In yet another “retained-acreage” dispute, the Amarillo Court of Appeals recently ruled that an assignee was entitled to retain all acreage covered by the assignment of four leases, where the assignment’s retained-acreage clause invoked the maximum acreage prescribed by the applicable field rules governing proration units, and, in the absence of any such field rules, deemed proration units to be 320 acres.
In XOG Operating, LLC v. Chesapeake Exploration Limited Partnership, XOG sought an interpretation of the retained acreage clause contained in an assignment to Chesapeake of XOG’s lease interests in four oil and gas leases collectively covering 1,625 acres. The assignment provided that:
Upon expiration of the Primary Term of this Assignment . . . [s]aid lease shall revert to [XOG],save and except that portion of said lease included within the proration or pooled unit of each well drilled under this Assignment and producing or capable of producing oil and/or gas in paying quantities. The term “proration unit” as used herein, shall mean the area within the surface boundaries of the proration unit then established by field rules or special order of the appropriate regulatory authority for the reservoir in which each well is completed. In the absence of such field rules or special order, each proration unit shall be deemed to be 320 acres of land in the form of a square as near as practicable surroundings [sic] a well completed as a gas well producing or capable of production in paying quantities. . . .
During the primary term of the assignment, six wells were drilled—five in the Allison-Britt Field and one in the Stiles Ranch (Granite Wash) Field. Field Rule 2 for the Allison-Britt Field provided that, for purposes of a production allowable assignment, the maximum area of a “prescribed proration unit” was 320 acres, and that any unit containing less than 320 acres was, by definition, a “fractional proration unit.” There were no field rules or special orders applicable to the Stiles Ranch Field.
As no pools were formed, the issue regarding how much acreage Chesapeake was entitled to retain under the retained-acreage clause turned on how the parties intended to define a “proration unit” with respect to each well.
XOG argued that the retained-acreage clause was tied to the regulatory framework of the Texas Railroad Commission (“RRC”), this being the common practice in the oil and gas industry according to XOG. Specifically, XOG contended that the amount of acreage designated by Chesapeake in the Statement of Productivity of Acreage Assigned to Proration Units (“Form P-15”) filed with the RRC was controlling for purposes of the retained-acreage clause. In filing a Form P-15, which is used to obtain a production allowable for a given well, the operator must include a certified plat setting out the size and location of the acreage constituting a prescribed proration unit, or fractional proration unit, assigned to the well.
In this case, Chesapeake had chosen not to designate a full proration unit (i.e., 320 acres for the five wells in the Allison-Britt Field) but instead designated fractional proration units for each of the six wells. Because Chesapeake had designated a total of only 802 acres in its Form P-15 filings for the six wells, XOG urged the court to hold that Chesapeake was limited to retaining 802 acres under the retained-acreage clause.
In response, Chesapeake contended that the plain language of the retained-acreage clause showed the parties’ intent that Chesapeake retain the acreage prescribed by the applicable field rules or, in the absence of any field rules, 320 acres per well. Thus, Chesapeake argued it was entitled to retain the full 1,625 acres covered by the assignment because the field rules applicable to the five wells in the Allison-Britt Field established a proration unit of 320 acres per well, and the proration unit of the well in the Stiles Ranch Field, which had no field rules, was 320 acres by express agreement, resulting in Chesapeake being entitled to retain up to 1,920 acres (6 wells x 320 acres), more than that covered by the assignment.
The trial court granted Chesapeake’s motion for summary judgment, holding that Chesapeake was entitled to retain the full 1,625 acres covered by the assignment, and the court of appeals affirmed. Noting that the retained-acreage clause unambiguously defined a “proration unit” to be the area within the surface boundaries of a proration unit prescribed by the applicable field rules, the court of appeals declined to read into the clause an intent to retain only the acreage “designated in the Form P-15 filing as to each well.” Thus, the acreage designated by Chesapeake in its Form P-15 filings for purposes of obtaining a production allowable for a fractional proration unit was immaterial, and Chesapeake was entitled to retain the entire 1,625 acres based on the field rules for the Allison-Britt Field and the deemed proration unit size prescribed by the retained-acreage clause.