Presentation:
Oil & Gas
Chapter 5: Oil and Gas Lease as an FSD
Professors Wells
October 5, 2015
Oil & Gas Leasehold:
Preliminary Comments
1.  Statute of Frauds
2.  Consideration
3.  Leasehold Interest
2 Habendum Clause: Production in Paying Quantities
Consumers Gas Trust Company v. Littler
Consumer Gas Trust Company v. Littler, 70 N.E. 363:
1.  Facts
2.  Court reasoning
“The obligation to explore is such an essential part of the contract, though implied, as must be
treated as a condition which, if not performed within a reasonable time, entitled appellee to claim a
forfeiture under the agreement that, “in default of complete compliance on the part of the second
part, or his assigns, renders this lease null and void.”
3 Oil & Gas Leasehold:
Sample Lease Habendum Clause
Paragraph 2
Subject to the other provisions herein contained, this lease shall be fore a term of ____ years from
this date (called the “primary term”) and as long thereafter as oil, gas, or other minerals is
produced from said land or land with which said land is pooled hereunder.
Lessor’s Issues:
1.  The above clause holds the lease for all minerals when Lessee may only explore for Oil & Gas.
Alternative: “oil, gas, or other liquid or gaseous hydrocarbons, and other minerals produced with oil and
gas.”
2.  The above clause holds the lease for all zones whether not all zones are explored as long as there is one
producing well at the end of the primary term: Alternative: Horizontal Pugh Clause
It is expressly agreed that this lease shall terminate at the expiration of the primary term as to all
nonproducing zones, strata, or horizons more than thirty feet above or below the lowest zone,
stratum, or horizon from which oil or gas is being produced at the end of the primary term,”
3.  The above clause holds the lease for all parts of the formation. Alternative: Retained Acreage Clause
“and shall also terminate as to all horizontal acreage in any zone, stratum, or horizon not included
within a proration unit or other area of horizontal acreage properly designated under the applicable
statutes, rules, or regulations of the appropriate state oil and gas regulatory agency and allocated to
a producing well,.”
4 Habendum Clause: Production in Paying Quantities
Baldwin v. Blue Stem Oil Co.
Baldwin v. Blue Stem Oil Co., 189 P.2d 920:
1.  Facts
2.  Court reasoning
“The leases did not contemplate that any circumstance or conditions should excuse the lessee from
performing the conditions of the leases on his part. By their terms ample time was given in which
to drill a well. The lessee was compelled to take notice of the climatic conditions and of the
topography of the country in the vicinity of the lands. . ..”
5 Model Lease Agreement:
Force Majeure Clause
Paragraph 11
Should Lessee be prevented from complying with any express or implied covenant of this lease,
from conducting drilling or reworking operations thereon or from producing oil or gas therefrom
by reason of scarcity of or inability to obtain or to use equipment or material, or by operation of
force majeure, any Federal or state law or any order, rule or regulation of governmental authority,
then while so prevented, Lessee’s obligations to comply with such covenant shall be suspended,
and Lessee shall not be liable in damages for failure to comply therewith; and this lease shall be
extended while and so long as Lessee is prevented by any such cause from conducting drilling or
reworking operations on or from producing oil or gas from the leased premises; and the time while
Lessee is so prevented shall not be counted against Lessee, anything in this lease to the contrary
notwithstanding.
6 Model Lease Agreement:
Well Completion Clause
Paragraph 6
If at the expiration of the primary term, oil, gas, or other mineral is not being produced on said
land, or on acreage pooled therewith, but Lessee is then engaged in drilling or reworking
operations thereon or shall have completed a dry hole thereon within sixty (60) days prior to the
end of the primary term, the lease shall remain in force so long as operations on said well or for
drilling or reworking of any additional well are prosecuted with no cessation of more than sixty
(60) consecutive days, and if they result in the production of oil, gas or other minerals, so long
thereafter as oil, gas or other mineral is produced from said land or acreage pooled therewith.
7 Habendum Clause: Production in Paying Quantities
Stanolind Oil & Gas Co. v. Barnhill
Stanolind Oil & Gas Co. v. Barnhill, 107 S.W.2d 746:
1.  Facts
2.  Court reasoning
“[The lessee’s] estate, consisting of a determinable fee, determined upon their failure to produce
oil or gas in paying quantities within such term, came to an end on February 4, 1935, as found by
the trial court, after which they did not possess any interest whatever in the land. The lease did not
exist. The term had closed, and the interest they procured by the lease was gone. It is not a
question of forfeiture for failure to continue to develop the land, nor does it rest upon any other
contingency. Appellants did not contract for a term which would depend upon the possibility of
procuring a market for the product at some date subsequent to its express date of expiration.”
8 Habendum Clause: Production in Paying Quantities
Shut-In Royalty Clause
Paragraph 3
* * *
“while there is a gas well on this lease or on acreage pooled therewith, but gas Is not being sold or
used, Lessee may pay as a royalty, on or before ninety (90) days after the date on which said well
is shut in and thereafter at monthly intervals, a sum equal to one-twelfth (1/12) of the amount of
the annual rental payable in lieu of drilling operations during the primary term on the number of
acres subject to this lease at the time such payment is made, and if such payment is made or
tendered, this lease shall not terminate and it will be considered that gas is being produced
from this lease in paying quantities”
* * *
9 Habendum Clause: Production in Paying Quantities
Garcia v. King
Garcia v. King, 164 S.W.2d 509:
1.  Facts
2.  Court reasoning
“It has been generally held that ‘paying quantities,’ when used in this connection means paying
quantities to the lessee. If a well pays a profit, even small, over operating expenses, it produces in
paying quantities, though it may never repay its costs, and the enterprise as a whole may prove
unprofitable.”
10 Habendum Clause: Production in Paying Quantities
Clifton v. Koontz
Clifton v. Koontz, 325 S.W.2d 684:
1.  Facts
2.  Court reasoning
“In the case of a marginal well, such as we have here, the standard by which paying quantities is
determined is whether or not under all the relevant circumstances a reasonably prudent operator
would, for the purpose of making a profit and not merely for speculation, continue to operate a
well in the manner in which the well in question was operated.”
11 Habendum Clause: Production in Paying Quantities
Clifton v. Koontz
1.  What is the distinction between operating cost and well drilling and completion costs?
2.  Using the formula developed in Clifton v. Koontz, answer this question:
Lessor sues to cancel on oil and gas lease on the grounds that the one well on the property which is
holding the lease is not producing in paying quantities as required by the lease. Lessor contends that in
determining whether or not the oil well is producing in paying quantities, Lessee must include the
following items:
Ad valorem taxes
Marketing Expenses
Lease Acquisition Cost
Administrative Expenses
Pumping Expenses
Well completion costs
Labor and repairs
1/64 overriding royalty
Depreciation
Income Taxes
Severance taxes
License and permits
3.  What time frame do you look at? In Pshigoda v. Texaco, the court reasoning looked at period before
reworking operations and period after reworking operations.
12 Habendum Clause: Temporary Cessation of Production
Watson v. Rochmill
Watson v. Rochmill, 155 S.W.2d 783:
1.  Facts
2.  Court reasoning
“It appears to be well settled that under the terms of the lease, upon cessation of production after
termination of the primary terms, the lease automatically terminated. The strictness of the above
rule has been modified where there is only a temporary cessation of production due to sudden
stoppage of the well or some mechanical breakdown of the equipment used in connection
therewith, or the like.[PRONG ONE] Under such circumstances there are authorities which hold
that the lessee is entitled to a reasonable time in which to remedy the defect and resume
production. [PRONG TWO] In the case at bar, however, the cessation of production was not
merely a temporary one.”
13 Habendum Clause: Temporary Cessation of Production
Natural Gas Pipeline Co. of America v. Pool (Dissent)
Natural Gas Pipeline Co. of America v. Pool (dissent), 124 S.W.3d 188:
1.  Facts
2.  Court reasoning
“I would reject Watson v. Rochmill formulation to the extent it forces the automatic termination of
leases, in which profitable production is not in dispute, when there is a temporary cessation of
production that furthers the economic interests of both lessors and lessees. Cessations of
production should no longer be accorded temporary status only when they are caused by sudden
stoppage or mechanical breakdown, but should permit the factfinder to weigh whether temporary
nonproduction furthered the core function of the lease.”
14 Habendum Clause: Temporary Cessation of Production
Ridge Oil Co. v. Guinn Investments, Inc.
Ridge Oil Co. v. Guinn Investments, Inc., 148 S.W.3d 143:
1.  Facts
2.  Court reasoning
“Accordingly, although decisions at times have said that the temporary cessation of production
doctrine applies when there is "sudden stoppage of the well or some mechanical breakdown of the
equipment used in connection therewith, or the like,” or that the doctrine applies when the cause of
a cessation of production is "necessarily unforeseen and unavoidable,” the circumstances in which
this and other courts have applied the doctrine have not been so limited. The court of appeals in
the present case correctly concluded that "foreseeability and avoidability are not essential
elements of the [temporary cessation of production] doctrine.”
15 Model Lease Agreement:
Temporary Cessation Clause
Paragraph 6
* * *
“if after the discovery of oil, gas or other hydrocarbons, the production thereof should cease from
any cause, this Lease shall not terminate if Lessee commences additional drilling or reworking
operations within sixty (60) days thereafter”
* * *
16 Habendum Clause: Substitute for Production
Freeman v. Magnolia Petroleum Co.
Freeman v. Magnolia Petroleum Co., 171 S.W.2d 339:
1.  Facts
2.  Court reasoning
“It necessarily follows, conversely, that while the royalty is not so paid, the well will not be held to
be a producer under that paragraph. Respondent did not pay the fifty dollars royalty on or before
April 7, 1940.”
17 Model Lease Agreement:
Shut-In Royalty for “Gas”
Paragraph 3
* * *
while there is a gas well on this lease or on acreage pooled therewith, but gas is not being sold or
used, Lessee may pay as royalty, on or before ninety (90) days after the date on which said well is
shut in and thereafter at monthly intervals, a sum equal to one-twelfth (1/12) of the amount of the
annual rental payable in lieu of drilling operations during the primary term on the number of acres
subject to this lease at the time such payment is made, and if such payment is made or tendered,
this lease shall not terminate and it will be considered that gas is being produced from this lease in
paying quantities.”
* * *
18 Habendum Clause: Substitute for Production
Gulf Oil Corp. v. Reid
Gulf Oil Corp. v. Reid, 337 S.W.2d 267:
1.  Facts
December 9, 1943
December 1948 (before December 9)
December 9, 1948
January 18, 1949
February 19, 1949
November 1949
Lease signed within 5 year primary term
Gulf begins drilling
Primary term expires
Drilling ends and well capped
Shut-in Royalty is tendered
Gas is sold (and so the well is producing)
2.  Court reasoning
“If we accept, as we must, the conclusion that there was no production, therefore, no cessation of
production and no abandonment, then in this case it necessarily follows that there was a gap
between the completion of the well and production, and the lease terminated.”
19 Comparison of Model Agreement to Gulf Oil Corp v. Reid:
Shut-In Royalty Clause
Paragraph 3 in Gulf Oil Corp. v. Reid
“3. * * * where gas from a well producing gas only is not sold or used, Lessee may pay as royalty Fifty Dollars
($ 50.00) per well per year, and upon such payment it will be considered that gas is being produced within the
meaning of Paragraph 2 hereof; * * *.
Paragraph 3 in Lease in Appendix A
while there is a gas well on this lease or on acreage pooled therewith, but gas is not being sold or used, Lessee
may pay as royalty, on or before ninety (90) days after the date on which said well is shut in and thereafter at
monthly intervals, a sum equal to one-twelfth (1/12) of the amount of the annual rental payable in lieu of drilling
operations during the primary term on the number of acres subject to this lease at the time such payment is
made, and if such payment is made or tendered, this lease shall not terminate and it will be considered that
gas is being produced from this lease in paying quantities;
Continuous Operations Paragraph in Gulf Oil Corp. v. Reid: Required abandonment for 60 day
Paragraph 6
“If at the expiration of the primary term, oil, gas or other mineral is not being produced on said land, or on
acreage pooled therewith, but Lessee is then engaged in drilling or reworking operations thereon or shall have
completed a dry hole thereon within sixty (60) days prior to the end of the primary term, the lease shall remain in
force so long as operations on said well or for drilling or reworking of any additional well are prosecuted
with no cessation of more than sixty (60) consecutive days to elapse between the abandonment of one well and
the commencement of drilling or reworking on another well until production is obtained, and if they result in the
production of oil, gas, or other mineral, so long thereafter as oil, gas or other mineral is produced from said land
or acreage pooled therewith.”
20 Habendum Clause: Substitute for Production
Vernon v. Union Oil Co. of California
Vernon v. Union Oil Co. of California, 270 F.2d 441:
1.  Facts
“Where gas from a well producing gas only is not sold or used, Lessee may pay as royalty $50.00 per
well per year, and upon such payment it will be considered that gas is being produced.”
2.  Court reasoning
“Where a well is capable of producing only negligible quantifies of liquidate condensate, the need
for such protection persists. In such a case, the constructive production provision would be
applicable. But, where the well is capable of producing liquid condensate in paying quantities,
i.e., where it would be reasonable to operate the well to produce liquid condensate alone, the need
for protection ceases as does the application of the constructive production provision.”
21 Model Lease Agreement:
Shut-In Royalty for “Gas”
Paragraph 3
* * *
“while there is a gas well on this lease or on acreage pooled therewith, but gas is not being sold or
used, Lessee may pay as royalty, on or before ninety (90) days after the date on which said well is
shut in and thereafter at monthly intervals, a sum equal to one-twelfth (1/12) of the amount of the
annual rental payable in lieu of drilling operations during the primary term on the number of acres
subject to this lease at the time such payment is made, and if such payment is made or tendered,
this lease shall not terminate and it will be considered that gas is being produced from this lease in
paying quantities.”
* * *
Note: The Vernon v. Union Oil Co. of California problem remains if the well is not a “gas well.” The
“problem” is resolved if the language is changed to apply to a “well capable of producing gas.”
22 Habendum Clause: Substitute for Production
Rogers v. Osborn
Rogers v. Osborn, 261 S.W.2d 311:
1.  Facts
2.  Court reasoning
“[W]e hold that the second word operates as used in the second sentence does not include
additional wells commenced after the expiration of the primary term. This sentence means that if
production results from the continuous prosecution of the very operation being engaged in by the
lessees upon the expiration of the primary term, the lease is good. This is not to be confused with
the lessee’s rights to drill additional wells under the “dry hold” and “if production ceases”
sentences.”
23 Model Lease Agreement:
Continuous Operation Clause
Paragraph 6
* * *
“If at the expiration of the primary term, oil, gas or other mineral is not being produced on said
land, or on acreage pooled therewith, but Lessee is then engaged in drilling or reworking
operations thereon or shall have completed a dry hole thereon within sixty (60) days prior to the
end of the primary term, the lease shall remain in force so long as operations on said well or for
drilling or reworking of any additional well are prosecuted with no cessation of more than
thirty (30) sixty (60) consecutive days, and if they result in the production of oil, gas, or other
mineral, so long thereafter as oil, gas or other mineral is produced from said land or acreage
pooled therewith.”
* * *
Note: The above non-bolded text, including the struck-through text, was in the lease in Rogers v.
Osborn but the bolded language was not in the lease discussed in Rogers v. Osborn but is in the
lease in the Appendix.
24 Habendum Clause: Substitute for Production
Perlman v. Pioneer Limited Partnership
Perlman v. Pioneer Limited Partnership, 918 F.2d 1244:
1.  Facts
2.  Court reasoning
“We therefore uphold the district court’s conclusion that Perlman’s obligations under the Lease
and Surface Agreement was not excused by a force majeure.”
25 Delay Rentals
Corley v. Olympic Petroleum Corp.
Corley v. Olympic Petroleum Corp, 403 S.W.2d 537:
1.  Facts
2.  Court reasoning
“On the other hand, an oil and gas lease may expressly provide for the payment of delay rentals by
the mailing of a check, draft, or other form of remittance to the lessors. In such a situation, the
postal service is made the lessor’s agent to deliver the remittance and proper mailing, although it is
never delivered, constitutes payment.”
26 Model Lease Agreement:
Delay Rental
Paragraph 5
“If operations for drilling are not <commenced> on said land or on acreage pooled therewith as
above provided on or before one year from this date, the lease shall then terminate as to both
parties, <unless> on or before such anniversary date Lessee shall pay or tender to Lessor or to the
credit of Lessor in ___ Bank at ____, Texas, (which bank and its successors are Lessor’s agent and
shall continue as the depository for all rentals payable hereunder regardless of changes in
ownership of said land or the rentals) the sum of ____ Dollars ($____), (herein called rentals),
which shal cover the privilege of deferring commencement of drilling operations for a period of
twelve (12) months. In like manner and upon like payments or tenders annually, the
commencement of drilling operations may be further deferred for successive periods of twelve
(12) months each <during the primary term>.” The payment or tender of rental under this
paragrapy and of royalty under pargraph 3 on any gas well from which gas is not being sold or
used may be made by the check or draft of Lessee <mailed or delivered> to the parties entitled
thereto or to said bank on or before the date of payment. If such bank (or any successor bank)
should fail, liquidate, or be succeeded by another bank, or for any reason fail or refuse to accept
rental, Lessee shall not be held in default for failure to make such payment or tender of rental until
thirty (30) days after Lessor shall deliver to Lessee a proper recordable instrument, naming another
bank as agent to receive such payment or tenders.”
* * *
27 Delay Rentals
Mitchell v. Simms
Mitchell v. Simms, 403 S.W.2d 537:
1.  Facts
2.  Court reasoning
“If the lessor has declared he will not receive the rental when due or has notified the depository
not to accept the rental, or has by any other acts evidenced a repudiation of the contract, the tender
of the rentals will not be required. Under such circumstances, as above mentioned, it would be a
useless act to require the lessee to go through the formality of making a tender of rental where it is
known before such tender of rentals that they would not be received.”
28 Delay Rentals
Humble Oil and Refining Co. v. Harrison
Humble Oil and Refining Co. v. Harrison, 205 S.W.2d 355:
1.  Facts
2.  Court reasoning
“Where, as in this case, the lessee has in good faith made a mistaken construction of the lessors’
partial conveyance of their interests and lessee has made a payment in accordance with such
construction, of which the assignee has notice, the duty rests on the assignee to notify the lessee of
its mistake so that the lessee will have an opportunity to make a property payment of the delay
rentals. Where the assignee, instead of giving the lessee such notice, remains silent, we hold that
the assignee is estopped to assert that the lease has terminated as to his interest on the ground that
the lessee has failed to pay to him a sufficiently large share of the delay rentals.”
29 Delay Rentals
Humble Oil and Refining Co. v. Clark
Humble Oil and Refining Co. v. Clark, 87 S.W.2d 471:
1.  Facts
2.  Court reasoning
“The fact that the new instrument contains the same terms as those contained in the old
instrument, which was void, does not alter the fact that such terms became and are now terms of
the new instrument. This being the case, the new instrument, duly executed as it was, effected a
transfer to the Humble Company of the leasehold estate in the undivided interest of Margaret
Coolidge in the land, regardless of the fact that the prior instrument is and was void.”
30 Delay Rentals
Texas Co. v. Parks
Texas Co. v. Parks, 247 S.W.2d 179:
1.  Facts
2.  Court reasoning
“The facts of the instant case do not bring it within the rule as announced in the above mentioned
case. In the instant case, appellant in its reply for admission, took the position that it owed $80
and that had been its position at all times. There was no pleading of mistake, fraud or accident, no
plea for reformation, and no offer to pay more than $80. Under the facts of this case, appellees are
not estopped to declare the lease terminated.”
31 Delay Rentals:
Model Lease Agreement
Paragraph 10
* * *
“Without impairment of Lessee’s right under the warranty in event of failure of title, it is agreed
that if Lessor owns an interest in the oil, gas or other minerals on, in, or under said land less than
the entire fee simple estate, whether or not this lease purports to cover the whole or a
fractional interest, then the royalties and rentals to be paid Lessor shall be reduced in accordance
with the nature of the estate of which Lessor is seized.”
* * *
32 Commencement of Well
Breaux v. Apache Oil Corp
Breaux v. Apache Oil Corp, 240 So.2d 589:
1.  Facts
2.  Court reasoning
“substantial surface preparations to drill are sufficient to be considered ‘commencement’ of
drilling operations for the lease-clause purposes, such as making and clearing a locaiton,
delivering equipment ot the well site, and the like, provided that such preliminary operations are
continued in good faith and with due diligence until the well is actually spudded in.”
33 Commencement of Drilling in
Horizontal Wells
Horizontal Well Diagram #1
(Overview of a Horizontal Well)
Mineral: Bigg Oil
Horizontal Drilling
Deviated Drilling
> <
> <
> <
> <
> <
> <
Terminus
Penetration Point
> <
Correlative
Interval
C
Mineral: Bigg Oil
> <
Kick-Off Point
B
> <
Mineral: Bigg Oil
Surface: Brown
Surface: Brown
> <
A
Surface: Able
“Take-Points” (Perforations)
Horizontal Drainhole Displacement
34 Pooling Clauses:
Scott v. Pure Oil Co.
Scott v. Pure Oil Co, 240 So.2d 589:
675 acres
1.  Facts
Unit Well
535 acres
2.  Court reasoning
140 acres
317 acres
“However, each of these cases . . . Give effect to the proposition that where the authority for the
unitization so provides, the production in paying quantities from the well or wells on the area
unitized may be imputed as the required production from each of such component tracts so as to
continue such individual leases in force as to their entire acreage- that both within and without the
unitized area.”
35 Pooling Clauses:
No Pugh Clause Hypothetical
Tract A
535 acres
30 acres
Unit Well
10 acres
Tract B
140 acres
40 acres
1.  Does the Unit Well hold the 535 acre tract? Does the Unit Well hold the 140 acre tract?
2.  How are royalties determined?
36 Pugh Clause:
Example of Clause
* * *
“Notwithstanding anything to the contrary herein contained, the commencement of operations for
drilling, the drilling or reworking of a well, or the production of oil gas or other mineral from any
well situated on lands included within a unit embracing a portion of the leased premises and other
lands not covered hereby shall only serve to maintain this lease in force as to that portion of the
leased premises embraced in such unit; but during the primary term delay rentals payable
hereunder shall be proportionately reduced and be payable on that portion of the leased premises
not included in such unit.”
* * *
37 Pooling Clauses
Problem Set on p. 5-64
160 acre unit
70 acres
30 acres
B
A
38 Pugh Clause:
Community Bank of Raymore v. Chesapeake
Community Bank of Raymore v. Chesapeake, 416 S.W.3d 750:
1.  Facts
Chesapeake developed Block Two at depth of 5,672 by end of
primary term. Lease had a continuous operations clause, horizontal
Pugh clause, and a retained acreage clause. Drilling was being done
at end of primary term but not at depths below 5,672. How are these
clauses to interact in the lease?
2.  Court reasoning
“[T]he lease’s horizontal Pugh clause never sprang into life. By its
terms, the Pugh clause operates “[a]t the expiration of the Primary
Term or the conclusion of the continuous development program[.]”
What Ab
o
Deeper ut
Zones?
“By its plain, grammatical terms, the severance clause is triggered
“after expiration of the Primary Term ...and any extension of the
Primary Term . . . Accordingly, the plain language of the severance
clause provides that the lease’s primary term is extended by
continuous development and that severance will not occur until after
the expiration of the extended primary term.
39 Pooling Clauses:
Jones v. Killingsworth
Jones v. Killingsworth, 403 S.W.2d 325:
1.  Facts
“Units pooled for oil hereunder shall not substantially exceed 40
acres each in area, and units pooled for gas hereunder shall not
substantially exceed in area 640 acres each plus a tolerance of
10% thereof, provided that should governmental authority
having jurisdiction prescribe or permit the creation of units
larger than those specified, units thereafter created may conform
substantially in size with those prescribed [or permitted]* by
governmental regulations.”
* Not in case but in Sample Lease §4
2.  Court reasoning
“The parties obviously knew when the lease contract was
executed that a permitted oil proration unit could conceivably be
much larger in area than one prescribed by governmental
authority. To say that a lessee can pool lessors’ land with units
of any size permitted by the Railroad Commission would defeat
the intention of the parties to restrict the size of the units to the
size prescribed by governmental authority. Absent express
authority, a lessee has no power to pool interests in the estate
retained by the lessor with those of other lessors.”
40 Allocation Wells:
The “No Authority to Pooling” Solution?
Horizontal Well Diagram #1
(Overview of a Horizontal Well)
Deviated Drilling
C
Mineral: Bigg Oil
(no pooling clause)
Horizontal Drilling
> <
> <
> <
> <
> <
> <
Terminus
Penetration Point
> <
Correlative
Interval
Mineral: Bigg Oil
(no pooling clause)
> <
Kick-Off Point
B
> <
Mineral: Bigg Oil
(no pooling clause)
Surface: Brown
Surface: Brown
> <
A
Surface: Able
“Take-Points” (Perforations)
Horizontal Drainhole Displacement
41 Pooling Clauses: Good Faith Pooling
Amoco Production Co. v. Underwood
Amoco Production Co v. Underwood, 558 SW.2d 509:
1.  Facts
Walser (Circle Dot)
Walser (Circle Dot)
Underwood
Underwood
Wright
Hefley
Johnson
Totals
Sec. 3
Sec. 81
Sec. 2*
Sec.1*
Sec. 1
Sec.4
Sec.4
Total Acres
643.23
647.90
320.90
320.00
160.00
40.00
120.00
2,252.03
Pooled Acres
553.02
45.00
10.00
20.00
10.00
40.00
10.00
688.02
Excluded Acres
90.21
602.90
310.90
300.00
150.00
0
110.00
1,564.01
2.  Court reasoning
“Lessee must exercise “good faith” toward the lessor and royalty owners in making a pooling
designation.”
42 Pooling Clauses: Good Faith Pooling
Coastal Oil & Gas Corp
18
Coastal Oil & Gas Corp, 268 SW.3d 1:
1.  Facts
9
Share 15
Share 13
3
1
28
7
6
2
14
5
8
2V
15
16
20
10
11
3
BS1
C2
C1
4
Share 12
P1
2.  Court reasoning
“Coastal was obligated to act in good faith, which the jury found it failed to do. . . . . We would
affirm the award except that we conclude, as we will explain, that there must be a new trial.”
43 Good Faith Pooling of Horizontal Wells
Horizontal Well Diagram #1
(Overview of a Horizontal Well)
Mineral: Bigg Oil
Horizontal Drilling
Deviated Drilling
> <
> <
> <
> <
> <
> <
Terminus
Penetration Point
> <
Correlative
Interval
C
Mineral: Bigg Oil
> <
Kick-Off Point
B
> <
Mineral: Bigg Oil
Surface: Brown
Surface: Brown
> <
A
Surface: Able
“Take-Points” (Perforations)
Horizontal Drainhole Displacement
44 Cross-Conveyance and Joinder
Veal v. Thomason
Veal v. Thomason, 159 SW.2d 472:
6,000 acre unit
1.  Facts
2.  Court reasoning
Veal
197.4
21+ other lessors
“The royalty owners under the other lease contracts in this unitized block are necessary parties to
this suit. There is no escape from this conclusion, because Thomason seeks in his action to obtain
a judgment freeing this land from the Texas Company lease, and if this is done by judgment which
names such company only the royalty owners under the other leases in this unitized block will
have had such royalty interest in this land, and for all practical purposes, cut off and destroyed
without having their day in court.”
45 Pooling Clauses: Good Faith Pooling
Wagner & Brown, Ltd. v. Sheppard
Wagner & Brown, Ltd. v. Sheppard, 282 SW.3d 419:
122 acres
1.  Facts
Choices:
Sheppard
th
è  1/8 co-tenant of 100% of net profits from production
62.72
(Sheppard’s View)
è  1/8th co-tenant * 51% (62.72/122) of net profits from production of pooled unit
(Wagner & Brown’s View)
è  Court Choice: Sheppard became an unleased 1/8th co-tenant when the lease expired, but the
tract remained part of the pooled unit since it was validly pooled and the pooled unit still
existed. So, Sheppard is entitled to her 1/8 co-tenant share of net profits of the pooled unit.
2.  Court reasoning
“The lease here allowed the Sheppard tract (rather than just the lease) to be pooled for purposes of
production, and that is what the unit designation did. As termination of the lease changed none of
the lands committed to the unit, we hold that it did not terminate the unit. Thus, while Sheppard is
entitled as a co-tenant to 1/8th of the proceeds due to the mineral owners of her tract, that does not
entitle her to 1/8th of the proceeds that must be shared with the mineral owners of other tracts by
the terms of the unit agreement.”
46