarbrough tract.

The court rules

The Yarbrough lease was held by the Acme Brick well and remained in effect.  The lease plainly stated that operations on any gas well within the gas unit would hold the lease.  Production from gas wells located within an oil unit within the gas unit were not excluded from this provision. (Of course, what lessor would think to write that into their lease?)

That the Acme Brick well was located within the oil unit is irrelevant because, “it is nonetheless a gas well that exists within the boundaries of the [gas unit.”]

Is something missing here?

The opinion never says that production from the Acme Brick well was attributed to the Yarbrough lease or that she ever received royalty payments from that well. Remember, her tract is not within the oil unit from which the Acme Brick wall produced. Can a well from which the lessor receives no royalty perpetuate her lease?

For trial lawyers

To learn how to lose a motion to continue a summary judgment hearing and the penalty for failure to supplement discovery responses, read the decision.

Let’s lift Ms. Yarbrough’s spirits with a piano performance that out-New Orleanses many a New Orleans piano player.

 

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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