No Partial Lease Termination from Amended Pooling Units

No Partial Lease Termination from Amended Pooling Units

Godfrey v. Chesapeake Exploration, LLC, 2012 WL 2865187 (Tex.App. – Eastland 2012)

Landowner (A) and the Lessee (B) entered into an oil and gas lease in 1997. The primary term of the lease, with extensions, expired on October 17, 2004. The lease contained a Pugh Clause (which terminates the lease as to any acreage that was not allocated to a well in connection with the formation of a unit under the lease).

The lease denied the Lessee any surface rights and provided that “the leased premises are to be utilized solely for pooling purposes” for the drilling and operation of subsurface directional wells. The lease also provided that, to exercise its pooling rights, the lessee must “file of record a written declaration describing the unit and stating the effective date of pooling.”

A Designation of Pooled Unit (DPU1) creating Unit 1 was executed prior to the expiration of the primary term of the Godfrey lease and, on October 1, 2004, was filed for record in the county clerk’s office. DPU1, with an effective date of September 28, 2004, pooled all of the 269 acres that were subject to A’s lease with 50 additional acres adjacent thereto. Operations on the Unit 1 were promptly commenced and continued until a horizontal gas well began producing in paying quantities.

DPU2 created Unit 2 was executed on March 1, 2005, had a stated effective date of February 23, 2005, and was filed for record on March 10, 2005. DPU2 purported to create a pooled unit consisting of 84 acres of A’s lease and 84 additional acres of adjacent property. Operations on Unit 2 were promptly commenced and continued until a horizontal gas well began producing in paying quantities on June 17, 2005.

DPU1-Amended amended DPU1 for Unit 1, was executed on March 11, 2005, and filed for record on March 21, 2005. DPU3 removed from Unit 1 the 84 acres of A’s lease that had been included in Unit 2 by DPU2. Like DPU1, DPU3 had a stated effective date of “September 28, 2004.”

The Landowner (A) argued that because DPU3 had a retroactive effective date of September 28, 2004, the 84 acres were not included in the Unit 1 when the primary term of the lease expired on October 17, 2004, and therefore, terminated A’s lease as to the 84 acres prior to the execution and filing of DPU2.

Although the lease at issue in this case provides that the lessee shall file of record a designation stating the effective date of the pooling or of the revision, the lease contains no provision authorizing the effective date of any such designation to be retroactive.

DPU1-Amended cannot be read to retroactively remove the 84 acres from Unit 2, nor can the stated effective date of the DPU1-Amended change history. On the actual date of October 17, 2004, A’s lease, including the 84 acres, was held in effect by Unit 1 pursuant to DPU1. Later, but prior to the execution and filing of the DPU1-Amended, the 84 acres were pooled into Unit 2 pursuant to the DPU2.