under all the relevant circumstances a reasonably prudent operator would, for purpose of making a profit and not merely for speculation, continue to operate that well as it has been operated.” Hardin-Simmons , at *19 (citing BP Am. Prod. v. Laddex, Ltd. , 513 S.W.3d 476, 482-83 (Tex. 2017)). Generally, reworking operations include “any and all actual acts, work or operations in which an ordinarily competent operator, under the same or similar circumstances, would engage in a good faith effort to cause a well or wells to produce oil or gas in paying quantities.” Cox v. Stowers, 786 S.W.2d 102, 105 (Tex. App.-Amarillo 1990, no writ). Thus, reworking operations must be activities that are reasonably to result in production. In this case, Hardin-Simmons argued that the reworking clause could not be applied to keep the oil and lease alive beyond the primary term because Hunt did not drill any new wells during the primary term of the lease; thus, there were no wells that Hunt could rework. The Court disagreed and explained that the lease did not provide that the legacy wells on the leased premises were excluded from the potential inventory of wells to be reworked and Hunt was engaged in reworking operations prior to the expiration of the primary term. Hardin-Simmons , at *23. However, despite Hunt’s arguments, the Court concluded that the reworking clause did not hold the entire oil and gas lease because of the continuous development, retained acreage and Pugh provisions. The Court concluded
that “according to the express terms of the Pugh clause and retained acreage clause, at the end of the primary term, the lease continued only as to acreage included within a defined ‘production unit,’ including wells being reworked.” Id ., at *25. Additionally, the Court concluded that Hunt breached its duty under the lease when it failed to execute and file a written release of the acreage and depths no longer subject to the oil and gas lease. Id. , at *28. Thus, although many leases may contain a provision regarding execution of a release, which in practice is not always followed, failure to execute and file the release may create a cause of action against the lessee or operator. The Hardin-Simmons decision is an important reminder to all operators regarding the steps necessary to maintain an oil and gas lease beyond the primary term. Because an oil and gas lease is a contract, courts will construe all provisions in the lease to ascertain the intent of the parties. Red Deer Res ., 2017 Tex. LEXIS 410, at *7. As a result, it is important to carefully review all provisions in the oil and gas lease and the interaction between the differing provisions. Thus, an operator should not rely on a single provision, as Hunt relied on the reworking clause, but understand how all of the provisions in an oil and gas lease will work together to determine whether a lease is maintained in force and effect beyond the primary term.
About the Authors:
Zachary Oliva is a partner with Kiefaber & Oliva LLP. Zack focuses his practice on energy and corporate law. He regularly assists clients in the drafting of oil and gas title opinions, purchase and sale agreements and contract interpretation. Additionally,
Eli Kiefabe r is a partner with Kiefaber & Oliva LLP. Eli focuses his practice on oil and gas matters, including acquisition and divestiture of oil and gas assets, title opinions, joint operating agreements, federal leases, pooling and unitization issues.
he assists clients with the negotiation, drafting and review of business formations, contracts and service agreements. Zack earned his B.A. from The Ohio State University and his J.D. from Capital University Law School. He is licensed to practice in New Mexico, Ohio and Texas.
Eli is licensed to practice law in Texas, Oklahoma, Colorado and Ohio, is a regular speaker on issues relating to the development of unconventional shale plays and has given a variety of presentations regarding legal issues relating to oil and gas development. Eli earned his B.A from Kenyon College and his J.D., with honors, from Marquette University Law School.
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N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s
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