Texas Supreme Court Will Not Save Landowners From Consequences of Loosely Worded Oil Lease

Austin, TX (Law Firm Newswire) July 27, 2018 – Land owners, Shirley Mae Herbst Adams and William Herbst entered into two lease agreements with two oil companies. The lease agreements stated that if anyone else sank draining wells on property adjacent to theirs Murphy Exploration & Production Co. is required either to pay royalties or drill an offset well.

Nothing in the lease specified how close the offset well should be to the adjacent property’s draining well. After the lease was executed, another driller, Comstock Oil & Gas, drilled a well just 350 feet from the boundary of Adams and Herbst’s property. In response, Adams and Herbst’s lessee, Murphy Exploration, elected to drill an offset well rather than pay royalties. However, the plaintiffs argued Murphy Exploration located the offset well so far from the property line — roughly 1,800 feet — that it did not qualify as an offset well.

After several years of litigation, the Texas Supreme Court ruled conclusively against the plaintiffs in Murphy Exploration & Production Co. v. Adams, No. 16-0505 (Texas, 6/1/18), finding that nothing in the lease required Murphy Exploration to locate the offset well close enough to the draining well to protect against drainage.

Gregory D. Jordan, an oil and gas litigation attorney from Austin, Texas with The Law Offices of Gregory D. Jordan, believes the Murphy Exploration ruling puts Texas landowners on notice that they may want to consider including more specific language in any lease offset provision.

Getting agreements in writing is just the beginning, Jordan says. Important contract terms should be defined, if possible, in a manner that leaves no doubt regarding performance in the minds of all parties to the agreement.

The lease at issue in Murphy Exploration left room for argument. Not only did the parties themselves disagree on the meaning of offset well in the lease, but all three courts examining the lease arrived at a different interpretation. In fact, the Texas Supreme Court split 5-4 on whether Murphy Exploration’s offset well complied with the lease.

Second, Jordan says, contracting parties should be aware that, to the extent that a contract term is defined in the agreement, it may be very difficult to later argue in court that the definition should be supplemented with reference to industry practices or norms.

In the Murphy Exploration case, Justice Debra H. Lehrmann’s majority opinion found it significant that the Adams/Herbst lease described some attributes of an offset well (e.g., it must be drilled within 120 days from the triggering well’s completion) but not the proximity attribute urged by Adams and Herbst in court.

“The fact that the leases specify exactly what is to be done once the offset provision is triggered, and do not mention proximity, is significant,” Justice Lehrmann wrote, adding that Murphy Exploration was required to drill a well in accordance with the contract’s written instructions “and no more.”

The case is Murphy Exploration & Production Co. v. Adams, No. 16-0505.