The Texas Supreme Court Rules on Overlapping Pooled Units

November 9, 2017
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Over this last summer the Texas Supreme Court took up the issue of overlapping pooled units in the case of Samson Exploration, LLC v. T.S. Reed Properties, Inc. Prior to Sampson, the Texas Supreme Court had never determined “whether pooled units may overlap,” which makes this case an exciting matter of first impression that affects the legal boundaries of pooling clauses in oil and gas leases.[1] In this article I will explain the fundamental oil and gas concepts dealt with in the case and then try to explain in detail how the Texas Supreme Court determined how to resolve the dispute. This summary will simplify and omit much of the case while trying to focus on the overlapping pooled units issue. To gain a complete understanding of the holding, I highly encourage a full reading of the case.

 

First off, a basic understanding of pooled units is necessary to understand the facts of the case. In many cases a lessee needs to conduct operations on a drilling unit that does not fit within the exact boundaries covered by their oil and gas lease. A pooling clause within the oil and gas lease “gives a lessee the right to combine small tracts or fractional mineral interests for drilling and apportions production to each interest.”[2] In other words, a pooling clause allows a lessee to form a single unit by taking land from two or more leases and the “lessors agree to accept a royalty that reflects their proportionate acreage contribution to the pooled area.”[3] So, if a well is located on a particular lessor’s land, then the lessor will share royalties with the other lessors in the pooled area.[4] A lessor will agree to this situation because the lessor will receive royalties for production that occurs off of their leased land but within the pooled area.[5] Lessees will choose to pool for a variety of reasons including to save a lease, comply with regulatory requirements, obtain maximum well production, protect against drainage, and many other reasons.

 

In this case, Samson Exploration drilled three wells and created two pooled units. Samson drilled two wells on a pooled unit called Black Stone Minerals A No. 1 Gas Unit.[6] After both wells were producing, Samson amended the pooled unit’s boundaries and renamed it Joyce DuJay No. 1 Gas Unit (“DuJay Amended Unit”).[7] The new boundaries of the pooled unit excluded one of the two wells that Samson had drilled.[8] We’ll call the excluded well “Well 1” and the well within the DuJay Amended Unit “Well 2.”

 

Here is where the first legal claim comes into play. “Samson did not attribute any production from the [Well 1] to [DuJay Amended Unit].”[9] The stakeholders in the DuJay Amended Unit sued Samson on breach-of-contract grounds because they claim that the amendment to the pooled unit was improper and Samson owes them royalties on production from Well 1.[10] We will refer to this claim as the “DuJay Amended Unit Stakeholder’s claim” to avoid any confusion. Before we get to the Court’s holding on this issue, let’s finish going over the facts of the case.

 

Samson next drilled a third well (“Well 3”) and created a new pooling unit covering the depth at which Well 3 was producing.[11] Samson named this new pooling unit the Joyce DuJay A No. 1 Gas Unit. [12] We’ll call this new unit the “Overlapping Unit” to avoid confusion. Well 3 produced at a subsurface level above the DuJay Amended Unit’s boundaries, but the Overlapping Unit’s boundaries, by its terms, extended to all production below 12,000 feet, which caused the Overlapping Unit to encompass subsurface depths that overlapped with the DuJay Amended Unit.[13] The consequence of this overlap was that Well 2 was within the DuJay Amended Unit and the Overlapping Unit. The two pooled units overlapped each other, and Well 2 was suddenly a part of two separate pooled units.

 

Here is where the second legal claim comes into play. Samson only paid royalties on Well 2 to the DuJay Amended Unit’s stakeholders and did not pay anything related to Well 2 to the Overlapping Unit’s stakeholders. The Overlapping Unit’s stakeholders sued Samson for breaching its obligations under the mineral lease and pooling unit designations for the lack of royalties on production from Well 2.[14] We’ll call this claim as the “Overlapping Stakeholder’s claim.” This is the extent of the facts needed to be known to cover the issues dealt with in this article.

 

Now, let’s first turn to the DuJay Amended Unit Stakeholder’s claim that Samson’s amendment to the DuJay Amended Unit was invalid. Citing a recent Texas Supreme Court case, the Court held that the DuJay Amended Unit Stakeholders ratified the amendment that created the DuJay Amended Unit, which excluded Well 1, by continuing to accept payments and failing to challenge the validity of the unit.[15] Because the DuJay Amended Unit Stakeholders ratified the amendment, the Court held their claim could not be maintained as a matter of law.

 

Next, let’s look at the more interesting claims made by the Pooling Unit Stakeholders. Samson made several arguments for why the royalties for Well 2 did not need to be paid to the Overlapping Unit stakeholders. For this article we’ll just focus on the overlapping pooled units issue.

 

Samson contends that the Overlapping Unit should be held invalid because it overlaps with the DuJay Amended Unit.[16] Samson claims that the contractual obligation to pay royalties for Well 2 “cannot be enforced unless the unit designation was capable of effecting a cross-conveyance of title of the related subsurface depths.”[17] In other words, Samson contends that pooling requires a cross-conveyance of title in the related subsurface depths, which could not happen here because “‘it is impossible to cross-convey the same pooled lands, substances, and depths twice at the same time.”[18] Therefore, the attempt to pool the two tracts must be invalid. This argument stems from the basis that pooling involves both contract and property law.

 

Although the Court admits that the cross-conveyance theory can be critical in certain pooling disputes, “in this case [it] is a theoretical construct that holds no water.”[19] The Court holds that just because the contract may fail as a conveyance in whole or in part does not mean that Samson’s contractual obligations cannot be enforced.[20] Justice Guzman cites to Texas Property Code § 5.002, which states that “an instrument intended as a conveyance of real property or an interest in real property that, because of this chapter, fails as a conveyance in whole or in part is enforceable to the extent permitted by law as a contract to convey the property or interest.”[21] Thus, the Court holds that the overlapping pooled units do not make the Overlapping Unit invalid.

 

In conclusion, the Court found no issue with allowing pooled units to overlap and rejected an argument based off the cross-conveyance theory. The Court held that the overlapped pooling may have failed as a cross-conveyance of title, but that created no impediment to enforcing Samson’s obligations under the mineral lease. The ramifications of this decision have yet to be seen, but it could potentially create new opportunities for oil and gas companies looking to pool tracts for drilling operations.

 

 

[1] Samson Exploration, LLC v. T.S. Reed Properties, Inc., 521 S.W.3d 766, 775 (Tex. 2017).

[2] John S. Lowe et al., Cases and Materials on Oil and Gas Law 279 (6th ed. 2013).

[3] Id. at 280.

[4] Id.

[5] Id.

[6] Samson, at 771.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id. at 772.

[12] Id.

[13] Id.

[14] Id.

[15] Id. at 785-86.

[16] Id. at 773.

[17] Id.

[18] Id. at 774.

[19] Id. at 777-78.

[20] Id. at 778.

[21] Tex. Prop. Code Ann. § 5.002 (West 2017).

Brantley Smith is a third year law student at The University of Texas School of Law. He graduated with honors from The University of Texas in 2014, and he will be working in Dallas for Gardere Wynne Sewell following graduation.