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High court revisits Texas well pooling, lease practices

By Steve Korris | Nov 26, 2008

Justice Scott Brister

AUSTIN – Retired lawyer Jane Turner Sheppard struck a bonanza when a mineral lease on her property accidentally expired, but the Texas Supreme Court won't let her collect on her lucky strike.

The Justices on Nov. 21 reversed two rulings of Upshur County District Judge Joe Clayton in Sheppard's favor.

Clayton's errors nearly doubled Sheppard's share of production while relieving her of any responsibility for the original cost of drilling.

Clayton stumbled in strange territory, for nothing like this had happened since Texans started pooling oilfield properties instead of drilling anywhere and everywhere.

According to "Conservation of Oil and Gas," a 1952 Harvard Law Review article by Howard Williams, prospectors drilled about 24,000 unnecessary wells in East Texas.

Dense drilling dissipated reservoir energy, increased fire and accident hazards, and wasted $50 million a year in labor and materials, Williams wrote.

Legislators provided for voluntary pooling of properties in 1949, but excess drilling persisted. In 1965, legislators made pooling compulsory.

"Since then, this Court has never addressed how a pool of producing properties is affected if a lease in the pool expires," Justice Scott Brister wrote.

The lease that raised the issue belonged to an accountant and attorney, in one person. Brister identified Sheppard as a "CPA and retired family lawyer."

She owned an eighth of the minerals under her land. In 1996 she and others pooled nine tracts to form the 122 acre Landers Gas Unit.

They agreed to split costs and proceeds in proportion to acreage. Sheppard owned 51.3 percent of the acres in the pool.

Sheppard held a lease different from others in the pool. It provided for termination if the operator didn't pay royalties in 120 days after first gas sales.

The operator, C. W. Resources, completed two successful gas wells on Sheppard's tract.

In 2000, Wagner & Brown Ltd. took over as operator and found that C. W. Resources didn't pay Sheppard in the first 120 days. Her lease had expired years ago.

Wagner & Brown offered her a new lease, and she declined.

"The parties agree that Sheppard's lease terminated on March 1, 1997, and since then she has been an unleased co-tenant, entitled to her share of the proceeds from minerals sold less her share of the costs of production and marketing," Brister wrote.

"The dispute here concerns both the proceeds and the costs," he wrote.

If termination of the lease ended her participation in the pool, he wrote, she would receive an eighth of production.

If termination didn't end her participation, he wrote, she would receive her 51.3 percent share and the others would divide the rest.

"The documents do not specify what happens to the unit when one lease terminates, so this one calls for interpretation rather than plain reading," Brister wrote.

"But we agree that a proper interpretation of these documents indicates the termination of Sheppard's lease did not terminate her participation in the unit," he wrote.

He wrote that the lease pooled lands and premises, and he added, "Although Sheppard's lease expired, the lands themselves obviously did not."

Judge Clayton also made a mistake in finding that Sheppard didn't have to pay for the drilling or other expenses the operator incurred before the lease expired, Brister wrote.

He wrote that "one who drills a well in good faith is entitled to reimbursement."

C. W. Resources breached the lease, he wrote, but a breaching party is not necessarily barred from reimbursement for improvements.

He wrote that "an operator who intentionally terminates a lease has a weaker claim to equity than one who does so by accident."

He wrote, "One who immediately offers to reinstate an expired lease has cleaner hands than one who does not."

Clayton abused his discretion, Brister wrote, "by allowing Sheppard to reap all the proceeds of production without bearing any of the costs."

The Court remanded the case to Clayton for calculation of reasonable and necessary costs that Brown & Wagner can deduct from payments to Sheppard.

Macey Reasoner Stokes, Gregory Copeland, Michael Lennon Jr., and John Carsey represented Brown & Wagner.

Ronald Holman, David Miller, John Minton Jr., Alan Wright and Ben Mesches represented Sheppard.

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