Sutton v. SM Energy Co.
421 S.W.3d 153
| Tex. App. | 2013Background
- 1966 oil and gas lease: Sutton Producing leased ~40,000 acres from Briscoe Ranch; early assignments reserved ORRIs (5.46875% and 2.00%) with savings provisions extending the ORRIs to amendments, extensions, renewals, or new leases taken within one year after termination.
- Over time the lease was amended; in 2000 ~22,000 acres were released and 18,000 acres remained under an amendment requiring certain work and containing a continuous-drilling provision and a retained-acreage (160-acre well tract) rule.
- 2007 amendment preserved a 120-day requirement to commence drilling an additional well after completion of the prior well but did not restate the 160-acre designation method.
- SM completed the Briscoe E 1272 well on the 18,000 acres on October 5, 2008, but did not commence another well within 120 days (deadline Feb 5, 2009); SM later executed a new lease for the 18,000 acres on May 1, 2010.
- SM sued for declaratory relief seeking a ruling that the 1966 lease terminated Feb 5, 2009, that appellants’ ORRIs were extinguished (no new lease within 12 months), and that SM owed no royalties on the 2010 lease; trial court granted SM summary judgment.
Issues
| Issue | Plaintiff's Argument (SM) | Defendant's Argument (Appellants) | Held |
|---|---|---|---|
| Did the 1966 lease terminate for failure to commence a new well within 120 days after Oct 5, 2008? | Lease required commencement within 120 days; SM did not commence and thus lease terminated Feb 5, 2009. | The 2007 amendment is ambiguous about consequences; because the 2007 amendment omitted the 2000 designation method, "nothing happened" on Feb 5, 2009 and the lease continued under the habendum clause until 2010. | Court held the continuous-drilling clause unambiguously required commencement within 120 days; lease terminated Feb 5, 2009. |
| Did appellants’ ORRIs survive and burden the 2010 lease? | ORRIs expired because no new lease was executed within 12 months of termination. | ORRIs survive because the 1966 lease did not terminate until execution of the 2010 lease (within 12 months). | Court held ORRIs expired — termination was Feb 5, 2009 and no new lease within 12 months, so ORRIs extinguished. |
| Does ambiguity in 2007 amendment about retained acreage method prevent termination? | N/A (SM contends clause is clear as to termination). | Ambiguity means no operative termination event occurred on Feb 5, 2009. | Court held any alleged ambiguity in acreage attribution did not prevent operation of the unambiguous continuous-drilling termination provision. |
| Does failure to designate well tracts act as an automatic termination? | N/A (SM relies on 120-day drilling requirement). | Failure to designate until 2010 means no retained-tract effect earlier. | Court held designation obligation is a covenant; its breach does not automatically terminate the lease. |
Key Cases Cited
- SM Energy Co. v. Sutton, 376 S.W.3d 787 (Tex.App.—San Antonio 2012) (pet. denied) (prior related opinion interpreting same lease history)
- Ridge Oil Co. v. Guinn Inv., Inc., 148 S.W.3d 143 (Tex. 2004) (new lease may terminate prior lease)
- Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550 (Tex. 2002) (habendum clause construction and lease duration principles)
- Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419 (Tex. 2008) (lease termination is contractual)
- Tittizer v. Union Gas Corp., 171 S.W.3d 857 (Tex. 2005) (oil and gas lease construed as contract)
- Krabbe v. Anadarko Petroleum Corp., 46 S.W.3d 308 (Tex.App.—Amarillo 2001) (savings clauses and termination on failure to comply)
- Kincaid v. Gulf Oil Corp., 675 S.W.2d 250 (Tex.App.—San Antonio 1984) (automatic termination and reversion to lessor)
- Amoco Prod. Co. v. Braslau, 561 S.W.2d 805 (Tex. 1978) (cessation of production ends secondary term)
- Parten v. Cannon, 829 S.W.2d 327 (Tex.App.—Waco 1992) (designation requirement is a covenant, not automatic termination)