OIL AND GAS CASE LAW UPDATE AS IT APPLIES TO FARM AND RANCH PROPERTY

Transcription

1 OIL AND GAS CASE LAW UPDATE AS IT APPLIES TO FARM AND RANCH PROPERTY Presented By JOHN B. HOLDEN, JR. Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas State Bar of Texas 4 th ANNUAL JOHN HUFFAKER AGRICULTURAL LAW COURSE May 20-21, 2010 Lubbock CHAPTER 7

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3 JOHN HOLDEN Partner Energy, International A.B., Ohio University J.D., George Washington School of Law L.L.M., Southern Methodist University John Holden has more than 34 years experience representing clients in the natural resources area. Mr. Holden has advised clients with respect to all aspects of exploration, production, transportation, processing, sale and marketing of oil and gas, and other natural resources. This includes the formation of and use of various entities, both public and private, and the financing of the acquisition and development of hydrocarbons and related assets. Mr. Holden advises clients with respect to the preparation and negotiation of merger and acquisition agreements, joint exploration agreements, lease acquisition agreements, seismic option agreements, leases, operating agreements, farmouts, oil and gas sales contracts, transportation agreements, processing agreements, pipeline construction and operating agreements, and other related documents. In addition, he advises and prepares surface use agreements to provide for the protection and development of both surface and mineral owners with respect to their respective interests. Mr. Holden also has significant experience in energy lending and debt and equity financing. He has represented borrowers and financial and financing institutions with respect to the negotiation, preparation, and documentation of financing transactions. His experience includes transactions involving hydrocarbon and other mineral reserves, drilling rigs, service companies, landfill gas recovery projects, wind projects and other forms of natural resources, and fixed site power generation projects. He has worked with financial institutions in the foreclosure on and the subsequent sale of various energy assets. Mr. Holden has also negotiated and documented equity participation in the foregoing. In addition, Mr. Holden has considerable experience representing clients on projects in Latin America. He directed the privatization of $750 million worth of assets of YPF, the national oil company of Argentina. That process required the analysis of the applicable laws, rules, decrees and regulations of that country and the creation of appropriate entities to accomplish the country's objectives. Mr. Holden has participated in transactions in other foreign venues and has represented foreign entities doing business in the United States. Mr. Holden is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization. Memberships Mr. Holden is a member of the American Bar Association and the State Bars of Texas and the District of Columbia, as well as the Dallas Bar Association. He is a member of the Corporation and Business Law Section, Past Chairman of the Energy Law Section, and past Chairman of the International Law Section and the Mergers and Acquisitions Section of the Dallas Bar Association. Mr. Holden also is a member of the State Bar s Corporate, Banking and Business Section, the Oil, Gas and Mineral Law Section. He is a member of the Business Law, Environment and Energy Resources Law, and International Law sections of the American Bar Association. Mr. Holden is also a member of the Association of International Petroleum Negotiators and many other regional and national energy associations. He is an Adjunct Professor of International Law at Baylor University Law School and an Associate Board Member of the Cox School of Business of the Southern Methodist University.

4 Awards Mr. Holden is listed in The Best Lawyers in America under Energy Law. He was also named a Texas Super Lawyer in the issues of Texas Monthly magazine. Admitted Education Texas District of Columbia Mr. Holden received his A.B. from Ohio University in 1965 and his J.D. from the George Washington School of Law in In 1976, he completed his L.L.M. in oil and gas and taxation from Southern Methodist University School of Law. Publications & speaking engagements Mr. Holden is a frequent speaker on oil and gas and international topics to business and legal audiences.

5 TABLE OF CONTENTS I. OBJECTIVE... 1 II. STRATEGY... 1 III. RECENT TEXAS OIL AND GAS CASES... 1 A. Effect of Lease Termination on Pool... 1 B. Lease Termination Quasi Estoppel... 2 C. Accommodation Doctrine D. Pipeline Condemnation... 3 E. Surface Owner Right to Permit for Disposal Well... 4 F. Duty of Executive Rights Holder to Non-Executive Mineral Owner... 4 G. Rights of Wellbore Assignee... 5 H. Adverse Possession of Minerals... 5 I. Perpetuation of Lease By Shut-in Payments... 5 J. Lease Termination-No Adverse Possession... 6 K. Lease Termination Commencement Operations Insufficient to Perpetuate Lease... 6 i

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7 OIL AND GAS CASE LAW UPDATE AS IT APPLIES TO FARM AND RANCH PROPERTY I. OBJECTIVE While the purpose of this speech is to provide an update on oil and gas case law as it applies to farm and ranch properties, it is important for attorneys representing those clients to keep in mind the objectives of their client with regard to the real property interests involved. On the one hand clients are interested in generating revenue from all sources, including leasing for oil, gas and mineral development, but this objective should not distract from or adversely affect the primary activity to be conducted on the property. The negotiation of any agreement should insure that the secondary activity does not unreasonably interfere with the manner in which revenues from the primary activity are presently being generated and will be generated in the future. II. STRATEGY The client and attorney should always keep in mind the needs and objectives of the primary function of the assets in question. The focus of any strategy should be the preservation and enhancement of the asset as a whole and the uses and potential uses of each of the component of the asset as a whole. Today s focus will be on the impact of the most recent cases on farm and ranch property and the manner in which these cases will influence the use of that property and achieving the owner s objectives and the protection of the entire asset. When offered a lease, after one decides to lease, the next question is usually the resolution of the economic terms. With those two matters resolved, one of the next issues confronting a lessor is the size of units or pools which will be permitted under the terms of the lease. Some parties, insist that any pool consist entirely and exclusively of their own acreage. If that is a goal, the ability to achieve this objective will depend on the size of the tract leased. In a large tract this is possible, on a small tract probably not. On this issue, one must consider the likelihood that the entire productive zone will be located under the subject acreage. Like the stock market, the choice is between putting all your money in one stock or spreading it out among a number of stocks. The impact of owning or controlling less than one hundred percent of the subject mineral interests is also a factor. A second decision confronting the mineral owner is the size of pool to which will be allowed. How large a pool should a landowner permit? As a general rule, he mineral owner wants the pool or unit to be small and have a number of them so more wells will be required to develop the tract. Generally the opposite is 1 true of the lessee, who wants the units to be larger so that more acreage will be held with fewer wells. By inventorying more acreage, the lessee will have the opportunity to come back later and drill more wells (infill) at a later date. For this reason, many feel that a large pool is not in the best interest of the mineral owner because the interest of the mineral owner would be diluted by the other mineral owners and because it reduces the pressure on the lessee to fully develop the pool in the sort term. With the price fluctuations we have experienced in recent years, it is difficult to determine when it is best to have a well produce. Many feel that oil companies have more information with which to make such a decision. Others, of course, want all the money they can get, as soon as possible and do not trust oil companies with that decision. There are other considerations. In today s shale resource plays one must also consider the number of wells that will be drilled inside a unit. If one is comfortable being in a pool or unit with other mineral owners, they still want to make sure that the unit containing any of their minerals is fully developed. The primary issue should not be whether to permit pooling but ensuring that the minerals in a pool are fully developed. That is to say one might be better off with an interest in a larger pool with a number of wells in it than having only one well on their one property. The complete development of the tract is the issue. Today, there are additional factors to consider. There are newer uses of technology which design simultaneous fracing of neighboring wellbores and horizontal paths. Wells are intentionally placed close to each other to cause the fractures created by fracing to assist the drainage of fractures in neighboring wells. One must be careful to not insist on a method of development which would not permit the use of the best practices of the day. The next consideration is what sort of restrictions and specificity should be employed in a lease. Are you dealing with a lessee that will work with you to accomplish the lessor s objectives either now or later? How specific must the language in your lease be? There is always the possibility that the subject lease will be assigned to someone else that is unknown and with whom you can not work or who will not honor the understandings you reached with the previous lessee? These are the considerations which one must consider in protecting the primary objectives and use of the subject property. There and many issues of this nature which are raised in a lease relationship. III. RECENT TEXAS OIL AND GAS CASES A. Effect of Lease Termination on Pool Wagner & Brown v. Sheppard, 282 S.W.3d 419 (Tex. 2008).

8 The dispute in Wagner & Brown v. Sheppard involved the basic question of whether a lessor's interest remains pooled even after the lease terminates. According to the lessor, Sheppard, the answer was no. The lessor claimed that when her lease terminated (due to the fatal breach of a provision requiring the timely payment of royalties) the lessee's fee simple determinable estate ended and her possibility of reverter became possessory. With the termination of her lease, Sheppard argued she became a cotenant in the wells which were drilled on her lease tract and that her tract was no longer subject to the pooling unit to which the lessee had committed her interest to while the lease was in effect. She consequently rejected the lessee's payments based on the diluted unit-based royalty and claimed that since the producing wells were on her property, cotenancy accounting rules applied. As such, the lessee should be required to account to her as an unleased cotenant on a net profits basis (she should share of profits from wells on her tract less the reasonable drilling and operating costs). The court s holding was that despite the termination of the lease, the mineral interest remained subject to the pooling unit, thus the royalties due Sheppard were diluted by the size of her tract in relation to the size of the entire unit. The opinion contradicted the prevailing view among attorneys and others that the standard lease pooling clause does not permit a lessee to pool the lessor's possibility of reverter. As a consequence, conventional wisdom would be that with the termination of the lease, lessors' interests would no longer be pooled. It also begged many related issues dealing with the unleased mineral interest. B. Lease Termination Quasi Estoppel Cambridge Production, Inc. v. Geodyne Nominee Corp., 292 SW3d 725 (Tex. App. Amarillo 2009, pet. denied) This case presented a complicated set of facts whereby Cambridge which was seeking to terminate section 33 oil and gas leases in which had been combined with leases held by a well in Section 44 of Hemphill County in a related voluntary pooling designation as well as requesting damages. Cambridge was the owner of top leases covering the mineral interests in Section 33. In January of 1980, the Prater No well was completed in the interval between 14,364 feet and 14,929 feet, and it produced from that interval throughout its productive life. In May of 1980, Geodyne's predecessor in title, Northern Natural Gas Company, filed a pooling agreement that designated the unit depths and intervals as being those encountered in the Prater No well. As a result of a scrivener's error, the pooling language filed stated 2 that the acreage was pooled insofar and only insofar as the stratigraphic equivalent between the depths of 14,364 fee and 14,372 feet below the surface are concerned. Some 19 years later, in March of 1999, Geodyne filed an amended pooling designation for the Pater No well describing the correct pooled depths as being between 14,634 and 14,929 encountered in the Prater well, stating that the prior mis-stated depths were the result of a scrivener's error. In the case, Cambridge was appealing the Trial Court's entry of summary judgment in favor of Geodyne with respect to the lease termination claims. The Texas Court of Appeals addressed two of the issues raised on appeal since it found that those issues were dispositive of the appeal. First, the court held that the claims of Cambridge were barred by "equitable estoppel". Equitable estoppel precludes a party from accepting the benefits of a transaction and then taking a subsequent inconsistent position to avoid corresponding obligations. The Court found that equitable estoppel applies when it would be unconscionable to allow a party to maintain a position inconsistent with one in which it acquiesced or from which it accepted a benefit. In the present case, the Section 33 mineral owners had, by virtue of the pooling designation, accepted the benefit of revenues of production from the Prater No well that was not located on Section 33. Second, the Court rejected Cambridge's contention that it was a bona fide purchaser of the top leases covering Section 33. Among other considerations, the Court found that Geodyne was in the same possession as its lessor in the Prater Unit, and a producing well was being operated on the Unit, at the time Cambridge obtained the top leases. "Had Cambridge made reasonable inquiry as to the basis upon which Geodyne was in possession of the well and was paying royalties from production to Geodyne's lessors, it would have discovered the basis upon which Geodyne claimed... the Section 33 leases." The Court cited prior holdings that a purchaser of land is charged with constructive notice of an occupant's claims. C. Accommodation Doctrine. Valence Operating Co. v. Texas Genco., LP, 255 S.W.3d 210 (Tex. App. Waco 2008, no pet.). In this case, Texas Genco operated a limestone plant that included a 541 acre landfill in which to deposit coal ash which fueled the plant which made electricity to run its neighboring operation. Genco deposited ash waste from its electric generating coal plant into the landfill. It had mapped out cells or pods for ash disposal on the various portions of the landfill. As a cell was filled, Texas Genco closed it and opened a new cell in a different part of the landfill. Here, 91

9 acres of the landfill were located in the Holmes Unit where Valence owned the mineral rights. The Holmes Unit contained four gas wells that were located within, or on the edge, of the landfill used by Texas Genco. The location of the wells on the edge of the tracts permitted Texas Genco to continue using the landfill because it would simply "notch around" these wells with their new cells. Valence obtained a drilling permit to drill an additional well within the landfill, and while it would be on the outer edge of the tract, it would be at a location which potentially reduced the lifespan of the landfill. While waste was not being deposited in cell where the proposed well would bed drilled at the time, Texas Genco objected to the proposed well and filed a lawsuit for a temporary injunction against Valence, seeking to stop Valence from drilling another well. Valence responded seeking a temporary injunction and counterclaimed that Texas Genco was wrongfully seeking an injunction. A jury found for Texas Genco and the trial court issued a permanent injunction against Valence based on the accommodation doctrine. Under the accommodation doctrine, "where there is an existing use by the surface owner which would otherwise be precluded or impaired, and where under the established practices in the industry there are alternatives available to the mineral owner whereby the minerals can be recovered, the rules of reasonable usage of the surface may require the adoption of an alternative by the mineral owner." If there is only one means by which to produce the minerals, then the mineral owner has the right to pursue that use regardless of surface damage. If reasonable alternative drilling methods exist that protect the surface owner's existing use, then an accommodation by the mineral owner would be required. On appeal, Valence argued that the permitted location of the well would not substantially impair Texas Genco's existing use of its landfill. Valence focused on the fact that after Texas Genco filed suit it expanded the footprint of the landfill to the east to include an area that Texas Genco offered as an alternative drilling location. Once Valence rejected the proposed alternative location, Texas Genco expanded the footprint. Valence asserted that Texas Genco's use was not substantially impaired because the proposed alternative site was just a "stones throw" from the approved location. The Court of Appeals first concluded that Texas Genco presented sufficient evidence that the approved drilling location would substantially impair Texas Genco's use of the landfill. The location would be within the landfill's footprint, and though no ash deposits had been made in these particular cells of the landfill. Further, Texas Genco had made preparations for their use. The approved drilling location would also cut 2.2 years (about 20% off) of the estimated 11-year remaining life of the landfill. Texas Genco maintained that the landfill footprint was modified to maximize "every available square inch" of space on the landfill's eastern side because the landfill was surrounded by wells and had no option to expand. Further, Valence was proposing additional wells within the footprint. The court concluded that the jury was free to believe this explanation over Valence's allegation that Texas Genco simply modified the footprint to improve its litigation position. D. Pipeline Condemnation Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas LLC 296 S.W.3d 877 (Tex. App. Beaumont September 24, 2009, pet. filed) In this case the court held that an entity's filings with the Texas Railroad Commission ("TRC") can establish the entity's status as a common carrier as a matter of law. Texas Rice repeatedly refused Denbury Green access to Texas Rice's property to survey the proposed location of a carbon dioxide pipeline. Denbury Green filed suit claiming common carrier status and seeking a temporary restraining order and a permanent injunction to prevent Texas Rice from denying it access to the property. Denbury Green prevailed on summary judgment. Texas Rice argued summary judgment was improper because there was no evidence that Denbury Green would actually operate the proposed pipeline as a common carrier, rather than for its own private purposes. The court found that a person is a common carrier... if it... owns, operates, or manages, wholly or partially, pipelines for the transportation of carbon dioxide or hydrogen in whatever form to or for the public for hire, but only if such person files with the commission [TRC] a written acceptance of the provisions of this chapter expressly agreeing that... it becomes a common carrier subject to the duties and obligations conferred or imposed by this chapter. A common carrier, as defined under section (6) of the Texas Natural Resources Code has the right to exercise eminent domain. The court noted that "when determining whether [a pipeline company] is a common carrier under (6) of the Texas Natural Resources Code, we have been instructed by the supreme court to give great weight to the TRC's determination of that issue." The court then considered Denbury Green's summary judgment evidence, including its TRC application for a permit to operate a carbon dioxide pipeline as a common carrier; the TRC's declaration of its common carrier status; Denbury Green's written acceptance of the provisions of Chapter 111 of the Texas Natural Resources Code and express agreement that it was a common carrier, filed with the TRC; and affidavit 3

10 testimony regarding Denbury Green's negotiations with other entities to transport carbon dioxide. The court concluded that Denbury Green had established its common carrier status as a matter of law. Texas Rice argued that there was no evidence that Denbury Green would actually operate the pipeline as a common carrier, but in fact the pipeline would be used solely for private purposes. Because Denbury Green's pipeline was not completed or operational, there was no evidence regarding Denbury Green's actual use of the pipeline. The court rejected Texas Rice's argument, saying "[e]ven if there was such evidence in the record, when determining public use, the existence of the public's right to use the pipeline controls over the extent to which that right is, or may be, exercised." E. Surface Owner Right to Permit for Disposal Well Rosenthal v. Railroad Commission of Texas No CV, 2009 WL (Tex. App. Austin August 20, 2009, pet. filed) (mem. op.) The court held that ownership of the surface was sufficient to establish a "good-faith claim" to the right to commercially dispose of salt water by injecting it in non-producing intervals under a Texas Railroad Commission ("TRC") disposal permit. The surface owner owned an existing wellbore and sought a TRC disposal permit for the purpose of operating a commercial salt water disposal well for offsite salt water. The owner of the mineral rights in the disposal tract contested the application for the disposal permit. The TRC granted the surface owner a permit to dispose of the salt water by injecting it in the non-productive intervals of the wellbore. On appeal of the TRC s permit issuance, the mineral owner argued that the surface estate owner did not establish a good-faith claim to the right to use the subterranean property for salt water disposal. The court recognized the limited authority of the TRC to grant permits: the TRC may not "determine or affirmatively create title or a right of possession In addition to other statutory requirements to grant a permit, the TRC must be satisfied by substantial evidence that a permit applicant has made a reasonably satisfactory showing of a good-faith claim of ownership in the property. "[A] permit applicant is not required to prove title or right of possession in the property affected by the permit, and the commission has no power to decide that question, the applicant nonetheless must make 'a reasonably satisfactory showing of a good-faith claim of ownership' in the property." "The underlying substantive title question of 'how much control a mineral owner has over the underground strata where the surface owner seeks to use a well for commercial injection of [salt watery is unsettled." The court found there was no dispute as to the validity of the surface owner estate. The issue was what parameters the surface estate granted its mineral lessee. That issue must be resolved in the courts. The court characterized that dispute as a "quintessential title dispute," a dispute that is outside the jurisdiction of the TRC Nevertheless, "the commission's authority to grant permits is negative in nature the commission, through a permit, merely removes a barrier the conservation laws otherwise would impose on use of the property, but does not determine or affirmatively create title or a right of possession in the property itself." Citing Emery v. United States and Humble Oil & Refining Co. v. West and the fact of undisputed surface ownership, the court upheld the TRC's grant of a permit based on substantial evidence to support a good faith claim that the surface estate includes geological structures beneath the surface suitable for storing non-native gas. F. Duty of Executive Rights Holder to Non- Executive Mineral Owner Veterans Land Board of the State of Texas et al. v. Lesley et al., 281 SW3d 602 (Tex. App. Eastland 2009, pet. filed). The issues in this case were whether the holder of executive rights has a duty to the non-executive mineral interest owners and, if so, was it violated. The trial court held there was a duty to lease. Under the facts presented, the non-executive rights owners owned the surface and the minerals under the subject 4,100 acre ranch question. They sold the surface, a portion of the minerals and the executive rights to their grantee. Subsequently an additional interest was sold and the surface, an interest in the minerals and executive rights were then sold to a real estate developer. The real estate developer began developing the property and a portion of the surface was then sold to the Veteran s Land Board of the State of Texas, individual purchasers and a property owner s association each of whom acquired the entire fee in the chain of title. The trial court held that the defendants, the mineral interest owners which were holders of the executive rights owed a duty of utmost good faith to the non-executive mineral owners and that such duty was fiduciary in nature including the duty to lease all of the minerals. Here one of the owners in the chain of title, the developer, created covenants and restrictions on the property which prohibited the mineral development of any portion of the property. The trial court granted the appellee s summary judgment motion finding both that there was a duty to lease which was breached and that there was a need for the reformation of the deed creating the covenants and restrictions against drilling which were held to be unenforceable. There was a sub-issue as to what party owned the 4

11 executive rights. In a collateral point, the court, citing previous cases held that in the absence of reservation of executive rights they passed to the grantee with the minerals. The court of appeals reversed the judgment stating that the holder of executive rights does not have an affirmative duty to lease the minerals. The Court of Appeals also determined the appellees should take nothing on the breach of fiduciary duty claim. G. Rights of Wellbore Assignee Petro Pro, Ltd. et al., v. Upland Resources, Inc. et al., No CV (Tex. App. Amarillo June 14, 2007, no pet.). This case involved wellbore assignments. The subject assignments expressly limited the assigned interests to rights in the wellbore in a given well. The district court granted summary judgment in favor of the appellees. The Court of Appeals reversed and rendered for appellants holding that the grantee of the wellbore assignment was not entitled to rights outside the wellbore. Here the subject well was completed as a gas well in the Cleveland formation between 6,500 and 6,600 feet subsurface. Medallion, the lessee at the time, pooled 500 acre tract with a 204 acre tract. Due to its determination that the well was no longer economic, the wellbore was sold to assignee and others. The assignor then farmed out the subject tract to L&R which drilled and completed two wells in the shallower Brown Dolomite formation. L&R sought clarification of the interests and the wellbore. The wellbore assignee filed a suit claiming that it had the exclusive right to produce gas from the entire unit from the surface to 6,800 feet (including the Brown Dolomite formation) and sought a declaratory judgment as to the property rights and an accounting and requesting that funds be placed in the court registry until resolution. The trial court ruled that the wellbore assignments were unambiguous and granted Appellee, Upland s, motion for summary judgment. The Court of Appeals rendered a judgment declaring that the wellbore assignments in question transferred to the wellbore assignee an estate that extends to the physical limits of the wellbore only, together with all the appurtenant rights incident to the underlying lease. The wellbore assignee did not acquire title to the gas in place outside the wellbore in other areas of the lease. The claims of trespass, conversion and money had and received were dismissed. H. Adverse Possession of Minerals Natural Gas Pipeline Co. v. Pool, 124 SW3d 188 (Tex. 2003) This case dealt with a claim of adverse possession with respect to the minerals held by lessors held under three oil and gas leases. During the life of the lease, there had been 30 day and a 153 day lapse in production for which the lessors claimed the leases had terminated. The trial court granted a partial summary judgment with respect to the claim that the leases had terminated due to cessation in production and rendered a judgment declaring that the leases had terminated. The Court of Appeals held that the leases had terminated and denied lessee s claim of adverse possession since lessee could not establish that lessor received notice of repudiation of lessors title and further found laches was not a defense. In its review, the Supreme Court discussed the 10 year statute of limitations, the five year and three year statutes of limitations and what constituted adverse possession. The held that to satisfy the 10 year statute, as defined in the Civil Practices and Remedies Code, an actual and visible appropriation of real property commenced and continued under the claim of right that is inconsistent with and is hostile to the claim of another person is required. The issue here was whether lessee had notice of repudiation of the claim of the lessor. The court also discussed what constitutes open and notorious. The Supreme Court held that the court of appeals erred in failing to hold that the lessees acquired leasehold interests by adverse possession. The Supreme Court held that a jury may infer notice where a long continued possession exists and there is no assertion of claims by the titleholder. It then went on to say that, as a matter of law, the lessors were put on notice that lessee s claims were hostile. The Supreme Court further held that the lower courts erred in failing to hold that the lessee acquired fee simple determinable title to the mineral estates by adverse possession. I. Perpetuation of Lease By Shut-in Payments Vorttexploration Co., Inc. v. Eogresources, Inc. et al., No CV, 2009 WL (Tex. App. - Eastland May 29, 2009, no pet.) (mem. op.). This case involved the question of whether, under the circumstances, a shut-in payment perpetuated the lease. The lease contained a shut-in payment provision. The trial court granted summary judgment for lessor where the habendum clause in an oil and gas lease automatically terminated the lease upon cessation of production. While the subject well had produced for several years, the well had not produced since at least November of 2001 when a gas purchaser disconnected the well. The court held that the unavailability of a market did not excuse the lessee s failure to produce. For a shut-in payment to perpetuate a lease the well must be capable of producing into a pipeline. The Court of Appeals held that the trial court correctly granted summary judgment in favor of the lessor. The well had not been produced in excess of the two-year 5

12 limitation and the lessee s claim the unavailability of market did not excuse this lessee s failure to produce. lease in question were insufficient to perpetuate the lease. J. Lease Termination-No Adverse Possession Sun-KeyOil Co. Inc. v. Cannon et al., No CV, 2009 WL (Tex. App. Eastland March 12, 2009, no pet.) (mem. op.) The State of Texas brought an action against an oil and gas company to recover funds expended by the state agency in plugging a gas well owned by the company. The District Court granted partial summary judgment for the State. Here the Court of Appeals agreed with the District Court s decision that the oil and gas lease terminated as a result of total cessation of production after the primary term and the trial court did not err in granting partial summary judgment. There was no production of gas from 1995 until June of 1997, when lessor entered into a new lease. The only issue was whether the evidence was sufficient to support this partial summary judgment. The State had a right to rely on the operator designation form conclusively establishing that the company was in control of the well and the trial court did not err in their decision which is affirmed. K. Lease Termination Commencement Operations Insufficient to Perpetuate Lease Veritas Energy LLC v. Brayton Operating Corp. et al., No CV (Tex. App. Corpus Christi Feb. 14, 2008, pet. denied). This was a lease termination case where the issue was whether the operations conducted by the lessee were sufficient to extend the lease. As the primary term of the lease was expiring, the lessee claimed that the lease was preserved when lessee s agent back dragged the grass from the curve to the highway over the primary term of the lease. This activity was commenced the agent on June 5, Lessee was unable to complete the work due to a light rain. On June 7, 2003, lessors executed a new oil and gas lease. On January 8, 2004, the original lessee filed its original petition against Lessors seeking trespass, conversion and tortuous interference. The trial court signed a judgment granting all summary judgment motions in favor of lessor and the new lessee. The Court of Appeals cited the lease which defined operations as being for and any of the following: drilling, testing, completing, reworking, recompleting, duping, plugging back and repairing a well in search for or in an endeavor to obtain production of oil and gas. The Court of Appeals held that the actions of the original lessee failed to extend the lease. The backhoe work was the only activity on the lease for some period of time and a well had been drilled by the new lessee before the original lessee made its claim. The court held that there the operations of the leasee of the first 6