DRAINAGE AND DEVELOPMENT CLAIMS IN TEXAS: Wells A … · 2013-10-17 · DRAINAGE AND DEVELOPMENT CLAIMS IN TEXAS: Wells A Lessee Must Drill Presented by: T. NEAL NOBLES Watt Beckworth

DRAINAGE AND DEVELOPMENT CLAIMS IN TEXAS: Wells A Lessee Must Drill

Presented by:

T. NEAL NOBLES Watt Beckworth Thompson & Henneman, L.L.P.

Houston, Texas

Written by:

DICK WATT T. NEAL NOBLES

Watt Beckworth Thompson & Henneman, L.L.P. Houston, Texas

State Bar of Texas 26TH ANNUAL

ADVANCED OIL, GAS & ENERGY RESOURCES LAW COURSE September 25-26, 2008

Houston

CHAPTER 9

DRAINAGE AND DEVELOPMENT CLAIMS IN TEXAS: Wells A Lessee Must Drill, Chapter 9

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TABLE OF CONTENTS

I. INTRODUCTION—Drainage and Development Claims: Wells a Lessee Must Drill ............................ 1 II. THE DUTY TO PROTECT AGAINST DRAINAGE: What is “Drainage”?.......................................... 1

A. What a Petroleum Engineer Means by “Drainage”........................................................................ 1 B. Legal Definitions of Drainage ........................................................................................................... 2

III. DUTY TO PROTECT AGAINST DRAINAGE: What Is It And How Does It Arise? ........................... 3

A. Obligations Arising Under the Implied Covenant to Protect Against Drainage .......................... 4 B. Elements of a Drainage Claim .......................................................................................................... 5

1. Substantial Drainage ............................................................................................................ 5 2. Profitability of an Offset Well—What is a reasonable expectation of profit?................. 5 3. What is an Offset Well?........................................................................................................ 7

C. What Standard of Care Applies? ..................................................................................................... 7 D. Express Drainage Covenants ............................................................................................................ 8

IV. REMEDIES FOR BREACH OF EXPRESS OR IMPLIED COVENANTS AGAINST

DRAINAGE ..................................................................................................................................................... 9 A. Recent Developments In The Law—Coastal Oil & Gas Corp. v. Garza Energy Trust,

____ S.W.3d ___, 2008 WL 3991029 (Tex. 2008)........................................................................... 10 B. Other Less Recent Developments, But Still Important Developments—Kerr-McGee

Corp. v. Helton, 133 S.W.3d 245 (Tex. 2004) .................................................................................. 11 1. The Hypothetical Facts Conflict with the Actual Facts. .................................................. 12 2. The Gap Between Observations and Conclusions............................................................ 13 3. A LESSON FROM HELTON—Hope the lessee drills the hypothetical well ................. 13 4. ANOTHER LESSON FROM HELTON—Probe the background facts.......................... 13

V. THE LESSEE’S DUTY TO DEVELOP THE LEASE.............................................................................. 14

A. Clifton v. Koontz................................................................................................................................ 15 B. Sun v. Jackson................................................................................................................................... 15 C. Unresolved Questions in Development Cases ................................................................................ 17

1. What is a “Producing Formation”? .................................................................................. 17


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2. When is a Formation “Known to be Capable of Production”? ...................................... 17 3. What is a Reasonable Expectation of Profit? ................................................................... 18

D. Remedies in Development Cases..................................................................................................... 19 E. Future Trends in Development Cases ............................................................................................ 19 F. What a Lessee Needs to do to Avoid a Development Claims ....................................................... 20

VI. CONCLUSION ............................................................................................................................................. 21


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TABLE OF AUTHORITIES

CASES

Amoco Production Co. v. Alexander, 622 S.W.2d 563, 567 (Tex. 1981)..................................................................................................................... passim

Amoco v. Alexander,

594 S.W.2d 467, 470 (Tex. Civ. App.--Houston [1st Dist.] 1979, modified and aff'd, 622 S.W.2d 563 (Tex. 1981). ............................................................................................................................... 2, 4, 5, 6

Atlantic Richfield Co. v. Gruy,

720 S.W.2d 121 (Tex. App.—San Antonio 1986, no writ) ..................................................................................... 16 Berry v. Wondra,

246 P.2d 282 (Kan. 1952).......................................................................................................................................... 6 Browning Oil Co., Inc. v. Luecke,

38 S.W.3d 625 (Tex. App.—Austin 2000, pet denied).............................................................................................. 4 Chapman v. Sohio Petroleum Co.,

297 S.W.2d 885 (Tex. Civ. App.—El Paso 1956, writ ref’d n.r.e.)................................................................... 4, 6, 7 Christie, Mitchell & Mitchell Co. v. Howell,

359 S.W.2d 658 (Tex. Civ. App.—Fort Worth 1962, writ ref’d n.r.e.) ......................................................... 9, 10, 18 Coastal Oil & Gas Corp. v. Garza Energy Trust,

___ S.W.3d ___, 2008 WL 3991029 (Tex. 2008) ..................................................................................... 5, 9, 10, 11 Coats v. Brown,

301 S.W.2d 932 (Tex. Civ. App.--Texarkana 1957, no writ) .................................................................................... 8 Edgar v. Southwestern Oil & Refining Co.,

377 S.W.2d 225 (Tex. Civ. App.—Corpus Christi 1964, writ ref’d n.r.e.) ............................................................. 18 Elliff v. Texon Drilling Co.,

210 S.W.2d 558 (Tex. 1948). .................................................................................................................................. 14 Garcia v. King,

164 S.W.2d 509 (Tex. 1942) ..................................................................................................................................... 6 Good v. TXO Production Corp.,

763 S.W.2d 59 (Tex. App.—Amarillo 1988, writ ref’d n.r.e.) .......................................................................... 5, 7, 8 Grayson v. Crescendo Resources, L.P.,

104 S.W.3d 736 (Tex. App.—Amarillo 2003, pet. denied)....................................................................................... 4 Gruy v. Reiter Foster Oil Corp.,

150 S.W.2d 842, 844 (Tex. Civ. App.—Galveston 1941, no writ) ........................................................................... 6


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Gulf Production Co. v. Kiski, 103 S.W.2d 965 (Tex. 1937) ................................................................................................................................. 4, 8

H.E.C.I. v. Neel,

982 S.W.2d 881 (Tex. 1998). ................................................................................................................................ 2, 4 H.L. Renner v. Monsanto Chemical Co.,

354 P.2d 326 (Kan. 1960).......................................................................................................................................... 7 Humble Oil & Refining Company v. Strauss,

243 S.W. 528 (Tex. Civ. App.—Amarillo 1922, no writ) ......................................................................................... 9 Hutchins v. Humble Oil & Refining Co.,

161 S.W.2d 571 (Tex. Civ. App.—Galveston 1942, error ref’d w.o.m.) .............................................................. 4, 7 J.M. Guffey Petroleum Co. v. Jeff Chaison Townsite Co.,

107 S.W. 609 (Tex. Civ. App. 1908, no writ)............................................................................................................ 3 Jupiter Oil Co. v. Snow,

819 S.W.2d 466 (Tex. 1991) ..................................................................................................................................... 3 Magnolia Petroleum Co. v. Page,

141 S.W.2d 691 (Tex. Civ. App.—San Antonio 1940, writ ref’d)........................................................................ 4, 8 Menking v. Tar Heel Oil Corp.,

621 S.W.2d 447 (Tex. Civ. App.—Corpus Christi 1981, no writ) ............................................................................ 7 Pan American Petroleum Corp. v. Hardy,

370 S.W.2d 904 (Tex. Civ. App.—Eastland, 1963, writ ref’d n.r.e.) .................................................................. 2, 10 Pan American v. Felmont,

334 S.W.2d 449 (Tex. Civ. App.—El Paso 1960, writ ref’d n.r.e.)................................................................... 17, 20 Rush v. King Oil Co.,

556 P.2d 431 (Kan. 1976).......................................................................................................................................... 7 Shell Oil Co. v. Stansbury,

410 S.W.2d 623, writ ref’d n.r.e., 410 S.W.2d 187 ....................................................................................... 4, 7, 8, 9 Sinclair Oil & Gas Co. v. Bryan,

291 S.W. 692 (Tex. Civ. App.—Galveston 1927, writ ref’d)............................................................................ 4, 7, 9 Southwestern Bell Telephone Co. v. DeLanney,

809 S.W.2d 493 (Tex. 1991) ................................................................................................................................... 10 Sun Exploration and Production Co. v. Jackson,

715 S.W.2d 199 (Tex. App.—Houston [1st Dist.] 1986), rev’d, 783 S.W.2d 202 (Tex. 1989) ....................... passim Sun Exploration and Production Co. v. Jackson,

1988 WL 220582 (Tex. 1982) ................................................................................................................................. 20


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Texas Co. v. Ramsower, 7 S.W.2d 872 (Tex. Comm. App. 1928), aff’d on rehearing 10 S.W.2d 537 (Tex. Comm. App. 1928)...................................................................................................................................................................... 3, 9

Texas Oil & Gas Corp. v. Vela,

405 S.W.2d 68, (Tex. Civ. App.—San Antonio 1966), rev’d on other grounds, 429 S.W.2d 866 (Tex. 1968) .............................................................................................................................................................. 10

Texas Pacific Coal & Oil Co. v. Barker,

117 Tex. 418, 6 S.W.2d 1031 (1920)......................................................................................................... 3, 9, 10, 11 Trimble v. Hope Natural Gas Co.,

187 S.E. 331, 338 (W.Va. 1936)................................................................................................................................ 7 Waggoner Estate v. Sigler Oil Co.,

19 S.W.2d 27 (Tex. 1929) ................................................................................................................................ passim Wes-Tex Land Co. v. Simmons,

566 S.W.2d 719, 722 (Tex. Civ. App.—Eastland 1978, writ ref’d n.r.e.) ............................................................... 10 Willingham v. Bryson,

294 S.W.2d 421 (Tex. Civ. App.—Fort Worth 1956, no writ)................................................................................ 15

OTHER AUTHORITIES

1 Smith & Weaver, Texas Law of Oil & Gas, p. 268................................................................................................. 3, 8 5 Williams & Meyers, Oil and Gas Law, § 821, p. 78 (1993) .............................................................................. passim Dick Watt, Sun v. Jackson: Analysis of A Lessee’s Obligations in Texas Under the Implied

Covenant of Reasonable Development in 1990, Houston Bar Association (April 1990) .................................... 1, 15 F.J. Stermole, “Economic Analysis of Mineral and Energy Investments,” Mining Engineering,

Vol. 26, No. 2 (Feb. 1984)......................................................................................................................................... 6 F.J. Stermole, Economic Evaluation and Investment Decision Methods, 5th Ed. (Investment

Evaluations Corp., Golden, Colo. 1984).................................................................................................................... 6 H.C. Coutret, Jr., “Use of Expert Witnesses in Development and Drainage Lawsuits,”

Development Drainage and Well Damage Lawsuit Seminar (ABA Dallas, Texas, April 22, 1986).......................................................................................................................................................................... 1

J. Robert Beatty and Dick Watt, Drainage from A to Z, State Bar of Texas 12th Annual Advanced

Oil, Gas, and Mineral Law Course (Oct. 1994)......................................................................................................... 1 R. Hemingway, The Law of Oil and Gas, 2d ed., § 8.7 (1983)...................................................................................... 4 Reavley, Express and Implied Covenants to Develop, ABA NAT. RESOURCES SEC. Drainage

and Development Seminar (1986). .......................................................................................................................... 19 Society of Petroleum Evaluating Engineers, Annual SPEE Review of Parameters Used in

Property Evaluation (SPEE Houston, Texas 1994)................................................................................................... 6


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State Bar of Texas, Selected Works of A.W. Walker, Jr., Ch. 6, p. 20 (2001), originally published in 11 TEX. L. REV., 399 (1933)................................................................................................................................ 15

Texas State Property Tax Board, “Market Derivation of Discount Rates for Valuation of Oil &

Gas Properties,” 1990 Property Value Study (Austin, Texas 1990).......................................................................... 6

DRAINAGE AND DEVELOPMENT CLAIMS IN TEXAS: Wells A Lessee Must Drill

(ADDENDUM)

Copy of PowerPoint Presentation

DICK WATT Watt Beckworth Thompson & Henneman, L.L.P.

Houston, Texas

State Bar of Texas 26TH ANNUAL

ADVANCED OIL, GAS & ENERGY RESOURCES LAW COURSE September 25-26, 2008

Houston

CHAPTER 9

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DRAINAGE AND DEVELOPMENT CLAIMS IN TEXAS: Wells A … · 2013-10-17 · DRAINAGE AND DEVELOPMENT CLAIMS IN TEXAS: Wells A Lessee Must Drill Presented by: T. NEAL NOBLES Watt Beckworth