CITE AS Energy & Min. L. Inst. Chapter 14 Horizontal Wells ... · Chapter 14 Horizontal Wells: Technical and Legal Issues ... Horizontal Well —ORRI for ... • What is the impact

Chapter 14

Horizontal Wells: Technical and Legal Issues

Arthur J. Wright CDX Gas, LLCDallas, Texas

Synopsis

§ 14.01. Introduction ............................................................................ 424§ 14.02. Lease Issues ............................................................................ 425

[1] — The Pooling Clause ............................................................425[2] — The Payment of Royalty ....................................................427

[a] — Allocation on a Surface Basis ............................. 427[b] — Risks of Unclear Lease Allocation ..................... 428

[3] — Implied Covenants .............................................................429[a] — Implied Duty to Protect Against Drainage .......... 430[b] — Implied Duty to Develop .................................... 431[c] — Administrative Relief—Pooling .......................... 432

[4] — Solution ...............................................................................433§ 14.03. Surface Lease Issues and Trespass ....................................... 433

[1] — Authority to Drill ...............................................................433[2] — Issues Surrounding Horizontal Wells and Trespass ..........434

§ 14.04. Regulatory Issues ................................................................... 435§ 14.05. Conclusions/Comments ......................................................... 436§ 14.06. Sample Clauses ....................................................................... 437

[1] — Pooling ................................................................................437[a] — Non-Horizontal Wells Located Within 330 Feet of Leased Premises .............................. 437[b]— Horizontal Wells Located On or Partially on Leased Premises ............................................. 437[c] — Pooled Unit Size ................................................. 438[d] — Effect of Pooling on Leased Premises ................ 438[e] — Recordation of Pooled Unit Declaration ............. 439[f] — Termination of Pooled Unit ................................. 439[g] — Allocation of Pooled Unit Production ................. 439[h] — Outstanding Royalty Interests ............................. 440[i] — Pooling Rights ..................................................... 440

[2] — Continuous Development .................................................. 442[a] — Extension of Primary Term ................................. 442[b] — Sixty (60) Day Rework ....................................... 442[c] — Release and Survivor of Lessee Obligations ...... 443[d] — Definition ............................................................ 443

CITE AS28 Energy & Min. L. Inst. ch. 14 (2008)

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§ 14.07. Horizontal Well —ORRI for Production ............................. 446[1] — Surface Drillsites from Lands Not Pooled with Surface Tracts ........................................................... 446[2] — Surface Damages .............................................................. 448[3] — Purchase Options; Purchase of Surface Sites ................... 448

§ 14.08. Bibliography ............................................................................ 449

§ 14.01. Introduction.This chapter is written to discuss certain legal issues associated with

horizontal drilling and production. The issues include:

• Which ownership estate can authorize drilling?• Which ownership estate can grant surface and subsurface

easements?• How do you allocate production among owners?• What is the impact of the new horizontal technology on “implied”

covenants?• What size should a drilling or spacing unit be?• What regulatory issues should be considered?

In connection with the foregoing, there are some basic concepts to keep in mind. First, the modern rule of capture is a doctrine of non-liability, conveying no rights other than non-liability for draining adjoining tracts.1 A person has the right to produce and save all production from a wellbore bottomed on his lands or tract, and accordingly, may drain any adjacent tracts. The only remedy or defense to drainage in this “free enterprise” theory is for the adjoining tract to do the same. Texas and other states have modified the rule of capture with a comprehensive regulatory scheme which includes well spacing and density requirements, pooling (voluntary or forced), and production allowables (today largely open flow) to promote efficiency and to maximize production.

Second, most oil and gas lease forms and state regulatory schemes were designed for vertical wells. Legal issues, including those related to trespass,

1 Ernest E. Smith & Jacqueline Lang Weaver, Texas Law of Oil and Gas § 1.1 (2d ed. 2002).

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arise because the horizontal drainhole crosses lease lines and production is not attributable to the specific tract underlying the tract on which the surface location of the well is situated. There is a dearth of case law dealing with legal issues related to the drilling of and producing from horizontal wells, including the application of oil and gas law to traditional leases used when horizontal wells are drilled.

Finally for regulatory bodies, the critical issue is to design their rules to encourage the efficient development and production from horizontal wells.

§ 14.02. Lease Issues.In drilling horizontal wells, there are a variety of potential problems with

the typical oil and gas lease that can give a lessee problems when pooling and allocating production such as “the implied covenants,” lease limitations on pooling (antidilution clauses) or the spacing requirements normally tied to vertical wells (such as 40 or 80 acres per well). The term “pooling” refers to the aggregation of small tracts in order to create a legal location and obtain a permit to drill under applicable state or federal spacing rules.2 These problems are amplified by key factual differences in the formations accessed by horizontal versus vertical wells. Because of the highly fractured nature of the oil and gas formations for which horizontal drilling is used, drainage does not exist in the traditional sense. While vertical wells typically drain in a radial pattern (at least theoretically), horizontal wells often drain small narrow formations which are fractured. The implied covenant claims, which will be discussed later, include those covenants to prevent drainage and to reasonably develop the lease.

[1] — Pooling and Antidilution Clauses.Many leases have either no pooling clauses or antiquated clauses which

were drafted without consideration of horizontal drilling. Pooling clauses permit a lessee to pool or join the lessor’s acreage with other adjacent acreage to form a spacing unit. An antidilution clause typically requires that unless

2 Williams and Myers, Oil & Gas Law 2006 at Vol. 6 § 901.

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all the lessor’s acreage is drilled, the lessor’s acreage must make up a certain percentage of the pooled unit. Although this concept is easily applied to a vertical wellbore, it does not take into account the fact that a pooled unit for a horizontal wellbore typically covers significantly greater acreage than that for a vertical wellbore and the pooled unit may include numerous leases. Including the minimum lease acreage required under an antidilution clause in a pooled unit for a horizontal wellbore may be difficult, and in some cases impossible, depending on the configuration of the wellbore.

One Texas case has addressed the issues surrounding a typical lease with an antidilution pooling clause and its application to horizontal wells. In Browning Oil Co. v. Luecke,3 the court posed and answered these questions: (i) should an antidilution pooling provision apply to both horizontal and vertical wells (Yes); (ii) do field rules or other regulatory rules trump antidilution provisions (No); (iii) is the rule of capture always applicable to production from an illegally formed unit when a pooling provision is breached (No); and (iv) should the traditional rule of capture apply to horizontal wells (No). In Browning, the court held that the pooling and antidilution clauses apply equally to vertical and horizontal wells. The court also had no sympathy for any arguments that the antidilution clause should be modified by either horizontal field rules or implied covenants. The court noted that the lessee should have gone to the Railroad Commission to amend the rules to permit different size units or the lessee should have tried to negotiate with the lessor to modify the lease.4 As to implied covenants, the court said that it was established law that express covenants trump implied covenants.5

This last holding of the court in Browning is significant. The court held that the rule of capture does not apply to the duty to pay royalties on production from horizontal wells. This rule is in stark contrast with the application of the rule of capture to vertical wells which would attribute 100 percent of the production from a vertical well to the drillsite tract.

3 Browning Oil Co. v. Luecke, 38 S.W.3d 625, 649 (Tex. App.-Austin 2000, pet. den’d).4 Id. at 641.5 Id.

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In summary, the Browning court held: • Strictly comply with any pooling clause;• The reasonably prudent operator standard is only applicable to

implied covenants and does not affect the validity of an express provision such as a pooling clause;

• The term “well” in a lease means a vertical or horizontal well;• Any lease provision selecting specific field rules prevents the selection

of other state regulatory rules; and• When faced with a “bad” lease from a spacing or pooling standpoint,

the lessee’s remedy is to renegotiate its lease or apply to the Railroad Commission or the applicable state regulatory agency for relief.

Lesson: If your lease is drafted for vertical wells, go amend your lease before you drill a horizontal well!

[2] — The Payment of Royalty.After considering what acreage to pool, the next issues a lessee must

face is (i) how to draft a clause to pay royalties or (ii) if leases are already in place, should he proceed to drill with the lease royalty clauses in the prospective pooled acreage?

[a] — Allocation on a Surface Basis. Production from a single lease in any pooled unit is usually allocated

to the lessor or other interest holders in proportion to the number of surface acres such leased tract bears to the total number of acres in the pooled tracts. However, in a horizontal well, should an allocation be on a drainhole basis? A fractured zone basis? Or some other basis? Obviously, a surface allocation presumes consistency (i) of thickness of the reservoir under the tract and (ii) of the porosity and permeability of the rock. However, this presumption does not hold true in many instances. We are all familiar with the unitization of vertical wells where one lease is structurally higher and has greater permeability. Similarly, for reasons previously mentioned, the allocation of production should not necessarily be the same as to all acreage under the tracts where a horizontal well is drilled. A prudent drafter would draft a lease after consulting with a knowledgeable reservoir engineer about the prospective drill tracts.

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[b] — Risks of Unclear Lease Allocation. Typically, in the case of a vertical well, it is fair to have the owner of

the tract where the well is located receive all the revenues from that well (the “non-apportionment” rule).6 The remedy of an adjacent tract owner for drainage is to drill his own well. Such a rule obviously does not work for a horizontal well because the horizontal wellbore underlies or traverses multiple tracts. For that reason, a prudent lessee should cover the allocation of royalty revenues for horizontal wells in its lease or modify the lease and obtain a royalty sharing formula.7

The court in Browning held that royalties are normally due to the drillsite tract lessor upon whose lands the well is located and to lands with which the drillsite tract is legally pooled.8 Where the allowable for a unit was based on the inclusion of non-drill site acreage mistakenly claimed as owned by the producer/driller, the court permitted the recovery of monies by the owner of the tract mistakenly pooled. However, the Browning court modified the rules as to the payment of royalties for a horizontal well. The court said that the rule of capture should not apply because production was accruing from a wellbore that was not entirely bottomed on the drillsite and each horizontal drainhole tract contributes to production. Therefore, royalty is due on the amount of production that was attributable to each tract with reasonable probability. The obvious problem for any lessee is inconsistent allocation of the amount of production attributable to the drillsite tract and any other tract from which the horizontal wellbore produces.9 California courts have held that the lessee is only required to pay royalty to the surface owner/lessor for oil and gas produced from the lessor’s tract as the lease only requires royalty

6 Japhel v. McRae, 276 S.W. 699 (Tex. Comm’n App. 1925).7 Humble Oil & Ref. Co. v. West, 508 S.W.2d 812 (Tex. 1974); Pauley v. Faucett, 124 Cal. App. 2d 406, 269 P.2d 89 (1954); Richter v. Adams, 43 Cal. App. 2d 184, 110, P.2d, 486 (1941).8 Id. at 645; see also, Southeastern Pipe Line Co. v. Tichacek, 997 S.W.2d 166, 170 (Tex. 1999)(bad faith pooling will not extend royalty on production to non-drill offsite leases), but see, Pan American Petroleum Corp. v. Candelaria, 403 F.2d 351 (10 Cir. 1968); see also Nunez v. Wainoco, Oil & Gas Co., 488 S.W.2d 953 (La. 1986).9 See Humble Oil & Ref. Co. v. West, infra.

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to be paid on oil and gas produced from the lessor’s lands, not some other lands from the lessor’s lands.10 An imprudent producer will bear the risk of having the burden of proving from which tracts the production comes and perhaps to account to all owners for such production under the “confusion of goods” doctrine.

[3] — Implied Covenants.The traditional implied covenants of an oil and gas lease, which are

recognized in various forms by different states, should not change. This developing technology (i) could affect the duties of the lessee to explore or develop where states impose such a duty and (ii) where new technology can be applied, certainly could affect the definition of what would constitute a reasonable prudent operator’s conduct.

The prudent operator rule states that the lessee must develop the lease with reasonable diligence and act as an ordinary prudent and diligent operator would to carry out the purposes of the oil and gas lease.11 The prudent operator test does also focus on what is reasonable for the lessee as well as stated in Trust Co. of Chicago v. Samedan Oil Corp.12 Most states place the burden of proof of establishing a breach of the prudent operator standard on the lessor (Texas, Wyoming, New Mexico, Colorado and Montana) while Arkansas and Oklahoma have a shifting burden.

In addition to the prudent operator rule, the case law has developed several other basic implied covenants that exist in every oil and gas lease unless negated by a specific lease provision. These implied covenants include:

to develop the premises, including the covenants to drill a well and pursue reasonable further development;

10 Pauley v. Faucett, 124 Cal. App. 2d 406, 269 P.2d 89 (1954); Richter v. Adams, 43 Cal. App. 2d 184, 110 P.2d, 486 (1941).11 Brewster v. Lanyon Zinc Co., 140 F. 801 (8th Cir. 1905); Clifton v. Koontz, 325 S.W.2d 684 (Tex. 1959); Amoco Prod. Co. v. Alexander, 622 S.W.2d 563 (Tex. 1981).12 Trust Co. of Chicago v. Samedan Oil Corp., 192 F.2d 282 (10 Cir. 1951), Louisiana, Ft. La. Stat. Ann. § 31.22 (West 1989).

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to protect the leased estate, including to protect against drainage; and

to manage and administer the lease including the duties to market the product, to operate with reasonable care, to use modern methods of production and to seek favorable administrative actions.

There are three of these covenants of particular interest—the duty to protect against drainage, the duty to develop and the duty to seek administrative relief.

[a]— Implied Duty to Protect Against Drainage. The duty to protect against drainage is both well specific and field wide.13

The implied covenant can extend to field wide drainage in the case of “down dip” or “updip” leases owned by the same operator.14 Courts balance the rights of the lessor and lessee and acknowledge the right of the lessee to a reasonable expectation of profit after administering, drilling, developing, maintaining, producing and marketing the product.15 The key issue concerning the drainage covenant is that in some court’s eyes, the drainage must be “substantial” and the circumstances are such that a reasonably prudent operator would have acted to prevent such drainage.16 Given the vagaries of production from fractured formations such as (i) are they oil or gas bearing?, (ii) how extensive are the formations and the fractures?, and (iii) is there a reasonable expectation for profit? This covenant is a testifying expert’s dream (especially in fractured formations) and should be difficult for a lessor to win. The burden of proof of issue and the attitude of the courts and jury pool will be critical in a drainage case.17

13 Amoco Prod. Co. v. Alexander, 622 S.W.2d 563 (Tex. 1981).14 Id.15 Id.16 Shell Oil Co. v. Stansbury, 410 S.W.2d 187 (Tex. 1967).17 Blake v. Texas Co., 123 F. Supp. 73 (D.C. Okla. 1954); Nolan v. Thomas, 309 S.W.2d 727 (Ark. 1958); Sonat Exploration Co. v. Superior Oil Co., 710 P.2d 221 (Wyo. 1985); U.V. Indus., Inc. v. Danielson, 602 P.2d 571 (Mont. 1979); Clayton v. Atlantic Refining Co., 150 F. Supp. 9 (D.C. N.M. 1957); Clovis v. Pacific Northwest Pipeline Corp., 345 P.2d 729 (Colo. 1959).

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In any drainage case, another area of litigation risk is the calculation of damages. There is the obvious damage of lost production. However, plaintiffs’ attorneys love “con-torts” with their ability to potentially recover punitive damages. Texas courts have closed the door to tort claims even where a breach of a lease or implied covenant is “malicious, intentional, or capricious,” unless a specific tort can be pled. They also reject tort claims such as the duty of good faith and fair dealing without a showing of an independent tort injury separate from the contract claim.18 Texas courts also hold that “when a contract spells out the parties respective rights and duties” the contract, and not common law negligence, governs.19 However, not all other courts have taken the same approach.20

[b] — Implied Duty to Develop. The implied duty to develop is a critical covenant in many areas,

such as the Barnett Shale where leases are held by production at other producing intervals. In analyzing this covenant, courts will look at various circumstances such as surrounding development, reasonable expectation of profit, lease size, passage of time or delay, technological developments, spacing, administrative actions, seismic or other prospecting efforts in the area, the interest of other potential lessees, and any demand for development. While the case law is developing, the failure to develop may be excused – not just for the lack of expectation for reasonable profit, it may also be excused where sufficient acreage cannot be aggregated to constitute a legal drilling unit under applicable state law.21 Experience has shown that factually the issue of additional development can be tricky when applying the “reasonable expectation of profit” test. For example, within the Barnett Shale, production varies dramatically and production techniques that worked in one area have

18 Continental Resources, Inc., PXP Gulf Coast, Inc. and PXP Louisiana, LLC, 2006 WL 2865509 (W.D. Okla. 2006).19 Id. at 22; DeWitt Co. Elec. Coop., Inc. v. Parks, 1 S.W.3d 96, 105 (Tex. 1999), Jim Walters Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986).20 Irgens v. Mobil Oil Corp., 442 N.W.2d 223 (N.D. 1989).21 U.V. Indus., Inc. v. Danielson, 602 P.2d 571 (Mont. 1979).

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not worked in another. Also, in the area of coalbed methane (“CBM”), vertical or horizontal wells might be appropriate in a particular situation and further advanced technology such as the “Z Pinnate” technology might be critical to development and profitability.22

[c] — Administrative Relief—Pooling. In regard to administrative action relating to development, certainly there

should be a duty to attempt to pool acreage including the duty to farmout or farm-in, voluntary pool, etc.23

In forming a unit or in pooling, courts have held that there is a duty to act in good faith. Many factors including the intent of the lessee (subjective or objective), the existence of a geological basis, and term of the lease are considered.24 As to the creation of a horizontal unit, the key question should be, “is there a reasonable basis for a horizontal unit?” If there is, then any

22 CDX’s patented technology, the Z-PINNATE® Horizontal Drilling and Completion System, accelerates hydrocarbon recovery utilizing substantially fewer surface penetrations, thereby resulting in significant economic benefit and a positive environmental effect. The dual-well, multilateral drainage network pattern and other technologies that make up the Z-Pinnate System allow access to over 1,200 acres of coal bed from a single well site. By contrast, traditional “drill and frac” recovery methods typically require one well for every 80 acres of coal. Economies of scale are achieved when 16 conventional wells are replaced by a single 1,200-acre drainage network. Increased exposure to the coal bed through the drainage network provides for greater production at accelerated rates. In fact, the system enables recoveries of up to 80 to 90 percent of the gas in place over an eight- to nine-year period. As much as 75 percent of the ultimate recovery occurs in less than five years. These accelerated recoveries provide economic benefits including an accelerated cash flow stream.

The Z-Pinnate System also overcomes problems encountered using conventional drilling techniques. Utilizing a dual-well configuration, the combination of vertical and intersecting horizontal wellbores result in the ability to achieve under balanced drilling conditions which are critical in the development of unconventional resources. Additional advantages of the system include more uniform drainage increasing safety associated with mining operations and efficient downhole water separation.23 See Sonat Exploration Co. v. Superior Oil Co., 710 P.2d 221 (Wyo. 1985); Felmont Oil Corp. v. Pan Am. Petroleum Corp., 334 S.W.2d 449 (Tex. Civ. App. 1960).24 Elliott v. Davis, 553 S.W.2d 223 (Tex. Civ. App. 1977), Smith v. Rogers, 702 S.W.2d 425 (Ky. 1986), Vela v. Pennzoil Producing Co., 723 S.W.2d 199 (Tex. App.-San Antonio, 1986).

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unit should withstand legal challenge. In addition, the commencement of the drilling of a horizontal well on an adjacent tract which is pooled with a leased property will hold a lease which would have otherwise expired after the well was commenced but prior to the penetration of the expiring lease premises.25

[4] — Solution.The best answer to avoid litigation relating to the application of traditional

lease provisions to horizontal wells is obviously to draft a lease that deals with the antidilution issues, and the allocation and payment of production from horizontal wells. No method of allocation of royalties is perfect. Experts can and will disagree. Some argue that the length of a horizontal wellbore is irrelevant. However, our goal is to draft a clause that can keep the experts from being employed to testify in a case where the proper allocation of royalties in a horizontal well is in dispute. So long as the lessee can draft a common lease allocation clause across the unit, show a legitimate business reason for pooling acreage based on geology or a land position and the royalty burden is the same, any pooling actions should be defendable and further, why should the lessors care?

§ 14.03. Surface Lease Issues and Trespass.[1] — Authority to Drill.Who can authorize the use of one estate to drill under another? Without

the permission of the surface owner, the surface of a tract may not be used for oil and gas operations on adjacent tracts.26

The surface owner of a tract has the right to grant an operator a drillsite to drill a well that produces from an adjacent tract.27 However, if any surface use would interfere with the mineral owner’s rights to develop the lands underlying the surface such as prohibiting the drilling of an offset well, such

25 Manzano Oil Corp. v. Chesapeake Operating, Inc., 178 F. Supp. 2d 1217 (D.N.M. 2001).26 Robinson v. Robbins Petroleum Corp., 501 S.W.2d 865 (Tex. 1973).27 Grubstake Inv. Ass’n v. Coyle, 269 S.W. 854 (Tex. Civ. App. 1925, writ dismissed) and Humble Oil & Refining Co. v. L&G Oil Co., 259 S.W.2d 933 (Austin App. 1953, writ ref.’d n.r.e).

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use may be prohibited.28 However, there must be a chance of meaningful interference with the mineral owner’s right to develop and an “I might drill” claim by the mineral owner will not suffice. The mineral owner must show that he will need the surface at the same time and place in which it is being used to drill the adjacent tract.29

[2] — Issues Surrounding Horizontal Wells and Trespass.The international drilling of a directional well without authority should

be considered bad faith unless mitigating circumstances are shown.30 No matter where the surface location of a well is, simply put, it would be

trespass to drill a well which is bottomed on, or has a drainhole below, the land of another. If a well bore traverses a tract but does not produce from it, absent interference with the mineral owner’s rights to produce, the surface owner can grant an easement.31 When creating a regulatory spacing unit or a pooled unit for a horizontal well, the lessee/operator should be careful not to include acreage that is owned or leased by a third party. In a case where the allowable for a unit was based on the inclusion of non-drill site acreage mistakenly claimed as owned by the producer/driller, the court permitted the recovery of monies by the owner of the tract mistakenly pooled.32 Courts have differed on the right of a lease (i) to use the surface to drill onto and produce from an adjacent tract or (ii) to permit another to drill.

In many states, the maximum allowable for a well may be calculated based on the acreage included in the unit. In most of the gas fields in Texas,

28 Mid-Tex Petroleum Co. v. Colcord, 235 S.W. 718, (Ft. Worth-App. – 1921, no writ.).29 Humble Oil & Refining Co. v. L&G Oil Co., 259 S.W.2d 933, (Austin-App. 1953, writ ref.’d, n.r.e.); and Atlantic Refining Co. v. Bright & Schiff, 321 S.W.2d 167 (San Antonio-App. 1959, writ ref.’d, n.r.e.).30 For a discussion of bad faith trespass, see Williams and Meyers, § 226.3.31 Humble Oil & Refinery Co. v. L&G Oil Co., 259 S.W.2 933 (Austin App. 1953, writ ref.’d n.r.e.); but see, Chevron Oil Co. v. Howell, 407 S.W.2d 525 (Tex. Civ. App.-Dallas, 1966, writ ref.’d n.r.e.); see also Atlantic Refining Co. v. Bright & Schiff, 321 S.W.2d, 167 (San Antonio-App. 1959, writ ref.’d. n.r.e.); Grubstake Inv. Ass’n v. Coyle, 269 S.W. 854 (Tex. Civ. App.-San Antonio 1925, writ dismissed).32 Pan American Petroleum Corp. v. Candelaria, 403 F.2d 351 (10th Cir. 1968); see also Nunez v. Wainoco Oil & Gas Co., 488 S.W.2d 953 (La. 1986), but see, Hancock Co. v. Meeker-Garner Oil Co., 118 Cal. App. 2d 379, 257 P.2d 988 (1953).

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including the Newark, East (Barnett Shale) Field, the allocation formula is suspended and a horizontal well will be allowed to produce at a maximum rate rather than be restricted to an allowable. However, even under such circumstances a lessee should still be cautious when creating a regulatory unit in the event that market conditions change and allowables are reinstated.

One question—if a court considers a subsurface passage by a wellbore to be a trespass, what would be the damages as no minerals should be produced or “taken” if the well merely crosses the tract?33 In regard to a tract which was force pooled, a producer drilling an authorized horizontal well does not commit trespass by drilling through an owner’s subsurface formation.34 However, the taking of core samples or obtaining other sub-surface information would not be permitted.35 As concerns the surface, the future desire by an oil and gas lessee to use the surface is not enough to block use,36 and the need must be more immediate.37 The grant in the lease of the “exclusive” right to develop the minerals or “drill and develop” the minerals should not alter the foregoing analysis.

It should be noted that in the case of severed minerals, the use of the surface on one tract to develop minerals on other tracts may not be permitted (the timing of the severance vs. use can be critical).38 However, the lease of an undivided mineral owner in two tracts may permit the use of one tract to benefit the others.39

§ 14.04. Regulatory Issues.There should be several fundamental premises considered in the

development of regulatory policies for horizontal wells. First, dual well

33 See also, Chevron Oil Co. v. Howell, 407 S.W.2d, 525 (Tex. Civ. App.-Dallas, 1966, writ. ref.’d. n.r.e.)(granting an injunction due to the damages to the sub-surface when a well is drilled).34 Continental Resources, Inc. v. Farrar Oil Co., 559 N.W.2d 841 (N.D. 1997).35 Phillips Petroleum Co. v. Cowden, 241 F.2d, 586 (5th Cir. 1957).36 See Humble at p. 938.37 See Atlantic supra.38 Robinson v. Robbins Petroleum Corp., 501 S.W.2d, 865 (Tex. 1973).39 TDC Eng’g, Inc. v. Dunlap, 686 S.W.2d 346 (Tex. Civ. App.-Eastland 1985, writ ref.’d. n.r.e.).

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systems that only result in production from a single wellbore should not create spacing violations as there is a “single” production well. Correlative rights of all interest owners must be respected and, in particular, royalty owners must be protected by permitting the development and draining of all tracts. Spacing requirements for horizontal wells must be flexible as horizontal wells will neither drain perfectly “cylindrically” or obviously “radially.” Further, flexibility is required because horizontal drilling can be used to connect and produce from multiple lenticular sands (i.e., several reservoirs), fractured intervals in tight sandstone or limestone, or coal seams of varying thickness. Finally, spacing rules should be written to prevent “waste” so that overlapping drainage will occur if every permitted well is drilled.

Regulatory schemes should encourage efficient and economic production, prevent waste, and protect correlative rights. They should minimize gamesmanship and give prompt administrative relief. We need to avoid “square” or round thinking that the correct unit drains radially from a square unit. A larger horizontal displacement of a well dictates a larger unit due to the greater production and acreage effectively drained.

§ 14.05. Conclusions / Comments.As to royalty payments, all interests where a horizontal drainhole is

actually draining a tract must be pooled or properly leased to avoid the real risk of paying each interest owner, including the surface tract, as if it were a drillsite tract. Other courts might not follow the analysis of the Browning court. Also, note the contrast between tests to calculate royalty in the case of trespass or confusion of goods in Humble. v. West of “reasonable certainty” with the test in Browning Oil Co. v. Luecke of “reasonable probability.”

Another clear source of conflict seen in the Browning case is the use of an antidilution clause. The parties failed to express whether the clause applied to vertical wells or horizontal wells. With the increased use of horizontal drilling, it is no longer safe to use a broad clause that fails to distinguish between horizontal or vertical drilling. This omission is easily remedied by stating the parties’ intentions in the lease. To drill without a clear definition of the party’s rights and obligations will (as seen in Browning) receive little sympathy from the courts.

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In conclusion, a lease drafting tip for lessees—draft a lease that gives you the “exclusive” right to use the premises to drill and produce oil and gas from any location.40 In urban areas or in areas with many small undeveloped tracts, there is significant value in a drill site.

§ 14.06. Sample Clauses.The following sample clauses address spacing, pooling, and continuous

development issues related to horizontal wells. There are also clauses that deal with compensation for the use of a non-producing surface tract to produce from adjacent tracts. Finally, there is an option to purchase the production site when drilling of a horizontal wellbore is completed. Please note the examples below are drafted pursuant to Texas statutes and regulations.

[1] — Pooling.Lessee shall have no right to pool or combine any portion of the Leased

Premises with adjoining lands belonging to third parties who are not signatories to this Lease without first obtaining the prior written consent of Lessor which consent shall not be unreasonably withheld. Lessee may pool as follows:

[a] —Non-Horizontal Wells Located Within 330 Feet of Leased Premises.

If the well is not a Horizontal Well and the bottomhole location of the well is located within 330 feet of the Leased Premises on land adjacent to the Leased Premises, Lessee may pool so long as no less than fifty percent (50%) of the land comprising the pooled unit for such well is from the Leased Premises.

[b] — Horizontal Wells Located On or Partially on Leased Premises.

If the well is a Horizontal Well located all or partially on the Leased Premises, Lessee may pool so long as the land comprising the pooled unit

40 See Humble Oil & Refining Co. v. L&G Oil Co., 259 S.W.2d 933 (Austin App., 1953, writ ref.’d n.r.e.); but see, Hancock Oil Co. v. Meeker-Garner Oil Co., 118 Cal. App. 2d 379, 257 P2d 988 (1953).

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for such well shall include land from the Leased Premises in at least the same percentage as the percentage that the length of the horizontal drainhole displacement of such well located on the Leased Premises bears to the total length of the horizontal drainhole displacement of such well, provided, however, that in any event no less than fifty percent (50%) of the land comprising such pooled unit shall be from the Leased Premises. As used herein, the term “Horizontal Well” means any well that is drilled with one or more horizontal drainholes having a horizontal drainhole displacement of at least 100 feet, provided and so long as such well also constitutes a “horizontal well” as defined in Statewide Rule 86, as promulgated by the Texas Railroad Commission.

[c] — Pooled Unit Size. No pooled unit shall be larger than the minimum number of acres

required to obtain approval of the drilling unit size applicable to a well under the applicable density rules adopted by a governmental authority having jurisdiction, provided, however, and notwithstanding anything contained to the contrary in the preceding clause, for gas wells completed in the Barnett Shale formation, the pooled unit (i) for a well which is not a Horizontal Well may be as large as, but shall not exceed, forty (40) acres and (ii) for Horizontal Wells may be as large as, but shall not exceed, forty (40) acres plus the additional acreage listed in the table in Statewide Spacing Rule 86 of the Railroad Commission of Texas for fields with a density rule of 40 acres or less.

[d] — Effect of Pooling on Leased Premises. Notwithstanding anything to the contrary herein contained, in the event

Lessee exercises its right to pool as provided herein, the commencement of operations for drilling on such pooled unit, the drilling or reworking of a well on such pooled unit, or the production of oil, gas or other minerals from such pooled unit shall serve only to maintain this Lease in force as to the portion of the Leased Premises embraced in such pooled unit; provided, however, if applicable, this Lease may be maintained in force and effect as to remainder of the Leased Premises not included in such pooled unit to the extent specifically provided under other provisions of this Lease.

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[e] — Recordation of Pooled Unit Declaration. In the exercise of its pooling rights hereunder, Lessee shall file of record

a written declaration describing the pooled unit. The effective date of such pooled unit shall be the date of filing. Lessee shall promptly provide Lessor a copy of such recorded written declaration. Lessee may file such declaration at any time while this Lease is in effect and whether before or after production has been established on the pooled unit lands.

[f] — Termination of Pooled Unit. Upon termination of the pooled unit, Lessee must promptly file of record

a written instrument declaring the dissolution of said pooled unit.

[g] — Allocation of Pooled Unit production. In the event of pooling, subject to the clauses in the proviso below, there

shall be allocated to the land covered by this Lease within such pooled unit that proportion of the total production from the producing well applicable to such pooled unit which the number of surface acres in such land covered by this Lease within such pooled unit bears to the total number of surface acres in such pooled unit; provided, however, (i) if less than all oil and gas interests in the lands included in such pooled unit are pooled as a part of such pooled unit, Lessor’s proportionate pooled unit royalty share on production from such pooled unit shall nevertheless be calculated and paid based on one hundred percent (100%) of the production from the well that is applicable to such pooled unit and (ii) if less than all oil and gas interests in any non-drillsite tract (being a tract in the pooled unit on which there is not located a producing well bottomhole or horizontal drainhole applicable to such pooled unit) have been pooled and unitized as a part of such pooled unit, then the allocation of production to the unit shall not be based on surface acres for such non-drill site tract and lessor’s royalty share from the unit shall be calculated as set forth above for other tracts and based on the number of net mineral acres in such non-drillsite tract committed to such pooled unit (as opposed to the gross surface acres of such non-drillsite tract included in such pooled unit). For purposes of Section 4 of this Lease, the term “net mineral acres” means, with respect to any tract, the product of (a) the number

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of gross acres in the tract and (b) the fraction of the oil or gas estate in such tract committed to such pooled unit. If any non-unitized mineral interest in a non-drillsite tract included in the pooled unit is later added to such pooled unit, by amendment, ratification or otherwise, then the allocation provided herein and the royalties payable hereunder shall be adjusted to take into account the additional net mineral acres added to such pooled unit, effective as of the date of amendment or ratification of the unit.

[h] — Outstanding Royalty Interests. If there are royalty interests in Minerals in the Leased Premises that

are owned by parties other than Lessor and if pooling occurs, Lessor makes no warranty or representation that this Lease grants Lessee the power or authority to pool such royalty interests, but in the event of pooling hereunder, Lessor’s royalty on production from the pooled unit shall be calculated and paid as if Lessee had the power, and had exercised the power, to pool such royalty interests, whether or not Lessee in fact has such authority.

[i] — Pooling Rights. Lessee may at any time and from time to time, as to any one or more

stratum or strata, pool and unitize all the Lease Premises (but not less than all) with other land(s) or lease(s) in the immediate vicinity of the Lease Premises in order to form, or from time to time re-form, either before or after operations are commenced, an oil or gas well or wells is completed, or production is obtained, a unit or units not to exceed 40 acres for oil and 160 acres for gas; provided, however, if units larger than the foregoing are permitted or prescribed by the rules or regulations of the Railroad Commission of Texas, or other lawful authority having jurisdiction of such matters, for the drilling or operation of a well at a regular location or for obtaining maximum allowable from any well to be drilled or already drilled, then any such unit may be established or enlarged to conform to the size allowed by such rules or regulations. Notwithstanding anything to the contrary stated herein, a unit for a horizontal well may include (i) the amount of acreage allowed for obtaining a permit to drill a well under the spacing and density provisions in the applicable field or statewide rules for a vertical wellbore, plus the

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additional acreage listed in the tables in Rule 86, or (ii) the amount of acreage allowed for obtaining a full production allowable under the applicable field or statewide rules for a vertical wellbore, plus the additional acreage listed in the tables in Rule 86. The units formed by pooling as to any stratum or strata need not conform in size or area with the unit or units into which the Lease is pooled or combined as to any other strata or stratum. No pooling, or unitization shall be effective unless Lessee executes and places of record in the county in which the Lease Premises are located a written instrument or instruments designating the unit or units it has elected to form. Lessee shall promptly send to Lessor a true and correct copy of each recorded instrument. Each unit shall be effective as to all parties hereto, their heirs, successors and assigns, irrespective of whether or not the unit is likewise effective as to all other owners of surface, mineral royalty or other rights in land included in such unit. Production or operations on any part of the pooled unit or units shall be treated for all purposes, except the payment of royalty, as production or operations on the Lease Premises, whether or not the well or wells are located on the Lease Premises. The entire acreage constituting such unit or units shall be treated, except for the payment of royalties on production from the pooled unit, as if it were included in this Lease. For the purpose of computing royalties to which owners of royalties and payments out of production and each of them shall be entitled on production of oil and gas from each pooled unit, there shall be allocated to the land covered by this Lease and included in said unit (or to each separate tract within the unit if this Lease covers separate tracts within the unit) a pro rata portion of the oil or gas produced from the unit after deducting that used for operations on the unit. Such allocation shall be on an acreage basis—that is, there shall be allocated to the acreage covered by this Lease and included in the pooled unit (or to each separate tract within the unit if this Lease covers separate tracts within the unit) that pro rata portion of the oil or gas produced from the unit which the number of surface acres covered by this Lease (or in each separate tract) and included in the unit bears to the total number of surface acres included in the unit. As used in this paragraph, “separate tract” means any tract with royalty ownership differing, now or hereafter, whether as to parties or amounts, from that as to any other part of the Lease Premises.

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[2] — Continuous Development.[a] — Extension of Primary Term.

Notwithstanding any provision contained herein to the contrary, whether or not Minerals are being produced on the Leased Premises or on lands pooled therewith at the expiration of the Primary Term, if Lessee (i) is engaged at the expiration of the Primary Term in drilling or reworking operations on the Leased Premises or lands pooled therewith or (ii) has completed a well either as a dry hole or as a producer on the Leased Premises or on lands pooled therewith within sixty (60) days before the expiration of the Primary Term, the Primary Term of this Lease shall be extended and remain in full force and effect as to all of the Leased Premises for so long as operations for drilling are conducted on the Leased Premises or lands pooled therewith with no more than sixty (60) days elapsing between the completion or abandonment of one well and the commencement of actual drilling operations of another well. Upon the expiration of such extended Primary Term, this Lease shall terminate as to: (1) all lands which are not included within a proration unit established by Lessee and approved by the Railroad Commission of Texas applicable to each producing well located on the Leased Premises or on lands pooled therewith (it being understood that each such proration unit shall contain no more acreage than that set forth for pooled units in Section _____. above and, in the event of pooling, that each such proration unit shall cover the same acreage as does the pooled unit that is applicable to such proration unit’s well) and (2) all depths and horizons 100’ below the stratigraphic equivalent of the deepest depth producing Minerals, or capable of producing Minerals, in each well which is included within the boundaries of such proration unit. After the expiration of the Primary Term, Lessee shall release all of the Leased Premises not otherwise held hereunder.

[b] — Sixty (60) Day Rework. If production should thereafter cease as to acreage included in a proration

unit or pooled unit, this Lease will terminate as to such acreage unless Lessee commences reworking or additional drilling operations on such acreage within sixty (60) days thereafter and continues such reworking or additional

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drilling operations until commercial production in paying quantities of Minerals is restored thereon, provided that if more than sixty (60) days pass between the abandonment of such well and the commencement of actual drilling operations for an additional well, or more than sixty (60) days pass since the commencement of reworking operations without the restoration of such commercial production, the Lease shall terminate as to the applicable proration unit and pooled unit.

[c] — Release and Survivor of Lessee Obligations. At any time or times that this Lease terminates as to all or any portion of

the acreage of the Leased Premises, Lessee shall promptly execute and record in the office of the County Clerk in the County where the Leased Premises are located, a proper release of such terminated acreage and all depths thereunder and shall furnish executed counterparts of each such release to Lessor at the address shown in Paragraph 18 hereof. All obligations of Lessee contained in this Lease that are to be performed by Lessee regardless of the execution and delivery of releases of this Lease by Lessee shall continue in force and effect and survive the execution and delivery of such releases.

[d] — Definition. “Completion of drilling” as used herein means, as to dry holes, the date

Lessee releases the drilling rig used to drill such well or the date such rig is moved off of the location, whichever date occurs first, and as to producing wells, the date Lessee has run casing and production casing or tubing and has perforated and/or tested the well, except for producing wells which are “fraced” by Lessee, “completion of drilling” shall mean the earlier to occur of (i) 30 days from the date Lessee releases the drilling rig used to drill such well or the date such rig is moved off of the location, whichever date occurs first, or (ii) the date Lessee completes such “fracing” operations and conducts a flow test on the well. “Commencement of drilling” as used herein means the date Lessee commences actual drilling with rotary drilling tools of a suitable size necessary to reach the object depth.

After the end of the Primary Term, Lessee shall continuously develop the Lease Premises, with no more than one hundred eighty (180) days

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(commencing on the day next following the expiration of the Primary Term) elapsing between the completion or abandonment of one well and the commencement of operations on the next well; provided however, if this Lease is then being maintained in force solely by the payment of shut-in royalty under paragraph 2(c) above, Lessee shall not be obligated to conduct continuous development operations until such time as the shut-in gas well is put into production, at which time the 180-day period shall commence. In the continuous development program, Lessor shall be entitled to accumulate and later use time saved between wells (that is, where the elapsed time between wells is less than one hundred eighty (180) days); however, it shall be Lessee’s duty to inform Lessor of the amount of time saved and to advise Lessor prior to using the accumulated time that Lessee plans to use the same. Failure to continuously develop in accordance with this paragraph 2(e) shall result in the termination of this Lease, save and except as to any acreage in the Lease Premises in as nearly the form of a square as possible around each productive well or wells (except for horizontal wells for which the acreage retained may be in a form other than a square and if the surface location for a horizontal well is not located on the Lease Premises or land pooled therewith, then “well” for purposes of the retained acreage, shall mean the portion of the wellbore between the penetration point and terminus point as defined in Statewide Rule 86 of the Railroad Commission of Texas) previously completed by Lessee on the Lease Premises (whether or not such well is currently producing). The retained acreage (“Retained Tract”) around each well may not exceed forty (40) acres; provided, however, if units larger than the foregoing are permitted or prescribed by the rules or regulations at the Railroad Commission of Texas, or other lawful authority having jurisdiction of such matters, for the drilling or operation of a well at a regular location or for obtaining maximum allowable from any well to be drilled or already drilled, then any such Retained Tract may be established or enlarged to conform to the size allowed by such rules or regulations. This Lease shall be preserved in effect as to the Retained Tract only to a depth of one hundred (100) feet below the stratigraphic equivalent of the base of the deepest formation drilled on each such Retained Tract. Lessee agrees to execute and deliver to Lessor a release in recordable form evidencing the

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termination of the Lease as to the acreage and depth not retained under this Lease as above determined. After the end of the Continuous Development Program, Lessee must file in the county records, a document, and furnish to Lessor a copy thereof, designating each Retained Tract and the retained depths thereunder, and releasing all other acreage and depths. A gas well that thereafter becomes an oil well will hold only the acreage permitted for an oil well and Lessee must file in the county records a re-designation of the tract as an oil well tract. Notwithstanding anything to the contrary stated herein, a Retained Tract for a horizontal well may include (i) the amount of acreage allowed for obtaining a permit to drill a well under the spacing and density provisions in the applicable field or statewide rules of the Railroad Commission of Texas, or other lawful authority having jurisdiction of such matters, for a vertical wellbore, plus the additional acreage listed in the tables in Rule 86 or (ii) the amount of acreage allowed for obtaining a full production allowable under the applicable field or statewide rules of the Railroad Commission of Texas, or other lawful authority having jurisdiction of such matters, for a vertical wellbore, plus the additional acreage listed in the tables in Rule 86. As used in this Lease, the term “horizontal well” means one that meets the definition of a “horizontal drainhole well” under Statewide Rule 86 of the Texas Railroad Commission, and a “vertical well” is a well that is not a horizontal well. When production in paying quantities ceases from any Retained Tract hereunder, and the Lease is not otherwise maintained under the provisions hereof as to such Retained Tract the Lease shall terminate as to such Retained Tract and Lessee shall execute and deliver to Lessor a release in recordable form, releasing the acreage in the Retained Tract. Notwithstanding the termination of this Lease as to any acreage in the Lease Premises under this paragraph 2(e), Lessee shall retain the right of ingress and egress over any released acreage as reasonably necessary to drill, develop, produce and operate any Retained Tract or Tracts and to process, transport and market any production therefrom. No release of acreage covered by the Lease will cause Lessee to relocate or rebuild any facilities or pipelines located on the released acreage and being used for the benefit of the Retained Tracts. Lessee shall have the right to use such released acreage without charge and shall have the right of ingress and egress thereto.

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§ 14.07. Horizontal Well – ORRI for Production.[1] — Surface Drillsites from Lands Not Pooled with Surface Tracts.(A) In addition to the right to use the surface of the Lease Premises

for purposes set forth in this Lease, Lessee is herby granted the exclusive right to drill directional and horizontal oil and gas wells from locations on the surface of the Lease Premises and to drill through the subsurface of the Lease Premises to bottom hole or terminus locations on lands rather than the Lease Premises and to operate, produce, and maintain such wells and to construct, operate and maintain equipment reasonably necessary for such operations, including the right to store and transport such oil, gas and associated hydrocarbons across the Lease Premises, together with the right of ingress and egress across the Lease Premises for all such operations. This surface use shall include one or more drillsite locations of up to 3 acres in size (a “Drillsite Pad”) and up to an additional 3 acres for two frac water source and flowback pits (“Frac Pits”) to service each Drillsite Pad, and it shall further include the right to locate a natural gas central facility of up to 2 acres in size for the treating, compression and dehydration of natural gas produced from on and off of the Lease Premises (the “Central Facility”). It is contemplated that multiple horizontal wells may be drilled from each such Drillsite Pad. As consideration for the rights granted in this paragraph, Lessor shall be entitled to and overriding royalty of _ percent of 8/8ths of the production from each well with a surface location on the Lease Premises which overriding royalty shall be proportionately reduced based on the amount of acreage from the Lease Premises included in a pooled unit for the production from such well as hereinafter set forth:

In the event that the well produces from lands other than the Lease Premises and no portion of the Lease Premises is included in a pooled unit from which such well, the Lessor will be entitled to receive 100 percent of the overriding royalty.

In the event that well produces from a pooled unit which includes a portion of the Lease Premises, the overriding royalty shall be proportionately reduced based on the amount of acreage from the Lease Premises included in the pooled unit. The amount of reduction shall be a fraction with the

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denominator being the total amount of acreage in the pooled unit and the numerator being the amount of acreage from the Lease Premises within the pooled unit. For example, if the well is producing form a pooled unit comprising a total of 160 acres, of which 10 acres is from the Lease Premises, the overriding royalty will be reduced by 10 ÷160 = 6.25 percent. Reduction of the _ percent overriding royalty by 6.25 percent results in an overriding royalty of _ percent to the Lessor.

In the event the well is a Lease well bottomed entirely on the Lease Premises and not included in a pooled unit. Lessor shall receive none of the overriding royalty

Lessor shall convey the overriding royalty set forth above to Lessor within sixty (60) days from the date of the first production from each well. The overriding royalty assignment shall be effective from the date of the first production, limited to the production from the well and shall be free and clear of all costs and expenses of production save and except applicable taxes.

It is intended that the overriding royalty for surface site provided by this paragraph shall be owned by Lessor as owner of the surface estate of the Lease Premises.

Lessor and Lessee shall collaborate on the desired locations of the Drillsite Pad(s), Frac Pits and Central Facility. The final location of the Drillsite Pad(s), Frac Pits and Central Facility shall be subject to Lessor’s approval which approval shall not be unreasonably withheld. Lessor and Lessee shall sign and file of record a document with a surveyed plat setting forth said approved locations.

Notwithstanding the expiration of the term of this Lease, the right to use of the surface granted herein shall survive for a period of five (5) years from the effective date of this Lease and as long thereafter is a production, or drilling or reworking operations on any well surfaced on the Lease Premises with no cessation of more than 120 consecutive days. It is not the intent of Lessor or Lessee that any provision herein violate any applicable law regarding the rule against perpetuities, the suspension of the absolute power of alienation, or other rules regarding the vesting or duration of estates, and Lesson’s right to future assignments of an overriding royalty shall be constructed as not violating such rule to the extent the same can be

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construed consistent with the intent of the parties. In event, however, that any provision hereof is determined to violate such rule, then such provision shall nevertheless be effective for the maximum period (but not longer than the maximum period) permitted by such rule that will result in no violation. To the extent such maximum period is permitted to be determined by reference to “lives in being,” Lessor and Lessee agree that “lives in being” shall refer to the lifetime of the last to die of the now living lineal descendants of the late Senator Prescott Bush (paternal grandfather of the current President). All rights to use of the surface of the Lease Premises granted herein are freely assignable in whole or in part by Lessee.

A release of this Lease, in whole or in part, will not terminate the right to use of the surface granted herein.

[2] — Surface Damages.Lessee shall pay to the owner of the surface estate (Surface Owner)

$_____ each time that a drilling rig is moved onto the Lease Premise. This payment shall be as consideration for the right to work space for the drilling and completion operation, including the Drillsite Pad and Frac Pits. Once the drilling rig is on location, this payment will include the drilling, completion and facture stimulation of multiple wells. These payments are only required for the movement of drilling rig onto the Lease Premises and are not required for movement of workover rigs and other equipment onto the Lease Premises.

[3] — Purchase Option; Purchase of Surface Sites.(A) At the expiration of three years from the expiration of the

Primary Term (Surface Purchase Date), Lessee shall purchase the surface of the lands Lessee desires to permanently use for Drillsite Pads, Frac Pits, and a Central Facility. Lessee shall prepare a survey of lands and shall deliver a copy of such survey to the owner of the surface estate of the Lease Premises (Surface Owner) on or before the Surface Purchase Date. Within

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30 days following the Surface Purchase Date, Lessee and Surface Owner shall each select a State—Certified Real Estate Appraiser who shall attempt to agree on an appraised value of the surveyed land to be purchased on or before 60 days from the Surface Purchase Date. If such appraisers are able to agree on the appraised value, then Lessee shall purchase the surface of such lands by tendering the agreed appraised value to surface owners on or before 90 days from the Surface Purchase Date. Surface Owner shall deliver a warranty deed to the surface of such lands upon tender of the appraised value by Lessee.

(B) In the event the appraisers chosen by Lessee and surface owner are unable to agree on the appraised value within 60 days from the Surface Purchase Date, then Lessee and the surface owner shall direct the two appraisers to select a third State- Certified Real Estate Appraiser to appraise the property. The appraised value of the Property shall be determined by the average of the three appraised values. Lessee shall purchase the surface lands by tendering such appraised value to surface owner on or before 30 days from the date of submission of the appraised value by the third appraiser. Surface Owner shall deliver a warranty deed to the surface of such lands upon tender of the appraised value by Lessee

(C) Notwithstanding the purchase of a portion of the surface of the Lease Premises, Lessee shall retain the right to drill directional and horizontal oil and gas wells from locations on the surface of the Lease Premises and to drill through the subsurface of the Lease Premises and the right to store and transport such oil, gas and associated hydrocarbons across the Lease Premises, together with the right of ingress and egress across the Lease Premises for all such drilling, production, and transportation operations. Such rights shall remain in effect for the term set forth in Paragraph __ (E).

§ 14.08. Bibliography.J. Robert Goldsmith, Jr., “Pooling for Horizontal Wells,” State Bar Advanced Oil, Gas and Mineral Law Journal (1992).

Christy M. Schweikhardt, Note, “Horizontal Perspective: Texas Oil & Gas Law in Light of Horizontal Drilling Technology,” 34 S. Tex. L. Rev. 329, 336 (1993).

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Ernest E. Smith & Jacqueline Lang Weaver, Texas Law of Oil and Gas § 4,7l.

Patricia A. Moore, “Horizontal Drilling—New Technology Bringing New Legal and Regulatory Challenges,” 36 Rocky Mountain Min. L. Inst. §§ 15.01.

Dennis, “Browning Oil Co. v. Luecke: Has Texas Illuminated a Dark Distinction Between Vertical and Horizontal Drilling,” 34 St. Mary’s L.J. 215 (2002).

Joy Stevens, “Hey, That’s my Dirt! Subsurface Trespass in Horizontally Drilled Wells,” 45 Landman 47-65 (May/June 2000).

Owen L. Anderson, Geophysical “Trespass” Revisited,” 5 Tex. Wesleyan L. Rev. 137 (1999); Barbara F. Fullmer and Lawrence Ostrovsky, “No Entry Exploration: High-Tech Trespass or Lawful Scrutiny,” 45 Rocky Mtn. Min. L. Inst. 8-1 (1999)(aerial surveys).

Laura H. Burney and Norman J. Hyne, “Hydraulic Fracturing: Stimulating Your Well or Trespassing Theirs?” 44 Rocky Mtn. Min. L. Inst. 19-1 (1998).

Blomquist, “Geophysical Trespass? The Guessing Game Created by the Awkward Combination of Outmoded Laws and Soaring Technology,” 48 Baylor L. Rev. 21 (1996).

Ragsdale, “Hydraulic Fracturing: The Stealthy Subsurface Trespass,” 28 Tulsa L.J. 311 (1993).

Dau and Ratliff, “Pipeline and Lender Liability for Slant-Hole Production,” 43 Tex. L. Rev. 772 (1965).

Nix, “What is the Proper Remedy in the Slant-Hole Suit?” 18 Southwestern L.J. 486 (1964).

“Suing a Slant-Driller for Subsurface Trespass or Drainage,” 15 Stan. L. Rev. 665 (1963).

Morrow, “Subsurface Trespass by Deviated Well,” 1 Houston L. Rev. 29 (1963).

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Smith, “Rights and Liabilities on Subsurface Operations,” Southwestern Legal Foundation, Eighth Annual Institute on Oil and Gas Law and Taxation 1 (1957).

Comment, “Oil and Gas: Liability and Damages for Underground Trespass,” 27 Cal. L. Rev. 192 (1939);

Kline, “Subsurface Trespassing,” 5 J. Marshall L.Q. 30 (1939).

Storey, “Oil and Gas-Deviation of Wells from the Vertical—Liability for Subsurface Trespass,” 16 Tex. L. Rev. 543 (1938).

O’Brien, “Tax Effects of Illegal Slant-Hole Drilling,” P-H, Oil and Gas Texas ¶ 4024 (1965).

§ 14.08

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