A Texas appeals court recently ruled in ConocoPhillips Company v. Vaquillas Unproven Minerals, Ltd. that a lease’s retained acreage clause invoked the Texas Railroad Commission’s field spacing rule as well as the statewide drilling unit rule, Rule 38, which operated to reduce the acreage the lessee was permitted to retain under the lease from 640 acres per well to 40 acres per well. The effect of the ruling was that ConocoPhillips was ordered to release an additional 15,351 acres to the lessor.

In this case, ConocoPhillips was the lessee under two oil and gas leases, one covering 26,622.79 acres and the other covering 6,740 acres. Both of the leases contained a retained acreage clause which set the number of acres around each gas well that ConocoPhillips would be allowed to retain once its continuous drilling program ended:

 . . . Lessee covenants and agrees to . . . release . . . any and all portions of this lease which have not been drilled to a density of at least 40 acres for each producing oil well and 640 acres for each producing or shut-in gas well, except that in case any rule adopted by the Railroad Commission of Texas or any other regulating authority for any field on this leaseprovides for such a spacing or proration establishing different units of acreage per well, then such established different units shall be held under this lease by such production, in lieu of the 40 and 640-acre units above mentioned. . . .

It was undisputed that ConocoPhillips’ drilling program had ended, and it had apparently already released all acreage in excess of 640 acres per gas well. Because the retained acreage clause provided that its default allowance of 640 acres per gas well could be overridden by a field rule establishing a spacing or proration unit of a different size, the issue was whether such a rule had been adopted for the applicable field which would operate to reduce the acreage ConocoPhillips would be entitled to retain.

The only relevant rule for the field was a spacing rule which provided:

Rule 2. No well shall hereafter be drilled nearer than [467] feet to any property line, lease line or subdivision line and no well shall be drilled nearer than [1,200] feet to any applied for, permitted or completed well in the same reservoir on the same lease, pooled unit or unitized tract. . . .

The question thus became whether the spacing requirement of Rule 2 established a “different unit[] of acreage per well” than the 640 acres provided by the retained acreage clause. While the court of appeals agreed with ConocoPhillips that Rule 2 did not expressly set forth a unit of acreage, it found that the field rule must be read in conjunction with statewide Rule 38, which establishes the standard drilling unit size for gas fields in which “only spacing rules” exist, including field-specific spacing rules such as Rule 2. For fields in which the spacing requirement is 467/1200, as was the case for the field at issue per Rule 2, Rule 38(b) provides that the standard drilling unit is 40 acres per well.

The court concluded that Rule 2, read in conjunction with Rule 38, was a field spacing rule that established “different units of acreage per well” than that provided for in the retained acreage clause. Thus, the standard 40-acre drilling unit rule controlled the number of acres ConocoPhillips was entitled to retain under the leases. The Fourth Court of Appeals therefore affirmed the trial court’s ruling that ConocoPhillips had breached the leases by failing to release all acreage in excess of 40 acres for each gas well, resulting in a release of an additional 15,351 acres.