Lessons from an Override Assignment

Originally published by Charles Sartain.

Co-author Rusty Tucker

Contract construction cases are fact-specific, but one can take lessons of general application from all of them. Here are the takeaways from Jones Energy, Inc. v. Pima Oil & Gas, L.L.C.,

• In assigning an ORRI, it matters whether the parties intend to exclude production from a particular interval of a formation or from a particular wellbore.
• It also matters, when two documents relate to one the same subject, which one will control.
• Courts rely on the grammatical meaning of words and phrases. If in doubt when writing or reviewing a document, brush up on your eighth grade grammar.

Caveat: If thus analysis doesn’t make total sense (or, God forbid, makes no sense at all), it’s because the agreements are complicated and we don’t have the space to dive into them in detail. Focus on the takeaways.

Facts:

There were two leases, a 1980 lease covering Section 117, and a 1991 lease covering the SW/4 of Section 117. Pima and Spring entered into a Retainer Agreement whereby Pima agreed to take on certain tasks In exchange for an ORRI. At that time, the Charles H. Wright 1-117 well (a vertical well) was producing from the A interval of the Granite Wash formation in the SW/4 of Section 117 and  the Gracie 117-1, was producing from multiple intervals in another formation in the NW/4.

Under the Retainer Agreement, Pima was entitled to the following ORRI in Section 117:

• 2.50% in Assignors interest in the lease(s) . . . and to future production from any drilling and/or spacing units contained in and/or described as all or a portion of Section 117 . . . (the Unit) ….
• The Assignment would burden Assignor’s interest in (1) the Wright 1-117 unit well producing at the time, save and except the intervals of the formation(s) open to production in, and only in, the wellbore of the aforementioned well(s) and 2) additional leases acquired by Assignor covering the Unit or the Leases.

The lease described on Exhibit ‘A’” was the 1980 lease “SAVE AND EXCEPT ALL RIGHTS ABOVE THE GRANITE WASH (11.000’) IN THE SW/4, … “

Then the Gracie 117-1H was completed in the Granite Wash underlying the W/2 of Section 117.  Pima notified Jones of its claim to production and demanded payment. Jones refused and Pima sued to have the court declare that its ORRI burdened production from the Gracie 117-1H and the “exception language” in the Assignment was limited to the two vertical wells in existence at the time of the Assignment.  Pima’s claim was that at the time of the assignment the horizontal wellbore in question was not “open to production” from the Gracie 117-1 vertical wellbore.  Therefore, it was not excluded.

The Court’s view

A proper grammatical interpretation of the Retainer Agreement was that the exclusion provision excluded zones, not wells, and that the phrase “in the wellbore(s)” was nothing more than a prepositional phrase modifying the noun zone. As such, “producing intervals of a formation” were excluded from the ORRI, not wells or wellbores, and that the Assignment’s reference to wellbores was merely the means by which the excluded producing intervals were identified.  Thus, production from the Gracie 1-117H well was excluded from the ORRI by the ‘save and except’ clause in the Assignment.

Under the subordinating language in the Assignment, in the event of a conflict the Retainer Agreement would control. The Retainer Agreement said that Pima will be assigned an ORRI on properties exclusive of producing zone(s) in the wellbore(s) of then existing wells.

As a side issue, the court upheld the trial court’s exclusion of affidavits for Pima.  The construction of an unambiguous instrument is a question of law upon which another’s opinion would not be binding.

RIP John Prine. One of the best songwriters ever.

 

 

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