Texas Supreme Court to Consider Continuous Development Clause

Originally published by Charles Sartain.

Co-author Chance Decker

The Texas Supreme Court has agreed to hear oral arguments in a dispute over an “accumulation” provision in a continuous development clause of an oil and gas lease.  The case is Endeavor Energy Resources L.P. v. Energen Resources Corp. et al.  Here’s the language:

…this lease shall terminate … [150] days after the expiration of the primary term unless during such [150] day period Lessee has commenced operations for the drilling of a well in which case this lease shall be extended  … so long as operations for the drilling of a subsequent well are commenced within [150] days after the completion of the preceding well. This lease shall terminate … any time a subsequent well is not commenced within [150] days from the completion of a preceding well. … Lessee shall have the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between the completion of one well and the drilling of a subsequent well.

According to Endeavor, this provision allows it to accumulate the days it drills prior to the 150 day deadline like “pennies in a jar” that it can use to extend the 150 day deadline to drill any subsequent well.  Energen (and the trial court and the Eastland court of appeals) interpret the provision to apply only to the next well.  Under this interpretation, Endeavor lost its lease on all non-retained acreage.

Here is Endeavor’s brief on the merits, Energen’s brief on the merits, and Endeavor’s reply.

Endeavor argues two points: The lower court failed to construe the provisions of the clause (to them, a “retained acreage clause”) as a harmonious whole, and allowed a special limitation of the grant without the required clear and unambiguous language.

The Supreme Court will make the call. Given the Court’s professed policy to resolve contract disputes on the plain language of the agreement, our pennies are on Energen in this one. Perhaps the special limitation argument is the key.

Bonnie Pointer RIP, a good song for the times we are in.

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