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a “notwithstanding” clause “contemplates the possibility that other parts of the provision may conflict with it, and they agree that this paragraph must be given effect.” The court then went on to analyze 1776’s well tract designation in light of the retained acreage provision. The Railroad Commission of Texas (“RRC”) promulgates spacing rules between wells to prevent waste; this spacing is dependent on operators assigning certain acreage to wells in a proration unit. A proration unit is the acreage assigned to a well in order to allocate production allowables to that well. Essentially, a production allowable is the maximum number of hydrocarbons that a well may produce from a particular well tract. Here, the “notwithstanding” clause incorporated by reference the Eagleville (Eagle Ford-1) Field Rules, which establish that proration units shall consist of 80 acres, but that additional acreage may be assigned to each horizontal drainhole well in accordance with Statewide Rule 86. Thus, the field rules set forth a “baseline” acreage and incorporate by reference Statewide Rule 86 which allows tolerance acreage to be assigned based on horizontal drainhole displacement. Rule 86 defines a “horizontal drainhole” as that portion of the wellbore drilled in the correlative interval between the penetration point and terminus and “horizontal drainhole displacement” as the calculated horizontal displacement of the horizontal drainhole from the first take point to the last take point. Rule 86 also includes an assignments charts that specifies additional amounts of tolerance acreage that may be assigned based on said horizontal drainhole displacement. 1776’s Byrd Ranch No 1H Well was found to have a horizontal drainhole displacement of 3,962 feet, entitling them to an additional 200 acres. Thus, the Court found that 1776 could retain a total of 280 acres, and not the 320 they originally claimed. This case first provides a reminder of the deference a court will give to “notwithstanding” language in a lease. It also provides an excellent demonstration of the multi- tiered analysis that must often take place with regard to retained acreage provisions (in this case three distinct
steps). First, 1776 had to analyze which retained acreage provision was operative. It then had to consult the field rules to determine the default proration acreage size and the available amount of tolerance acreage. However, the analysis did not stop there, as 1776 then had to look to Rule 86 to determine the exact amount of tolerance acreage it could assign. Tellingly, neither party brought to the lawsuit a correct interpretation of the provision, at least per the San Antonio Court of Appeals. It turned out that the correct amount of acreage was not 40 acres, 80 acres or even 320 acres, but instead was 280 acres. As always, when faced with a convoluted retained acreage provision, we encourage you to seek the advice of counsel familiar with these issues to avoid finding yourself in a lengthy and expensive dispute such as Vermillion FC, LLC v. 1776 Energy Partners. CONTACT If you have any questions regarding this case law update or suggestions for topics to be covered in future issues, please call our office at 713-229-0360 or contact:
Brad Gibbs Partner bgibbs@kolawllp.com
Eli Kiefaber Partner rkiefaber@kolawllp.com
Emily Sheffield Attorney, Houston esheffield@kolawllp.com
Zachary Oliva Partner zoliva@kolawllp.com
___________________________________________________________________________________________ www.kolawllp.com The content of this publication and any attachments are not intended to be and should not be relied upon as legal advice or to create a lawyer-client relationship. © 2021 Kiefaber & Oliva LLP. All rights reserved. This publication may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Houston (principal office): 815 Walker St., Suite 1140, Houston, Texas 77002, 713-229-0360 | Columbus: One East Livingston Avenue, Suite B, Columbus, Ohio 43215, 614-349-4525.
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