PEC Minerals L.P. v. Chevron USA, Inc.

Filing

UNPUBLISHED OPINION FILED. [10-40967 Affirmed ] Judge: WED , Judge: ECP , Judge: PRO Mandate pull date is 09/21/2011 [10-40967]

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IN THE UNITED STATES COURT OF APPEALS
United States Court of Appeals
FOR THE FIFTH CIRCUIT
Fifth Circuit

FILED
August 31, 2011

No. 10-40967

Lyle W. Cayce
Clerk

PEC MINERALS LP,
Plaintiff-Appellant
v.
CHEVRON U.S.A., Inc.,
Defendant-Appellee

Appeal from the United States District Court
for the Eastern District of Texas
No. 6:09-CV-166

Before DAVIS, PRADO, and OWEN, Circuit Judges.
PER CURIAM:*
This case involves the interpretation of a 1944 oil and gas lease (the
“Lease”). Plaintiff-Appellant PEC Minerals LP (“PEC”), successor in interest to
the original lessor, filed suit seeking to force Defendant-Appellee Chevron U.S.A.
Inc. (“Chevron”), successor in interest to the original lessee, to release all its
rights under the Lease to certain disputed acreage. PEC argued to the district
court that a provision of the Lease amended the Lease’s “habendum” clause such
that continued production of oil or gas on a particular unit of land continued the
*

Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.

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lease in force only as to that unit rather than to the entire acreage covered by
the Lease. The district court held that the provision of the Lease relied upon by
PEC did not amend the Lease’s habendum clause, and thus the district court
granted Chevron’s motion for summary judgment. PEC now appeals. For the
following reasons, we AFFIRM the district court’s ruling on summary judgment.
I.
In 1944, Louis Werner Saw Mill Company (the “Lessor”) entered into the
Lease with Skelly Oil Company (the “Lessee”), which covered 29,105.70 acres in
Panola County, Texas. Through subsequent transactions, PEC later became the
successor in interest to the Lessor and Chevron became the successor in interest
to the Lessee. The dispute in this case revolves around the interpretation of two
provisions in the Lease.
Paragraph 2 of the Lease states: “Subject to the other provisions herein
contained, this lease shall be for a term of ten years from this date (called
“Primary term”) and as long thereafter as oil, gas or other mineral is produced
from said land or land with which said land is pooled hereunder.” This is called
the Lease’s habendum clause.
Paragraph 5(f) of the Lease provides for dividing the Lease into separate
units of land and states the following:
But anything in this lease to the contrary notwithstanding, it is
agreed that as additional consideration for the payment by Lessee
of the said cash payment of $50,000.00 and its agreement to pay the
said fixed rentals as and when due under the above provisions
hereof, Lessee shall have the right, in event it shall, prior to March
10th, 1948, drill a well on said leased premises or on acreage pooled
therewith productive of oil, gas or other minerals in paying
quantities, to continue this lease in force as to each of the other
undeveloped drilling or spacing units “all to be selected by Lessee as
soon as practicable after the completion of such well” for as long as
such paying production shall continue and without being obligated
to conduct drilling operations on such undeveloped units, by paying
or tendering to Lessor, or to its credit in said depository bank,
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commencing on or before March 10th, 1948, and annually thereafter
until the end of the said primary term of this lease, a rental of one
dollar per acre for each acre contained in each such undeveloped
drilling or spacing unit or fraction thereof. But the commencement
by Lessee of drilling operations on any such undeveloped drilling or
spacing unit shall relieve Lessee from the payment of such rental
thereon, and if paying production should result from such
operations this lease shall continue in force as to the drilling or
spacing unit on which such production is had for as long as such
production continues. It is agreed that the provisions of this
subparagraph (f) hereof shall be separable and shall be considered
and applied as a separate agreement as respects each such
undeveloped drilling or spacing unit.
(underline added). The meaning of the underlined language above is the central
dispute between the parties.
The original primary term of the lease was for ten years. Through a series
of amendments, the parties extended the primary term of the Lease to 1969.
When the parties executed the final extension of the primary term in 1964 (the
“1964 Agreement”), Chevron agreed to release any units of land not producing
when the primary term expired:
[O]n March 10, 1969, Lessee will re-lease back to the Lessor the
acreage in said lease not then producing or embraced in a producing
unit or embraced in a drilling unit upon which operations for
drilling have commenced, provided that if such operations on such
drilling unit do not result in paying production, the acreage included
in such drilling unit shall be released to Lessor upon the completion
of such drilling operations by Lessee.
The 1964 Agreement also stipulated that the original terms and provisions of the
Lease shall otherwise remain in full force and effect.
On the date the primary term expired, Chevron did in fact release the
units of land not producing oil or gas pursuant to the 1964 Agreement. Chevron
retained 80 productive units, designated in an exhibit to its 1969 release. Of the
original 80, six of the units are in dispute in this case.

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As of October 2008, at least five of the six disputed units were not
producing oil or gas.1 Around that time, PEC entered into a lease with a third
party, XTO Energy, Inc. (“XTO”), to lease the disputed units. When XTO
claimed a title defect on the basis of the Lease with Chevron, PEC requested
that Chevron execute a full release of the disputed units. Chevron refused, and
the present action ensued.
PEC filed suit in state court to establish clear title to 2,397.17 acres
contained in the disputed units. Chevron removed the case to the federal district
court. The parties filed cross motions for summary judgment. The parties both
agreed that the Lease was unambiguous (although the parties asserted
contradictory interpretations of the contractual language at issue). The district
court, therefore, interpreted the Lease as a matter of law.
The district court held that the language of Paragraph 5(f) was not clear,
precise, and unequivocal. The district court concluded that under the habendum
clause, production outside the disputed units held the Lease on the entire leased
acreage, including the acreage in the disputed units. The district court held that
Paragraph 5(f) concerned “delay rentals” and related matters that applied only
during the Lease’s primary term and did not address the required action to
maintain the Lease during the secondary term, which was controlled by the
habendum clause. PEC now appeals the district court’s ruling.
II.
This court reviews a district court’s order for summary judgment rendered
on cross motions de novo. Cedyco Corp. v. Petro Quest Engergy, LLC, 497 F.3d
485, 488 (5th Cir. 2007).

Each motion with its supporting evidence is

independently reviewed. Morgan v. Plano Ind. School Dist., 589 F.3d 740, 745

1

The district court found that one of the six disputed units was producing at that time, but PEC
has asserted that a fact issue exists as to whether the sixth unit was producing enough to satisfy the
production requirements of the Lease.

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(5th Cir. 2009). “The court shall grant summary judgment if the movant shows
that there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.”

FED. R. CIV. P. 56(a) (2011).

Interpretation of an unambiguous contract is a legal issue that may be decided
on summary judgment. Boudreaux v. Unionmutual Stock Life Ins. Co., of Am.,
835 F.2d 121, 123 (5th Cir. 1988).
III.
PEC argues that Paragraph 5(f) modifies the Lease’s habendum clause in
Paragraph 2 such that acreage is held by the Lease past the primary term only
with regard to the property in the particular units of land where production
continues. For the following reasons, we agree with the district court that
Paragraph 5(f) does not modify the habendum clause.
A.
1.
The habendum clause in an oil and gas lease generally establishes the
duration of the lease. See Owen L. Anderson, et al., HEMINGWAY OIL AND GAS
LAW

AND

TAXATION, § 6.4, 247 (4th ed. 2004). A traditional habendum clause

provides that the lease will extend to all acreage covered by the lease as long as
oil and gas is produced anywhere on the leased property. Id.; see also Ridge Oil
Co., Inc. v. Guinn Invs., Inc., 148 S.W.3d 143, 149 (Tex. 2004).
Parties to a lease may modify a traditional habendum clause either in that
clause or through another provision of the lease. Anderson, HEMINGWAY OIL AND
GAS LAW AND TAXATION at § 7.13(D), 395-97. A clause dividing a lease into units
may modify the habendum clause, depending on its specific provisions. Id.
However, a clause dividing a lease into units “must be read carefully” to
determine whether it relates to perpetuation of the lease beyond the primary
term or to other aspects of the Lease, such as delay rentals. Id. at 395-96.

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Moreover, the general rule is that “[a]bsent contrary language, the
habendum clause of an oil and gas lease is indivisible.” Id. at 395. Texas law
goes further and holds that another provision of a lease may modify the
habendum clause only if the language used is “so clear, precise, and unequivocal
that [it] can reasonably [be given] no other meaning.” Anadarko Petroleum
Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002).

This Texas rule of

interpretation is important to the resolution of this appeal.
2.
Paragraph 2 of the Lease is a traditional habendum clause. It states that
“[s]ubject to other provisions herein contained, this lease shall be for a term of
ten years from this date (called “Primary term”) and as long thereafter as oil,
gas, or other mineral is produced from said land or land with which said land is
pooled hereunder.” Under Texas law, an habendum clause referring to “said
land” extends the lease as to all the leased property while production of oil or gas
occurs anywhere on the property. Ridge, 148 S.W.3d at 149. Thus, “in the
absence of anything in the lease to indicate a contrary intent, production on one
tract will operate to perpetuate the lease as to all tracts described therein and
covered thereby.” Matthews v. Sun Oil Co., 425 S.W.2d 330, 333 (Tex. 1968).
PEC argues that Paragraph 5(f) modifies Paragraph 2 so that production
of oil or gas on a unit of land holds the Lease only as to that unit during the
secondary term. However, for the reasons explained below, we conclude that the
language of Paragraph 5(f) relied upon by PEC does not clearly, precisely, and
unequivocally divide or limit the effect of the habendum clause on a unit-by-unit
basis. Therefore, Paragraph 5(f) does not meet the high standard Texas law
requires for modification of the habendum clause. See Anadarko, 94 S.W.3d at
554.

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B.
1.
First, as the district court held and as Chevron emphasizes on appeal, it
is clear that Paragraph 5(f) relates to “delay rentals” and the Lease’s application
during the primary term. In a traditional oil and gas lease, during the primary
term of the lease, the lessee agrees to drill a well or if it does not drill, pay a sum
of money called a “delay rental.” This payment allows the lessee to delay drilling
operations and still maintain the lease. See Anderson, HEMINGWAY OIL AND GAS
LAW

AND

TAXATION, at § 6.2, 218. Under a typical delay rental provision,

therefore, drilling relieves the lessee of the obligation to pay the delay rentals.
Id.
Paragraph 5(f) is a delay rental provision. It establishes an annual delay
rental of $1 per acre of undeveloped land “until the end of the said primary
term.”

The first half of the next sentence—the sentence relied upon by

PEC—goes on to explain, in typical fashion, “[b]ut the commencement by Lessee
of drilling operations on any such undeveloped drilling or spacing unit shall
relieve Lessee from the payment of such rental [of $1 per acre] thereon . . . .”
It is only the second half of this sentence that arguably supports PEC’s
position. It states “and if paying production should result from such operations
this lease shall continue in force as to the drilling or spacing unit on which such
production is had for as long as such production continues.” PEC argues that
this half sentence extends the Lease only with regard to those units of land on
which production continues, even though the Lease is well beyond the primary
term.
We conclude, however, that because the language relied on by PEC is
inextricably embedded in the Lease’s delay rental provision, this language only
applies during the primary term of the Lease. It does not clearly, precisely, and
unequivocally amend the Lease’s habendum clause, as required by Texas law.
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Anadarko, 94 S.W.3d at 554. The district court was correct that this sentence
should be read as simply “clarify[ing] the circumstances under which delay
rentals are no longer necessary during the primary term” of the Lease. The
sentence clarifies that delay rentals are not due for any unit during drilling and
continued production on that unit. Without additional clear, precise, and
unequivocal language to the contrary, we agree that the partial sentence in
Paragraph 5(f) has no effect beyond the primary term of the Lease, which is
when the delay rental provisions of the Lease were relevant.
2.
This court’s opinion in Glasscock v. Sinclair Prairie Oil Co., 185 F.2d 910,
912 (5th Cir. 1950), which involved similar language embedded in a Texas oil
and gas lease’s delay-rentals clause, supports our conclusion. The lease in that
case included an habendum clause indistinguishable from the clause in the
present case. The lessor relied on language in the delay-rentals clause that
provided in part: “Operations for the drilling of a well or reworking operations
on any well on said land or production from any well thereon shall continue this
lease in force only in so far as this lease covers a tract for each well with respect
to which operations for drilling are being conducted, or on which reworking
operations are being conducted, or from which production is being obtained.”
Glasscock, 185 F.2d at 192. The court held that this provision applied only to the
primary term of the Lease and that its purpose was “to assure to the lessor
during that period a continuance of the rental payments . . . in the event of
production or drilling under the lease . . . .” Id.
Although the language at issue in Glasscock is not identical to Paragraph
5(f) of the instant lease, it is instructive. PEC argues that Glasscock is not
helpful because the Glasscock provision did not include the words “for as long as
such production continues,” as in Paragraph 5(f). Nevertheless, despite this
difference, Glasscock stands for the proposition that a delay rental provision that
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allows production to only hold the lease on acreage in specific units is intended
to avoid a forfeiture by the lessor of all the delay rentals on other units upon
production of a single well. Because delay rentals are only relevant during the
primary term of the Lease, under the reasoning of Glasscock a provision such as
Paragraph 5(f) that is embedded in a delay-rentals clause should not be read as
affecting the duration of the Lease beyond the primary term.
3.
PEC argues that Paragraph 5(f) is similar to lease provisions that Texas
courts have interpreted as modifying habendum clauses. In these cases, the
courts have held that the lessee may retain acreage only in units where
production continues during the secondary term. However, in contrast with
Paragraph 5(f) of the instant Lease, each case PEC cites in support of this
argument involves a lease containing clear language modifying the habendum
clause and limiting the duration of the lease with regard to each unit based on
continued production in that unit during the secondary term.
For instance, in SMK Energy Corp. v. Westchester Gas. Co., 705 S.W.2d
174 (Tex. App. – Texarkana 1985), the habendum clause was amended by a
provision that clearly and expressly stated “this lease shall not (repeat shall not)
extend beyond the primary term as to any part of the acreage described therein,
excepting that part of the acreage which is then (at the end of the primary term)
pooled or united for drilling, reworking operations, or production of oil and/or gas
from such unit or units . . . .” Id. at 176. Similarly, in Riley v. Meriwether, 780
S.W.2d 919, 923 (Tex. App. - El Paso 1989), the habendum clause itself expressly
stated that the lease was to continue “for so long thereafter, as to each of the
respective tracts . . . .” oil and gas are produced.
PEC also cites Hitzelberger v. Samedan Oil Corp., 948 S.W.2d 497, 504
(Tex. App. - Waco 1997) for the proposition that a provision modifying the
habendum clause need not refer to the habendum clause by name. But in that
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case, the lease’s royalty clause plainly stated that the lease would terminate if
the lessee failed to pay royalties. Id.
Unlike the provisions at issue in these other cases, the language in
Paragraph 5(f) does not clearly alter the habendum clause based on unit
production or address the duration of the Lease with regard to non-producing
units after the primary term expires. For example, in contrast with the lease in
SMK, the sentence in Paragraph 5(f) on which PEC primarily relies fails to state
that the Lease “shall not” extend beyond the primary term to non-producing
acreage.
In addition, PEC puts too much emphasis on the language in the
habendum clause providing that the clause is “[s]ubject to other provisions
herein contained . . . .” in comparison with the language in Paragraph 5(f)
stating “[b]ut anything in this lease to the contrary . . . .” This language does not
establish with clarity that Paragraph 5(f) was intended to supersede the
habendum clause with regard to the requirements for retaining acreage during
the secondary term of the Lease. Similarly, the last sentence of Paragraph 5(f)
stating that the provisions of that paragraph “shall be separable and shall be
considered and applied as separate agreement as respects each such
undeveloped drilling or spacing unit” does not clearly affect the habendum
clause, as PEC argues. This language separates Paragraph 5(f)’s delay-rental
provisions by unit but does not expressly separate any other provisions of the
Lease. See Matthews v. Sun Oil Co., 425 S.W.2d 330, 333 (Tex. 1968)(stating
that simply “[b]ecause a lease will be considered as two leases for certain
purposes, it does not follow that a single lease will be considered as two leases
for all purposes”).
The lack of clarity in Paragraph 5(f) in comparison to the leases in the
Texas cases PEC cites provides further support for our conclusion that

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Paragraph 5(f) relates to delay rentals only, as in Glasscock, and should be not
be interpreted to modify the Lease’s habendum clause.
C.
In response to questions from the court, PEC’s counsel asserted at oral
argument that the 1964 Agreement by which the parties extended the primary
term of the Lease until 1969 tends to show that the parties did not intend the
original Lease to allow one producing well to hold the entire Lease during the
secondary term. This argument has no merit.
In the 1964 Agreement, the Lessee agreed to release back to the Lessor
any non-producing units at the end of the extended primary term. This is the
only written provision between the parties indisputably requiring the Lessee to
release its rights to non-producing units back to the Lessor at a particular time.
This provision supports rather than detracts from the conclusion that the Lessee
was not, prior to the 1964 Agreement, operating under a contractual obligation
to release non-producing units at the end of the primary term. If Paragraph 5(f)
already required the Lessee to release non-producing units upon expiration of
the primary term, this provision of the 1964 Agreement would have been
superfluous. Accordingly, to the extent the 1964 Agreement has any bearing on
our interpretation of the Lease, it supports Chevron’s interpretation. The 1964
Agreement does not alter our interpretation of the Lease’s original terms and
provisions, which apply to the units retained by Chevron.2
D.
Finally, we address the incongruence noted by the parties during oral
argument between the obligations the Lease placed on the Lessee to maintain

2

The 1964 Agreement expressly states that the original terms and provisions of the
Lease shall otherwise remain in full force and effect. We further note that the parties entered
into the 1964 Agreement 14 years after we decided the Glasscock case and, therefore, at the
time the parties were presumably aware of our interpretation of the similar lease in that case.

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the Lease during the primary term compared to those relating to the secondary
term. In response to questions from the court, PEC’s counsel pointed out that
(1) the Lease required either production or the payment of delay rentals for each
and every individual unit to maintain the entire Lease during the primary term;
but (2) according to Chevron’s interpretation, the Lease requires nothing more
than production on a single unit to maintain the entire Lease during the
secondary term. We do not agree with PEC, however, that this inconsistency
requires the conclusion that the parties could not have intended production on
a single unit to maintain the entire Lease during the secondary term.
As explained above, a delay-rentals clause is generally designed to provide
a lessor with income in the event a lessee fails to drill on a particular unit. This
delay-rental income substitutes for the royalty income that a lessor would
otherwise be entitled to if the lessee obtained paying production on a unit. See
generally Anderson, HEMINGWAY OIL AND GAS LAW AND TAXATION, at § 6.2, 218.
Thus, the obligation to make delay-rental payments provides an incentive to the
lessee to begin drilling and producing, which generates royalties for the lessor.
The delay-rental payment can be viewed as a penalty imposed on the lessee if it
fails to drill and as income to the lessor that takes the place of the hoped-for
royalties.
Therefore, the extension of this Lease during the secondary term to
acreage outside of producing units is not remarkable. This is how traditional
habendum clauses operate, as explained above. We also can assume that this
reflected the parties’ expectation that production developed during the primary
term—which was encouraged by delay-rental payments— would continue to
generate royalty income during the secondary term. Although the Lessor could
have achieved an additional economic benefit by including unequivocal language
terminating the Lease during the secondary term with regard to all non-

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producing units, as in the other Texas cases cited by PEC, the Lessor failed to
do so.
The economic bargain struck by the parties in this case is the same
bargain struck by the parties in Glasscock. We decline to second-guess that
bargain decades after the fact in the absence of clear, precise, and unequivocal
language modifying the Lease’s traditional habendum clause and expressly
stating that more than production on a single unit is required to maintain the
Lease during the secondary term.
IV.
For the foregoing reasons, the district court’s order granting Chevron’s
motion for summary judgment is AFFIRMED.

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OWEN, Circuit Judge, concurring.
I agree with the panel majority’s conclusion that, under applicable Texas
law, paragraph 5(f) of the 1944 oil and gas lease (Lease) at issue does not modify
the Lease’s general habendum clause.

I also agree with much of the

accompanying analysis. I write separately to emphasize the importance of
reading the Lease as a whole in interpreting its provisions. With great respect,
the panel majority focuses too narrowly on the placement of the disputed
language in the Lease. It is not the location, but rather the meaning of the
provision read in harmony with other portions of the Lease, which confirms that
production anywhere on the leased property (or land pooled therewith) is
sufficient to maintain the Lease during the secondary term under the facts
before us.
I
The Lease at issue was executed in 1944. It originally covered 29,105.70
acres of contiguous and non-contiguous land. The primary term of the Lease was
initially ten years, and originally, the primary term was to expire in 1954.
However, the parties extended the primary term several times, the last
extension occurring in an amendment executed in 1964, extending the primary
term until March 10, 1969.
Under Texas law, when construing an unambiguous oil and gas lease, our
“primary duty is to ascertain the parties’ intent as expressed within the lease’s
four corners” and, in turn, to “give the lease’s language its plain, grammatical
meaning unless doing so would clearly defeat the parties’ intentions.”1
Moreover, “[w]e examine the entire lease and attempt to harmonize all its
parts . . . because we presume that the parties to a lease intend every clause to

1

Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002) (citations
omitted).

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have some effect.”2 Significantly, a lease will not be held to “impose a special
limitation on the grant [of a mineral estate] unless the language is so clear,
precise, and unequivocal that we can reasonably give it no other meaning.”3
It is undisputed that paragraph 2 of the Lease contains a general
habendum clause providing, upon the expiration of the primary term, for a
secondary term of “as long thereafter as oil, gas or other mineral is produced
from said land or land with which said land is pooled hereunder.” To further
limit the secondary term, other portions of the Lease must do so via “clear,
precise, and unequivocal” language.4 Paragraph 5(f), considered in conjunction
with the rest of that paragraph as well as other paragraphs in the Lease, does
not use such language. As discussed by the panel majority,5 we construed
similar language in Glasscock v. Sinclair Prairie Oil Co. to “apply only to the
primary term” in order to “assure to the lessor during that period a continuance
of the rental payments with a reduction instead of a cessation thereof in the
event of production or drilling under the lease.”6 Significantly, the Supreme
Court of Texas cited Glasscock’s holding with approval in Skelly Oil Co. v.
Archer,7 providing us with binding precedent on this issue of state law.8 The
lease at hand, as a whole, like the paragraph at issue in Glasscock, “first

2

Id. (citations omitted).

3

Id. (citation omitted).

4

Id. (citations omitted).

5

Ante, at 8-9.

6

185 F.2d 910, 912 (5th Cir. 1950).

7

163 Tex. 336, 356 S.W.2d 774, 780 (1961).

8

Packard v. OCA, Inc., 624 F.3d 726, 729 (5th Cir. 2010) (“In determining questions
of Texas law, this court looks to the decisions of the Texas Supreme Court, which are binding.”
(citation omitted)).

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provides for the payment of a fixed sum on or before a certain date upon pain of
termination of the lease; it next provides for annual delay rentals . . . ; it then
contains the above quoted paragraph, which provides for reduction of the rental
by one dollar per acre upon each designated [unit] whereon a producing well is
located.”9
The panel majority construes Glasscock to hold that a provision “that is
embedded in a delay-rentals clause should not be read as affecting the duration
of the Lease beyond the primary term.”10

I disagree.

Glasscock simply

interpreted an unambiguous lease provision that, by its language, applied only
to the primary term and did not “impose an additional limitation upon the
determinable estate granted by the lease.”11 Paragraph 5(f) of the Lease is
properly read the same way based on Texas precedent that confirmed the
propriety of Glasscock’s conclusions.
II
PEC Minerals nevertheless contends that paragraph 5 must be read to
sever each drilling or spacing unit from the Lease such that production on one
unit will not maintain the lease as to other units. It makes two arguments in
support of this construction, one of which is foreclosed by the case law, as
discussed above, and the other of which finds no support in the Lease.
Paragraph 5 generally deals with the Lessee’s payment of fixed and delay
rentals during the primary term as well as the Lessee’s duty to develop the
Lease. Paragraph 5(a) provides that fixed payments were to be made at the end
of each year for the first four years of the Lease. The Lease provides in
paragraph 5(g) that these fixed payments were to be made even if the Lessee

9

185 F.2d at 912.

10

Ante, at 9.

11

185 F.2d at 912.

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released or surrendered all or part of the lands covered by the Lease. With
regard to delay rentals, this is an “unless” lease. If delay rentals are not paid,
the lease terminates as to the acreage to which the delay rentals pertained.12
With regard to delay rentals, a number of scenarios are contemplated by
paragraph 5, including, but not limited to, the possibilities that (1) the Lessee
could defer all drilling during the primary term and maintain the Lease as to all
acreage until the end of the primary term by paying the full amounts of delay
rentals each year,13 and (2) if production in paying quantities were obtained by
a date specified in the Lease, delay rentals could be reduced proportionately. It
is this latter possibility to which paragraph 5(f) is primarily addressed. It
provides:
But anything in this lease to the contrary notwithstanding, it
is agreed that as additional consideration for the payment by Lessee
of the said cash payment of $50,000.00 and its agreement to pay the
said fixed rentals as and when due under the above provisions
hereof, Lessee shall have the right, in the event it shall, prior to
March 10th, 1948, drill a well on said leased premises or on acreage
pooled therewith productive of oil, gas or other mineral in paying
quantities, to continue this lease in force as to each of the other
undeveloped drilling or spacing units “all to be selected by Lessees
12

See infra note 13, quoting paragraph 5(b) of the Lease; see also Holman v. Meridian
Oil, Inc., 988 S.W.2d 802, 807 (Tex. App.—San Antonio 1999, pet. denied) (“It is well settled
that under the terms of an ‘unless’ lease, the failure to begin a well or pay delay rentals, ipso
facto, terminates the lessee’s interest.”).
13

The Lease provides in paragraph 5(b):

If operations for drilling are not commenced on said lands, or on acreage
pooled therewith as above provided, on or before March 10th, 1948, this lease
shall then terminate as to both parties unless on or before said last mentioned
date Lessee shall pay . . . ($29,105.70), (hereinafter called “delay rental”) which
shall cover the privilege of deferring the commencement of drilling operations
for a period of twelve (12) months from and after said last mentioned date. In
like manner and upon like payments or tenders of such delay rental, annually,
the commencement of drilling operations may be further deferred for successive
periods of twelve (12) months each during the remainder of said 10-year
primary term.

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as soon as practicable after the completion of such well” for as long
as such paying production shall continue and without being
obligated to conduct drilling operations on such undeveloped units,
by paying or tendering to Lessor, . . . commencing on or before
March 10th, 1948, and annually thereafter until the end of the said
primary term of this lease, a rental of one dollar per acre for each
acre contained in each such undeveloped drilling or spacing unit or
fraction thereof. But the commencement by Lessee of drilling
operations on any such undeveloped drilling or spacing unit shall
relieve Lessee from the payment of such rental thereon, and if
paying production should result from such operations this lease
shall continue in force as to the drilling or spacing unit on which
such production is had for as long as such production continues. It
is agreed that the provisions of this sub-paragraph (f) hereof shall
be separable and shall be considered and applied as a separate
agreement as respects each such undeveloped or spacing unit.
Existing case law compels me to conclude that this provision does not have
the effect of severing each drilling or spacing unit from the Lease and treating
each as a separately leased property for all purposes such that production on one
unit would fail to hold the Lease as to others, although I think that it would be
a closer question if we were writing on a blank slate. In light of precedent,
paragraph 5 must be read as permitting the Lessee to reduce proportionately the
amount of delay rental that is owed by drilling on unproductive units or
obtaining production from previously unproductive units but not creating a
separate lease for each unit.
PEC Minerals argues that the language in the last sentence of paragraph
5(f) would serve no purpose unless it means that each drilling or spacing unit is
treated as separately leased.

That is not the case.

The last sentence of

paragraph 5(f) can reasonably be construed as making clear that if the Lessee
begins drilling on a unit in order to eliminate the obligation to pay delay rentals
for the acreage covered by that unit, the entire Lease is not forfeited or
terminated if a dry hole results.

In other words, this sentence could be

reasonably construed to mean that if the Lessee fails to pay delay rentals
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attributable to a particular unit while drilling, but a dry hole then results, any
contention that the Lease expired due to the non-payment of delay rentals for
some period of time would affect only that unit and not the entire Lease. A
similar protective provision is found in the immediately preceding subparagraph
of paragraph 5 regarding development of the Lease.14 Essentially, subparagraph
5(e) requires the Lessee to designate a unit around a well once production is
obtained and provides a safety net perpetuating the Lease as to each such
producing unit in the event the Lease is terminated or lost as to other acreage
for any reason.
PEC Minerals also argues that it is “unfair” and unreasonable to conclude
that the parties contemplated that a single well could hold the entire leased
acreage, which was originally 29,105.70 acres, after the primary term. This
contention has a concrete answer under the terms of the Lease. As noted above,
the Lessee is entitled under paragraph 5(b) to defer all drilling until virtually
the last day of the primary term by paying delay rentals on all the leased
acreage. If that had occurred, paragraph 6 of the Lease permits the Lease to be
maintained in force and effect by drilling, and a single productive well would
hold the entire acreage after the primary term:

14

Paragraph 5(e) provides, in pertinent part:

After the discovery of oil, gas or other minerals in paying quantities on
the above-described leased premises, or on acreage pooled therewith, Lessee
shall reasonably develop the acreage retained and pooled hereunder, but in
discharging this obligation it shall in no event be required to drill more than one
well per 640 acres of the area retained and pooled hereunder and capable of
producing oil, gas or other minerals in paying quantities. . . . It is agreed that
in case of cancellation, termination, or forfeiture of this lease for any cause the
discovery of such paying production shall hold and perpetuate this lease as to
such a drilling or spacing unit around the well for as long as such production
continues without any obligation on Lessee to conduct further drilling
operations thereon, and that such unit should be selected by Lessee as promptly
as practicable after such discovery of paying production.

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If at any time subsequent to 60 days prior to the beginning of the
last year of the primary term and prior to the discovery of oil, gas or
other minerals on said lands or on acreage pooled therewith, Lessee
should drill a dry hole thereon, no rental payment or operations are
necessary in order to keep the lease in force during the remainder
of the primary term. If at the expiration of the primary term, oil,
gas or other minerals are not being produced on said land [the
leased property], or on acreage pooled therewith, but Lessee is then
engaged in drilling or reworking operations thereon, or shall have
completed a dry hole thereon within 60 days prior to the end of the
primary term, the lease shall remain in force so long as operations
are prosecuted with no cessation of more than 60 consecutive days,
and if such operations result in the production of oil, gas or other
mineral, so long thereafter as oil, gas or other mineral shall be
produced on said lands or acreage pooled therewith.
Accordingly, although PEC Minerals’ argument that the parties did not intend
for one well to hold such a large leasehold has some equitable appeal, it is
refuted by the terms of the Lease.
III
The panel majority relies on the March 1, 1964 amendment to the Lease
as supporting the Lessee’s construction of paragraph 5(f) of the original Lease.
I respectfully disagree. The 1964 amendment does not clearly support either
party’s position regarding paragraph 5(f).
At two junctures, the 1964 amendment says that the Lease is extended on
the same terms and conditions as the original lease. However, in another
provision of the 1964 amendment, the parties agreed that in consideration of
recited nominal consideration and “all the mutual agreements and benefits”
contained in the 1964 amendment, at the end of the extended primary term
(March 1969), the Lessee would release acreage that was not “embraced in a
producing unit” or drilling unit upon which operations have been commenced.
The parties also agreed that the Lessee could release “any acreage under the
lease on which it does not care to further explore, develop or produce” at any

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time during the extended primary term and have no obligation to pay delay
rentals on the released acreage. The panel majority says that the agreement to
release non-producing acreage at the end of the primary term would be
surplusage if paragraph 5(f) already terminated the Lease as to non-producing
acreage at the end of the primary term. But the provision regarding the Lessee’s
right to release acreage at any time during the primary term is unquestionably
surplusage. The original Lease contained an express provision, in paragraph
5(d), permitting the Lessee to do precisely that.15 I therefore cannot conclude
that we must construe paragraph 5(f) of the original Lease as not requiring a
release of non-producing acreage at the end of the primary term in order to avoid
surplusage in the 1964 amendment since the 1964 amendment has other
surplusage in it.
Nevertheless, I agree with the panel majority that under existing
precedent, we cannot construe paragraph 5(f) of the original Lease as creating
a separate lease for each production or drilling unit such that production on one
unit will not hold the Lease as to all other units.
*

*

*

I concur in the judgment rendered by the panel majority but not all of the
reasoning in its opinion.

15

Paragraph 5(d) provides:

Lessee may at any time exercise and deliver to Lessor . . . a release or
releases covering any portion or portions of the above described lands, and
thereby surrender this lease as to such portion or portions and be relieved of all
obligations as to the acreage surrendered, and thereafter the delay rental
payable hereunder shall be reduced to the proportion that the acreage covered
by this lease is reduced by such release or releases.
See also Ridge Oil Co. v. Guinn Invs., Inc., 148 S.W.3d 143, 152 (Tex. 2004) (recognizing that
Texas law allows a lessee to surrender all or part of an oil and gas lease, either under an
express provision of the lease or by mutual agreement of the parties).

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