                                                                                         ACCEPTED
                                                                                    04-15-00066-CV
                                                                         FOURTH COURT OF APPEALS
                                                                              SAN ANTONIO, TEXAS
                                                                                4/9/2015 3:46:42 PM
                                          ORAL ARGUMENT REQUESTED                     KEITH HOTTLE
                                                                                             CLERK



                         No. 04-15-00066-CV
                                                                  FILED IN

                     In the Court of Appeals
                                                           4th COURT OF APPEALS
                                                            SAN ANTONIO, TEXAS

                for the Fourth District of Texas
                                                           4/9/2015 3:46:42 PM
                                                             KEITH E. HOTTLE
                      San Antonio, Texas                           Clerk



                     CONOCOPHILLIPS COMPANY,
                                                              Appellant,
                                     V.

               VAQUILLAS UNPROVEN MINERALS, LTD.,
                                                                  Appellee.

                   From Cause No. 2014 CVQ000 438 D4
              406th Judicial District Court, Webb County, Texas
                Honorable Oscar J. Hale, Jr., Presiding Judge

         BRIEF OF APPELLANT, CONOCOPHILLIPS COMPANY


Michael V. Powell                         Adolfo Campero
 State Bar No. 16204400                    State Bar No. 00793454
 Email: mpowell@lockelord.com              Email: acampero@camperolaw.com
Cynthia K. Timms                          Campero & Associates, P.C.
 State Bar No. 11161450                   315 Calle Del Norte, Suite 207
 Email: ctimms@lockelord.com              Laredo, Texas 78041
Elizabeth L. Tiblets                      Tel: 956-796-0330
 State Bar No. 24066194                   Fax: 956-796-0399
 Email: etiblets@lockelord.com
Locke Lord LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201-6776
Tel: 214-740-8520
Fax: 214-740-8800

                     ATTORNEYS FOR APPELLANT
                     CONOCOPHILLIPS COMPANY
                IDENTITY OF PARTIES AND COUNSEL
               Party                                    Counsel

ConocoPhillips Company,                    Michael V. Powell
                                            State Bar No. 169204400
                          Appellant         mpowell@lockelord.com
                                           Cynthia K. Timms
                                            State Bar No. 11161450
                                            ctimms@lockelord.com
                                           Elizabeth L. Tiblets
                                            State Bar No. 24066194
                                            etiblets@lockelord.com
                                           LOCKE LORD LLP
                                           2200 Ross Avenue, Suite 2200
                                           Dallas, Texas 75201-6776
                                           Telephone: (214) 740-8000
                                           Telecopier: (214) 740-8800

                                           Adolfo Campero
                                            State Bar No. 00793454
                                            acampero@camperolaw.com
                                           Campero & Associates, P.C.
                                           315 Calle Del Norte, Suite 207
                                           Laredo, Texas 78041
                                           Telephone: (956) 796-0330
                                           Telecopier: (965) 796-0399




                                      ii
                Party                                      Counsel

Vaquillas Unproven Minerals, Ltd.,             Raul Leal
                                                State Bar No. 24032657
                             Appellees          rleal@rl-lawfirm.com
                                               RAUL LEAL INCORPORATED
                                               5810 San Bernardo, Suite 390
                                               Laredo, Texas 78041
                                               Telephone: (956) 727-0039
                                               Telecopier: (956) 727-0369

                                               Armando X. Lopez
                                                State Bar No. 12562400
                                                mandox@rio.bravo.net
                                               LAW OFFICES OF ARMANDO X.
                                               LOPEZ
                                               1510 Calle Del Norte, Suite 16
                                               Laredo, Texas 78041
                                               Telephone: (956) 726-0722
                                               Telecopier: (956) 726-6049

                                               Gregg Owens
                                                 State Bar No. 15383500
                                                gregg.owens@haysowens.com
                                               Robert G. Hargrove
                                                State Bar No. 09303300
                                                rob.hargrove@haysowens.com
                                               Alicia R. Ringuet
                                                State Bar No. 24074958
                                                alicia.ringuet@haysowens.com
                                               HAYS & OWENS L.L.P.
                                               807 Brazos Street, Suite 500
                                               Austin, Texas 78701
                                               Telephone: (512) 472-3993
                                               Telecopier: (512) 472-3883




                                         iii
Party                    Counsel


             P. Michael Jung
              State Bar No. 11054600
              michael.jung@strasburger.com
             STRASBURGER & PRICE, LLP
             901 Main Street, Suite 4400
             Dallas, Texas 75202-2794
             Telephone: (214) 651-4724
             Telecopier: (214) 659-4022




        iv
                                         TABLE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL ........................................................... ii

TABLE OF CONTENTS ...........................................................................................v

INDEX OF AUTHORITIES.....................................................................................vi

STATEMENT OF THE CASE .................................................................................. 1
STATEMENT REGARDING ORAL ARGUMENT ............................................... 2
ISSUE PRESENTED .................................................................................................3

STATEMENT OF FACTS ........................................................................................4
SUMMARY OF THE ARGUMENT ......................................................................11

ARGUMENT ...........................................................................................................14
1.       The Field Rules did not “establish” different units of acreage per well. ...... 14

         A.       The parties’ competing interpretations................................................14

         B.       Analysis of the retained acreage clause in light of the Field
                  Rules ....................................................................................................16

2.       If there were any doubt about the proper interpretation of Sentence
         (2), the Court should apply the strong presumption in Texas law
         against making that sentence a “limitation on the grant.” .............................27

PRAYER FOR RELIEF ..........................................................................................31
CERTIFICATE OF COMPLIANCE .......................................................................33

CERTIFICATE OF SERVICE ................................................................................34
APPENDIX TO APPELLANT’S BRIEF................................................................35




                                                             v
                                     INDEX OF AUTHORITIES

                                                                                                           Page(s)
CASES
Anadarko Petroleum Corp. v. Thompson,
  94 S.W. 3d 550 (Tex. 2002)....................................................................13, 27, 29

Birnbaum v. SWEPI LP,
   48 S.W.3d 254 (Tex. App.—San Antonio 2001, pet. denied)............................16
Chesapeake Exploration, L.L.C. v. Energen Resources Corp.,
  445 S.W.3d 878 (Tex. App.—El Paso 2014, no pet.) ..................................13, 30

Clifton v. Koontz,
   325 S.W.2d 684 (Tex. 1959) ..............................................................................23
ConocoPhillips Co. v. Ramirez,
  No. 04-05-00488-CV, 2006 WL 1748584 (Tex. App.—San Antonio,
  2006) (not designated for publication) .........................................................21, 22
EOG Resources, Inc. v. Killam Oil Co., Ltd.,
  239 S.W.3d 293 (Tex. App.—San Antonio 2007, pet. denied)....................21, 27
Fox v. Thoreson,
  398 S.W.2d 88 (Tex. 1966).................................................................................29
Halbouty v. Railroad Commission,
  357 S.W.2d 364 (Tex. 1962) ..............................................................................23
Heritage Resources, Inc. v. NationsBank,
  939 S.W.2d 118 (Tex. 1996) ..............................................................................16
Humphrey v. Seale,
  716 S.W.2d 620 (Tex. App.—Corpus Christi 1986, no writ) ............................28
Jones v. Killingsworth,
   403 S.W.2d 325 (Tex. 1965) ..............................................................................18

Knight v. Chicago Corp.,
  183 S.W.2d 666 (Tex. Civ. App.—San Antonio 1944), aff’d, 188 S.W.2d
  564 (Tex. 1945)...................................................................................................30


                                                         vi
Knight v. Chicago Corp.,
  188 S.W.2d 564 (Tex. 1945) ........................................................................29, 30

Matthews v. Sun Oil Co.,
  425 S.W.2d 330 (Tex. 1968) ..............................................................................28

Natural Gas Pipeline Co. v. Pool,
  124 S.W.3d 188 (Tex. 2003) ..............................................................................27

Prize Energy Resources, L.P. v. Cliff Hoskins, Inc.,
   345 S.W.3d 537 (Tex. App.—San Antonio 2011, no pet.) ................................28

Railroad Commission v. Woods Exploration and Producing Co.,
   405 S.W.2d 313 (Tex. 1966) ..............................................................................23

Rogers v. Ricane Enterprises, Inc.,
  773 S.W.2d 76 (Tex. 1989).................................................................................29
Rowley v. Braley,
  286 S.W. 241 (Tex. Civ. App—Amarillo 1926, writ dism’d)............................17
Shown v. Getty Oil Co.,
   645 S.W.2d 555 (Tex. App.—San Antonio 1982, writ ref’d.) ...........................28
Springer Ranch, Ltd. v. Jones,
   421 S.W.3d 273 (Tex. App.—San Antonio 2013, no pet.) ..............14, 16, 18, 27
State v. Bilbo,
   392 S.W.2d 121 (Tex. 1965) ..............................................................................16
Tomlin v. Petroleum Corp. of Texas,
  694 S.W.2d 441 (Tex. App.—Eastland 1985, no writ) ......................................30



STATUTES AND RULES
TEX. CIV. PRAC. & REM. CODE § 37.009..................................................................32

TEX. CIV. PRAC. & REM. CODE § 51.014(d) ............................................................... 1
TEX. R. APP. P. 43.2(c) .............................................................................................14

16 T.A.C. §3.38(b)(1) ..............................................................................................10
                                                         vii
OTHER AUTHORITIES
BLACK’S LEGAL DICTIONARY at 626 (9th ed. 2009) ..........................................17, 18
J. Hayes, Texas Railroad Commission: Some Basics Every Practitioner
   Should Know, 28 State Bar of Texas, Oil, Gas and Mineral Law Section
   Report 3, 20 (June 2004).....................................................................................23
WEBSTER’S THIRD NEW INTERNATIONAL UNABRIDGED DICTIONARY (1993) .......... 18




                                                       viii
                            STATEMENT OF THE CASE
      This interlocutory appeal requests the Court to interpret, de novo, near-

identical “retained acreage clauses” in two oil and gas leases. Plaintiff-Appellee

Vaquillas Unproven Minerals, Ltd. (“Vaquillas”), the Lessor, claims the retained

acreage   clauses    caused    Defendant-Appellee     ConocoPhillips    Company

(“ConocoPhillips”), a Lessee, to forfeit substantially more acreage than

ConocoPhillips voluntarily released when ConocoPhillips’ program of continuous

drilling ended. ConocoPhillips disagrees, saying it retained the proper blocks of

acreage under the leases.

      Vaquillas sued ConocoPhillips in the 406th District Court, Webb County.

(CR:190). ConocoPhillips filed a traditional motion for summary judgment based

on its interpretation of the leases. (CR:27). Vaquillas filed a traditional cross-

motion for partial summary judgment based on its interpretation of the retained

acreage clause. (CR:200). The trial court, The Honorable Oscar J. Hale, Jr.,

denied ConocoPhillips’ motion for summary judgment and granted Vaquillas’

cross-motion. (CR:433, Appendix (“App.”) B).

      The trial court granted ConocoPhillips’ unopposed motion for interlocutory

appeal under TEX. CIV. PRAC. & REM. CODE § 51.014(d). (Id.) By Order dated

February 13, 2015, this Court granted ConocoPhillips’ Petition for Permission to

Appeal. (App. A).


                                        1
              STATEMENT REGARDING ORAL ARGUMENT
      Appellant ConocoPhillips requests oral argument.

      The question presented by this interlocutory appeal comes before the Court

on cross-motions for summary judgment and presents a question of law.

Nevertheless, the appeal requires the Court to construe retained acreage clauses in

oil and gas leases in light of field rules adopted by the Railroad Commission of

Texas, as well as that Commission’s Statewide Rule 38.

      ConocoPhillips believes oral argument could be helpful to the Court as the

Court considers various provisions of the oil and gas leases and the Commission’s

rules. There is also a great deal at stake in this appeal. The trial court has decreed

that ConocoPhillips has forfeited approximately 15,000 acres from decades-old

Webb County oil and gas leases on which ConocoPhillips has drilled over 200

natural gas wells.




                                          2
                               ISSUE PRESENTED
        Did the trial court err by denying ConocoPhillips’ Motion for Summary

Judgment and by granting Vaquillas’ Cross-Motion for Partial Summary

Judgment? (App. B).

        More specifically, the retained acreage clauses authorize ConocoPhillips to

retain 640 acres around each existing gas well at the end of the continuous drilling

program, unless Railroad Commission field rules provide for spacing or proration

“establishing different units of acreage per well.” If that exception is triggered,

those “established different acreages” are held in lieu of 640 acres. Did the trial

court err by holding that spacing requirements in the field rules, which require a

minimum of 40 acres in order to obtain a drilling permit for a new well, caused

ConocoPhillips’ leases to terminate except for 40 acres around each existing gas

well?




                                         3
                              STATEMENT OF FACTS
        The Oil and Gas Leases.         ConocoPhillips is Lessee, and Vaquillas the

Lessor, under two oil and gas leases covering Webb County land. Sworn copies of

the leases are in the record at CR:47-88 and 283-323, and copies are attached as

Appendices C and D to this Brief (the “Leases”) (CR:192).

        By the Lease at Appendix C, granted in 1974 and amended in 1987,

Vaquillas (and its predecessors) conveyed to ConocoPhillips’ predecessor the

mineral estate underlying 26,622.79 acres for “five years . . . and as long thereafter

as oil, gas or other mineral is produced from said land or land with which said land

is pooled hereunder.” (CR:192, 209).       By the Lease at Appendix D, dated 1987,

Vaquillas granted the mineral estate under an additional 6,740 acres, except the

term of that Lease was for “three years . . . and as long thereafter as oil, gas or

other mineral is produced from said land or land with which said land is pooled.”

(Id.)

        All of the wells at issue in this case are natural gas wells. For gas wells,

both Leases authorize ConocoPhillips to pool units up to 640 acres in size.

Paragraph 4 of the Leases, which grants pooling authority, states:

              . . .units pooled for gas hereunder shall not substantially exceed
        in area 640 acres each plus a tolerance of ten percent (10%) thereof,
        provided that should governmental authority having jurisdiction
        prescribe or permit the creation of units larger than those specified, for
        the drilling or operation of a well at a regular location or for obtaining
        maximum allowable from any well to be drilled, drilling or already

                                            4
       drilled, units thereafter may conform substantially in size with those
       prescribed or permitted by governmental regulation.

       Paragraph 4 gives the Lessee “the right and power to pool or combine the

acreage covered by this lease or any portion thereof as to oil and gas, or either of

them, with any other land covered by this lease and/or with any other land, lease,

or leases in the immediate vicinity thereof . . . .” Paragraph 16 restricts that power

somewhat by restricting pooling only to other lands owned in whole or part by

Vaquillas, but that restriction is not pertinent here.

       Vaquillas’ claim in this action is based on one isolated provision in

Paragraph 18, the retained acreage clause, of the Leases. In order to facilitate the

discussion in this Brief, ConocoPhillips will separate and number the four phrases

or sentences of that clause that are pertinent here, and then refer to those

“Sentences” by number: 1

       Sentence (1): “On November 1, 1990, Lessee covenants and agrees

       to execute and deliver to Lessor a written release of any and all

       portions of this lease which have not been drilled to a density of at

       least 40 acres for each producing oil well and 640 acres for each

       producing or shut-in gas well,”


1
    The provisions quoted are from the 26,622.79-acre Lease at Appendix C. The
    only difference between the language of Paragraph 18 in the two Leases is that
    Paragraph 18 of the 6,740-acre Lease (App. D) starts with: “At the end of the
    primary term, Lessee covenants and agrees . . . .”
                                            5
Sentence (2): “except that in case any rule adopted by the Railroad

Commission of Texas or other regulating authority for any field on

this lease provides for a spacing or proration establishing different

units of acreage per well, then such established different units shall be

held under this lease by such production, in lieu of the 40 and 640-

acre units above mentioned;”

Sentence (3): “provided, however, that * * * if, after the completion

or abandonment of any such well Lessee commences the drilling of an

additional well within Ninety (90) days from the completion or

abandonment of the preceding well, or continuously conducts drilling

operations in good faith and with reasonable diligence on said lease

without any cessation for longer than Ninety (90) days, said lease

shall remain in full force and effect during such drilling operations

and until the end of Ninety (90) days after the completion or

abandonment of the final well, at which time Lessee shall execute and

deliver to Lessor said written release, releasing all portions of the

lease not then so developed.”

Sentence (4): “Each retained unit shall contain at least one (1) well

producing or capable of producing oil or gas in paying quantities, and

the acreage within a unit shall be contiguous.”


                                   6
(Emphasis added).

      Sentence (3), quoted above, established the continuous drilling program that

extended the date after which ConocoPhillips had to release acreage. There is no

dispute that by continuous drilling, ConocoPhillips maintained the 26,622.70-acre

Lease in full force and effect for many years after November 1, 1990, and the

6,740-acre Lease in full force and effect many years after the end of its primary

term. ConocoPhillips’ continuous drilling program ended at or about the date

alleged in Vaquillas’ Petition, June 21, 2012. (CR:193; 242). Vaquillas counted

that by that date, ConocoPhillips had drilled 208 wells on the two Leases.

(CR:203, 224).

      In early 2014, ConocoPhillips filed Partial Releases in the Webb County

deed records that released all acreage covered by the Leases except for 640 acres

around each producing or shut-in gas well, as permitted by Sentence (1) of the

retained acreage clause.   (CR:194; 90-179).    Vaquillas contends those Partial

Releases were insufficient and asserts that at the end of the continuous drilling

program, ConocoPhillips’ Leases terminated as to all acreage except 40 acres

around each producing or shut-in gas well. (CR:195-96; 227). Vaquillas moved

for summary judgment that 25,042 of the total 33,363 acres Vaquillas granted to

ConocoPhillips by the Leases “reverted” to Vaquillas when the continuous drilling




                                        7
program ended, and consequently, ConocoPhillips must release 15,351 more acres

than those released by the Partial Releases it already filed. (CR:203, 204-05).

       The Field Rules.      Vaquillas bases its contention on the exception in

Sentence (2) of Paragraph 18, quoted above, and the Railroad Commission’s Field

Rules for the Vaquillas Ranch (Lobo Cons.) Field, Webb County, Texas (the

“Field Rules”).    The Commission initially adopted Field Rules for the Lobo

Consolidated Field in 1998 (App. E, CR:183, 245).          It amended those rules in

2010 (App. F, CR:181, 254). There is no dispute that these Field Rules apply to

the field that includes the Leases.

       The Field Rules do not “establish” any mandatory units of acreage per well.

Neither the Commission’s adoption of Field Rules in 1998, nor its amendment of

those rules in 2010, required ConocoPhillips to make any changes to its gas wells

on the Leases.

       Rule 3 in the original 1998 Field Rules is the proration rule for the field.

(App. E). Unlike other forms of proration rules, Rule 3 of these Field Rules does

not specify a maximum amount of acreage that may be allocated to a well as a

factor in the proration formula. 2 Vaquillas correctly explains proration rules as


2
    There is an example in the record of another field rule that does limit the size of
    proration units to 160 acres. (CR:188-89). Rule 2 of the Temporary Field
    Rules for the Big Reef (Edwards) Field, Webb County, adopted June 2002,
    states: “No proration unit shall consist of more than ONE HUNDRED SIXTY
    (160) ACRES [plus a 10 percent tolerance].” Id.
                                           8
follows: “[a] prescribed proration unit does not address the number of acres

necessary to drill a well. It simply specifies the maximum amount of acres that an

operator may assign to a well as a proration unit for that well. * * * Prescribed

proration units are by their nature maximum-sized units, because they prescribe the

maximum acreage that an operator may assign to a well as a proration unit for

production allowable purposes.” (CR:208-09, emphasis added). ConocoPhillips’

point is that the Field Rules for this field contain no “prescribed proration units,”

and they do not specify, in any other way, a maximum amount of acres

ConocoPhillips may pool for any well.

      In the trial court, Vaquillas did not base its argument on the proration rule,

Rule 3 of the Field Rules. Rather, it based its argument on Rule 2, the spacing

rule. (CR:211-13; 222 n.59).

      Rule 2 provides no different spacing from the Statewide Rules applicable

before field rules were adopted for this field, i.e., the spacing in the rule requires a

minimum of 40 acres for obtaining a permit to drill a new well. (App. E). Rule 2

accomplishes that result by providing that wells may not be drilled closer than 467

feet to any lease line, or 1,200 feet from another well in the same reservoir. (App.

F). These are the same spacing distances that are found in the Statewide Spacing

Rule applicable in the absence of field rules. See 16 T.A.C. § 3.37(a)(1).




                                           9
       When, as here, a field rule contains only spacing rules, a Table in the

Commission’s Statewide Rule 38(b)(2) supplies the minimum acreage necessary

for obtaining a Commission permit to drill a new well.3 For the 467 and 1,200 feet

spacing in these Field Rules, the Table specifies a minimum drilling unit of 40

acres. (Statewide Rule 38 and its Table are attached as Appendix G). The Table

shows the number of acres that are included in the “standard unit” associated with

various spacing rules, i.e., the smallest amount of acreage required for obtaining a

drilling permit for a well, irrespective whether the well is ultimately completed as

an oil or gas well.   But the only prohibition established by Rule 38 is that “[n]o

well shall be drilled on substandard acreage.”             16 T.A.C. §3.38(b)(1).

“Substandard acreage” means “[l]ess acreage than the smallest amount established

for standard or optional drilling units.” Id. at §3.38(a)(4). Thus, as pertinent here,


3
    The Table is as follows:




                                         10
the only prohibition regarding acreage that may be derived from these Field Rules

is that the Commission will not issue a permit for drilling a new well on less than

40 acres.

      Statewide Rule 38 is titled “Well Densities,” 16 T.A.C. §3.38 (App. G), and

the 40-acre requirement for a drilling unit is a density, not a spacing, requirement.

Statewide Rule 38 defines a “drilling unit” as “the acreage assigned to a well for

drilling purposes.”   16 T.A.C. § 3.38(a)(2) (App. G, emphasis added).            As

Vaquillas correctly explains: “[t]he density requirement [prescribes] the minimum

number of acres the operator must have to drill a well. * * * Such units are by the

nature minimum-sized units, because they prescribe the minimum acreage required

to obtain a Railroad Commission permit to drill a well.” (CR:208).

      The Field Rules establish no density requirement, or other unit size

requirement, that extends beyond the issuance of a drilling permit.

                      SUMMARY OF THE ARGUMENT
      The Leases granted ConocoPhillips a fee simple determinable estate in the

minerals in and under 33,363 acres of Webb County land.                By the time

ConocoPhillips’ continuous drilling program ended in 2012, ConocoPhillips had

drilled more than 200 gas wells on that land. Under Sentence (1) in the retained

acreage clause, ConocoPhillips was entitled to retain, under lease, 640 acres for




                                         11
each gas well. ConocoPhillips was obligated to release the remainder of the

acreage back to Vaquillas, which it did.

      Contrary to Vaquillas’ argument, the exception in Sentence (2) of the

retained acreage clause does not apply. The Railroad Commission’s Field Rules,

adopted in 1998, did not provide “a spacing or proration establishing different units

of acreage per well.” The Field Rules did nothing but carry forward from the

Statewide Spacing Rule the same requirement that an operator must assemble a

minimum of 40 acres before the Commission will issue a permit to drill a new

well. The Field Rules effected no change to ConocoPhillips’ gas wells in the field.

Consequently, when ConocoPhillips’ continuous drilling program ended, no units

different from 640 acres had been “established” in the field by Field Rules.

      If Vaquillas were correct in contending that Sentence (2) of the retained

acreage clause limits ConocoPhillips to retaining only the minimum acreage

required to obtain a permit to drill a new well, that minimum acreage will likely be

less than 640 acres. Accordingly, Vaquillas’ interpretation erroneously makes the

exception in Sentence (2) swallow the 640-acre general rule in Sentence (1).

      In addition, Vaquillas’ proposed interpretation would render illusory the

pooling clause’s authority to pool up to 640 acres for gas wells, and render

superfluous Sentence (4)’s statement that ConocoPhillips must have at least one




                                           12
well per block of retained acreage. ConocoPhillips could not drill more than one

well on Vaquillas’ proposed retained 40-acre blocks.

      Vaquillas’   interpretation   would     also   obliterate   the   parties’   clear

differentiation between the acreage assigned to oil wells (40 acres) and gas wells

(640 acres) that is stated twice in the Leases. Under Vaquillas’ interpretation, both

oil and gas wells would retain only 40 acres.

      But most significantly, Vaquillas’ erroneously interpretation of Sentence (2)

violates the established rule of Texas law that “we will not hold the lease’s

language to impose a special limitation on the grant unless the language is so clear,

precise, and unequivocal that we can reasonably give it no other meaning.” E.g.,

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

rule applies when interpreting retained acreage clauses.            E.g., Chesapeake

Exploration, L.L.C. v. Energen Resources Corp., 445 S.W.3d 878, 883 (Tex.

App.—El Paso 2014, no pet.).

      Specifically, Vaquillas claims Sentence (2) results in more than 15,000

additional acres “reverting” to Vaquillas under the retained acreage clause.        But

Sentence (2) does not mandate that result “so clearly, precisely, and

unequivocally” so that the Court could “reasonably give it no other meaning.”




                                         13
                                   ARGUMENT
      Standard of Review.         This Court reviews the trial court’s summary

judgment ruling de novo. E.g., Springer Ranch, Ltd. v. Jones, 421 S.W.3d 273,

279 (Tex. App.—San Antonio 2013, no pet.). When, as here, both parties moved

for summary judgment and the trial court granted one motion and denied the other,

this Court considers the summary judgment evidence presented by both sides,

determines all questions presented, and if the Court determines the trial court erred,

renders the judgment the trial court should have rendered. Id. See TEX. R. APP. P.

43.2(c).

1.    The Field Rules did not “establish” different units of acreage per
      well.

      A.     The parties’ competing interpretations
      In Sentence (1) of the retained acreage clause, the parties agreed that

ConocoPhillips was entitled to retain 640 acres “for each producing or shut-in gas

well” when its continuous drilling program ended.              Consequently, when

ConocoPhillips filed its Partial Releases of the Leases, it correctly retained 640

acres per gas well as agreed in Sentence (1).

      Vaquillas, on the other hand, contends the exception in Sentence (2)

controls. Vaquillas claims that under the exception, the Field Rules “provide for a

spacing or proration establishing different units of acreage per well,” and thus,




                                         14
“such established different units shall be held” in lieu of the 640-acre units

specified in Sentence (1).

      In the trial court Vaquillas offered no substantial analysis of the Field Rules,

except to say those rules identify one kind of unit—a minimum 40-acre drilling unit

to obtain a Commission permit to drill a new well.           (CR:215).     From that

observation, Vaquillas leapt, erroneously, to the conclusion that the minimum 40-

acre requirement for a drilling permit in those rules triggered the exception in

Sentence (2). Vaquillas moved for (and was granted) partial summary judgment

that ConocoPhillips “retains only 40 acres for each producing and shut-in-gas well

drilled by [ConocoPhillips] on the oil and gas leases that are the subject of this

lawsuit.” (CR:202).

      Consequently, the lease interpretation question for this Court is whether

ConocoPhillips correctly retained 640 acres per well under Sentence (1) of the

retained acreage clause, or whether (as Vaquillas contends) the Field Rules

triggered the exception in Sentence (2) of that clause? As will be discussed in

greater detail below, Vaquillas maintains that Sentence (2) operates as a limitation

on the grant ConocoPhillips received by virtue of the Leases.          Consequently,

Vaquillas argues that all acreage granted by the Leases to ConocoPhillips

“reverted” to Vaquillas at the end of the continuous drilling program, except for 40

acres around each existing well. Vaquillas’ Petition expressly states: “At the


                                         15
Release Date, the Reverted Minerals automatically reverted to Vaquillas.”

(CR:195, see also CR:196).

        B.   Analysis of the retained acreage clause in light of the Field
             Rules
        The general rules for construing oil and gas leases are well known. The

Court examines the entire lease “and consider[s] each part with every other part so

that the effect and meaning of one part on any other part may be determined.”

Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996);

Birnbaum v. SWEPI LP, 48 S.W.3d 254, 257 (Tex. App.—San Antonio 2001, pet.

denied). The Court gives terms in the lease “their plain, ordinary, and generally

accepted meaning unless the instrument shows that the parties used them in a

technical or different sense.” Heritage, 939 S.W.2d at 121; Birnbaum, 48 S.W.3d

at 257. When construing oil and gas leases, the Court should “avoid when possible

a construction which is unreasonable, inequitable, and oppressive.         Springer

Ranch, 421 S.W.3d at 287.

        Neither party contends the retained acreage clause is ambiguous, so the

Court may interpret the clause as a matter of law. E.g, Springer Ranch, 421

S.W.3d at 279. Furthermore, the Court may interpret the Commission’s Field

Rules as a matter of law. See, e.g., State v. Bilbo, 392 S.W.2d 121, 122 (Tex.

1965) (interpretation of certificate issued by the Commission presents a question of

law).

                                        16
      “Establishing” and “established” different units. The contested language

in the retained acreage clause is Sentence (2)’s statement that “in case any rule

adopted by the [Commission] . . . provides for a spacing or proration establishing

different units of acreage per well, then such established different units shall be

held under this lease by such production, in lieu of the . . . 640-acre units above

mentioned.”

      In that language, the parties twice used forms of the word, “establish.” The

first time “establish” is used, the form is “establishing,” which modifies the phrase

“rule adopted by the Commission [that] provides for a spacing or proration.” That

usage suggests the “establishing” of different units of acreage per well occurs

when the Commission adopts a field rule.

      The second time the parties used a version of “establish,” they employed the

past tense, i.e., they referred to “established different units,” suggesting that

different units had already been “established” in the past. In the context of the

entire phrase, the meaning is that different units were “established” when the Field

Rules were adopted, as a result of the Field Rules.

      The ordinary meaning of “establish” is “to settle, make, or fix firmly.”

BLACK’S LEGAL DICTIONARY at 626 (9th ed. 2009). Similarly, an old Texas case

says “established” means “[m]ake steadfast, firm, or stable, to settle on a firm or

permanent basis.” Rowley v. Braley, 286 S.W. 241, 245 (Tex. Civ. App—Amarillo


                                         17
1926, writ dism’d).      WEBSTER’S THIRD NEW INTERNATIONAL UNABRIDGED

DICTIONARY (1993) says “establish” means either “to make firm or stable,” or to

“settle or fix after consideration by enactment or agreement.” Id. at 778.4

       These Field Rules did not “establish” different units.           Using those

common definitions of “establish,” it is incorrect to argue that the Field Rules

“made firm or stable,” “settled on a permanent basis,” or “settled or fixed after

consideration by enactment or agreement” a requirement that units for gas wells

must be different from the 640 acres granted by the pooling authority of the Leases

and specified for retention under Sentence (1) of the retained acreage clause. Upon

the Commission’s adopting of the Field Rules, those rules neither required nor

made any change to ConocoPhillips’ gas wells in the field, i.e., the Field Rules

imposed no requirement that different units be “established” for wells in

production or shut-in awaiting production.

       The Field Rules contain only one requirement that pertains to quantity of

acreage. They do that by means of the spacing rules—at least 467 feet from lease

4
    The Supreme Court’s opinion in Jones v. Killingsworth, 403 S.W.2d 325 (Tex.
    1965), illustrates the importance of focusing on the specific words parties
    employ in oil and gas leases. In Jones, the Court held that the word
    “prescribed” did not mean “permitted.” Consequently, before Sentence (2)
    comes into play, the Commission must “establish” units of a different size than
    640 acres. The parties did not say the exception in Sentence (2) comes into
    play if the Commission adopts a Field Rule that merely permits drilling on units
    of fewer than 640 acres, and that is all the Field Rules do. They permit
    operators to drill on a minimum of 40 acres, but they do not “establish” 40-acre
    units.
                                         18
lines and 1,200 feet from other wells—found in Rule 2.            By applying those

minimum spacing rules to the Table in Statewide Rule 38, 16 T.A.C. § 3.38(b)(2)

(App. G, fn. 3, infra), one sees that the minimum density, or drilling unit size, is 40

acres. As Vaquillas correctly explains: “[t]he density requirement [prescribes] the

minimum number of acres the operator must have to drill a well.” (CR:208).

      Thus, the sole acreage requirement imposed by the Field Rules is a minimum

acreage requirement for the obtaining of a permit to drill a new well. The Field

Rules do not say there is anything wrong with a 640-acre unit for any producing or

shut-in gas well. Simply put, nothing in the Field Rules “established” different

units from the 640-acre retained acreage units to which the parties agreed in

Sentence (1) of the retained acreage clause.

      Two additional rules of oil and gas lease construction. There are two

additional reasons why Vaquillas’ proposed interpretation of the retained acreage

clause is wrong:

             First, under Vaquillas’ interpretation that minimum drilling units

control, the exception in Sentence (2) would swallow the general rule in Sentence

(1). Whether a particular field is governed by a special field rule or by Statewide

Rules 37 and 38, the Commission requires an operator to assemble a minimum

number of acres before the Commission will issue a drilling permit for a new well.

And it is unlikely that the minimum number of acres the Commission would


                                          19
require for a drilling permit would be more than 640.          One may see that by

reviewing the Table in Statewide Rule 38 on which Vaquillas relies, reproduced at

fn. 3, infra. The largest “standard drilling unit” in the entire Table is 40 acres. See

16 T.A.C. § 3.38(b)(2)(A) (App. G). All other drilling units listed in the Table are

smaller, ranging from 2 to 20 acres. Id.

      Consequently, if what Vaquillas claims were correct—i.e., that one would

look to the minimum acreage required for a drilling unit by a Field Rule—then the

general rule of 640-acres in Sentence (1) likely would never apply.             Under

Vaquillas’ argument, if a field rule exists, one first would look to see what

minimum drilling units were triggered by the spacing rules in that rule, by

consulting either the rule itself or Statewide Rule 38’s Table. Then as Vaquillas

wants this Court to interpret the retained acreage clause, that minimum drilling

unit—usually 40 acres, likely never more than 640 acres—will always prevail.

Sentence (1)—the 640-acre general rule—would become meaningless.                  The

exception will have swallowed the rule.

      It would have been simple for the parties to write the interpretation for

which Vaquillas contends into the retained acreage clause. To capture Vaquillas’

proposed interpretation, the parties needed to write only that when the retained

acreage clause operates, the lessee may retain around each well only the minimum

amount of acreage required by the Commission to obtain a drilling permit. That is


                                           20
the construction for which Vaquillas contends and the construction the trial court

adopted. But as this Court has said, courts may not rewrite leases in the guise of

interpreting them. E.g., EOG Resources, Inc. v. Killam Oil Co., Ltd., 239 S.W.3d

293, 300 (Tex. App.—San Antonio 2007, pet. denied). Yet that is what Vaquillas

wants this Court to do.

      This Court considered a retained acreage clause very similar to the one in

these Leases in ConocoPhillips Co. v. Ramirez, No. 04-05-00488-CV, 2006 WL

1748584 (Tex. App.—San Antonio, 2006) (not designated for publication). For

one of the wells at issue in Ramirez, the Serafin No. 1, there were no applicable

field rules. Instead, the Commission’s Statewide Rules applied. Ramirez sought to

limit ConocoPhillips’ retained acreage for the Serafin No. 1 to 40 acres by relying

on the minimum 40-acre drilling units resulting from application of Statewide Rule

37’s spacing requirements to the Table in then-existing Statewide Rule 38. See

2006 WL 1748584 at *1. The spacing required by Statewide Rule 37 was 467 and

1,200 feet, the same spacing carried into the Field Rules at issue in this appeal. See

16 T.A.C. §3.37(a)(1). The Table in Statewide Rule 38 expressly applies both to

Statewide Rules and field rules, so Statewide Rule 37’s spacing triggered 40-acre

drilling units, just like the Field Rules at issue here.    See Ramirez, 2006 WL

1748584 at *3.




                                         21
      Although the trial court ruled for Ramirez, this Court reversed, rejecting

Ramirez’s attempt to limit ConocoPhillips to 40 acres of retained acreage around

the Serafin No. 1 well by application of Statewide Rule 38 through the spacing

requirements stated in Statewide Rule 37. The exception in the retained acreage

clause in Ramirez required, as does the retained acreage clause here, for the

Commission to adopt a rule “for a field.” In Ramirez, this Court gave meaning to

the phrase, “for a field,” and held the Commission’s Statewide Rules were not

adopted “for a field.” Consequently, Ramirez’s attempt to apply the exception in

that retained acreage clause failed at the threshold. 2006 WL 1748584 at *2.

      But one of the reasons this Court gave for its holding in Ramirez is

applicable here.   This Court observed that if Ramirez’s arguments had been

correct, “the structure of [the retained acreage clause] is turned on its head: the

first clause [here Sentence (1)] would never apply, while the ‘except’ clause [here

Sentence (2)] would state both the general rule . . . and the exception.”         If

Vaquillas were correct, the exact same would be true in this appeal. The general

rule in Sentence (1) would never apply. The exception in Sentence (2) always will.

As this Court wrote in Ramirez, that construction “would be not only nonsensical

but contrary to general rules of construction.” Ramirez, 2006 WL 1748584 at *3.

      This certainly does not mean, as Vaquillas argued below, that the word

“spacing” in Sentence (2), where that sentence refers to “spacing or proration,” has


                                        22
no meaning. Over the years, the Commission has adopted field rules that establish

maximum densities for wells in specific fields. There are mentions of such field

rules in decided cases. See, e.g., Railroad Commission v. Woods Exploration and

Producing Co., 405 S.W.2d 313, 326 (Tex. 1966) (Smith, J., dissenting) (stating

that field rules at issue “established a 320-acre spacing unit rule.”); Halbouty v.

Railroad Commission, 357 S.W.2d 364, 368 (Tex. 1962) (quoting field rule

stating: “the above spacing rule and the other rules to follow are for the purpose of

permitting only one well to each one hundred and sixty (160) acre proration unit”);

Clifton v. Koontz, 325 S.W.2d 684, 695 (Tex. 1959) (stating that field rules at issue

“provide for 320-acre units with 10 percent tolerance so that a maximum of 352

acres may be assigned.”). 5 But the Commission did not include such a provision in

the Field Rules at issue in this appeal.

       If the Field Rules for the Lobo Consolidated Field had established a

maximum unit size for gas wells different from 640 acres (which they did not),

ConocoPhillips would have been required to conform to the rules as soon as they

became effective. Different units would have been “established,” and Sentence (2)

would then apply when the continuous drilling program ended. In other words, if

5
    “Rule 38 establishes the minimum number of acres that must be assigned to
    each well in order to obtain a drilling permit. In the absence of special field
    rules, the minimum requirement is 40 acres per well.” J. Hayes, Texas Railroad
    Commission: Some Basics Every Practitioner Should Know, 28 State Bar of
    Texas, Oil, Gas and Mineral Law Section Report 3, 20 (June 2004) (emphasis
    added).
                                           23
the Field Rules had “established” different units, those different units would have

taken effect when the Field Rules were adopted. But the Field Rules effected no

changes to acreages for producing wells.

             Second, under Vaquillas’ interpretation, the power granted in

Paragraph 4 of the Leases to pool up to 640 acres for gas wells would be

destroyed.     As explained above, Paragraph 4 of both Leases granted

ConocoPhillips the power to pool for gas wells up to 640 acres. Paragraph 4 also

provides that if the Commission “prescribes or permits” the creation of larger units,

ConocoPhillips’ power to pool would include those larger units. (App. C & D).

Also as explained above, the general rule in Sentence (1) of the retained acreage

clause allows ConocoPhillips to retain 640 acres for each gas well.

       That both Paragraphs associate gas wells with 640-acre blocks of acreage is

not coincidence. Vaquillas’ proposed interpretation of Sentence (2) would create

three surprisingly negative results for the lessee.

       (A)   Even though the Lessor granted the right to pool up to 640 acres for

gas wells, each 640-acre unit, although properly pooled and operated in good faith,

would abruptly shrink to 40 acres when the retained acreage clause operates. 6 This


6
    Vaquillas argued in the trial court that ConocoPhillips would had to drill 16 gas
    wells per 640-acres in order to “fully develop the acreage” and thereby earn the
    right to retain that 640 acres under the retained acreage clause. (CR:379). That
    argument conflicts with the authority Vaquillas granted ConocoPhillips in
    Paragraph 4 to pool 640 acres for gas wells, and it also directly conflicts with
                                           24
would be true—and oddly so—even though Rule 2 of the Field Rules, on which

Vaquillas relies, has been in effect since February 24, 1998, yet this “shrinking”

did not occur when (or since) those Field Rules were adopted.

      (B)    The retained acreage clause does not operate to terminate the Leases;

it requires only a release of certain acreage from the Leases. Consequently, after

the retained acreage clause operates, the pooling clause in Paragraph 4 should

remain in full force in effect.

      But, under Vaquillas’ erroneous interpretation, the pooling clause becomes a

dead letter. Under Vaquillas’ interpretation, ConocoPhillips would retain under

lease only 40 acre blocks around individual wells.       It will be impossible for

ConocoPhillips to exercise the power granted in Paragraph 4 to pool up to 640

acres, or even to drill a new gas well on an existing 640 acre unit. Consequently,

Vaquillas’ proposed interpretation of Paragraph 18, the retained acreage clause,

cannot be harmonized with Paragraph 4 of the same Leases.

      Furthermore, under Vaquillas’ erroneous interpretation of Sentence (2), two

words in Sentence (4) of the retained acreage clause are rendered superfluous.


   the general rule in Sentence (1) of the retained acreage clause. Under
   Vaquillas’ contentions, the pooling authority for gas wells under Paragraph 4
   and Sentence (1) of the retained acreage clause would become illusory.

   The Leases do not state, as Vaquillas erroneously claims, that ConocoPhillips
   was obligated to “drill . . . additional wells to develop the leasehold acreage to
   the density provided by Railroad Commission rules.” (CR:203).
                                         25
Sentence (4) states there must be “at least” one well per block of retained acreage.

If Vaquillas’ 40-acre argument were correct, there could never be more than one

well per 40-acre block of retained acreage because the Commission would not

issue a permit for a second well, either for oil or gas.

      On the other hand, all paragraphs of the Leases harmonize under

ConocoPhillips’ interpretation of the retained acreage clause.      ConocoPhillips

retains 640-acre blocks of acreage around wells, the same as Paragraph 4, the

pooling authority, allows it to do. Consequently, ConocoPhillips may continue to

pool and maintain 640-acre gas units. Furthermore, ConocoPhillips may obtain

permits to drill new wells on those 640-acre blocks, so as long as the Field Rule’s

from-lease-line and between-well spacing requirements are met.

      (C)    The Leases plainly contemplate that the operator will assign different

acreages to oil and gas wells. Paragraph 4 restricts pooling for oil wells to 40

acres, but allows pooling for gas wells up to 640 acres. Sentence (1) of the

retained acreage clause allows ConocoPhillips to retain only 40 acres around

producing oil wells, but 640 acres around gas wells.          Vaquillas’ proposed

interpretation of Sentence (2) would completely destroy the differentiation the

parties clearly intended between acreages assigned to producing oil and gas wells.

Vaquillas’ argument causes that result by relying, at bottom, on Statewide Rule 38,

which does not distinguish, for drilling permit purposes, between oil and gas wells.


                                           26
      As this Court frequently has observed, courts should strive to harmonize and

give effect to all provisions of the Leases “so that none will be rendered

meaningless.”    E.g., Springer Ranch, 421 S.W.3d at 279; EOG Resources, 239

S.W.3d at 300. ConocoPhillips’ is the only interpretation that gives meaning to all

provisions of the Leases. Vaquillas’ incorrect interpretation does not. Indeed, it is

simply impossible to find within Sentence (2) the wholesale revisions to the Leases

Vaquillas’ erroneous interpretation would make.

2.    If there were any doubt about the proper interpretation of
      Sentence (2), the Court should apply the strong presumption in
      Texas law against making that sentence a “limitation on the
      grant.”
      For the reasons above, the Commission’s Field Rules covering these Leases

do not trigger the exception in Sentence (2) of the retained acreage clause in the

Leases. But even if there were any doubt, this Court should apply the strong Texas

law presumption against construing a lease provision to effect a limitation on the

grant. Under that presumption, the Court should not interpret Sentence (2) to work

the forfeiture for which Vaquillas contends.

      By way of background, these Texas oil and gas leases were conveyances by

which Vaquillas and its predecessors granted to ConocoPhillips’ predecessor the

fee simple determinable in the mineral estate under the land described in the

Leases. Natural Gas Pipeline Co. v. Pool, 124 S.W.3d 188, 192 (Tex. 2003);

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

                                         27
Prize Energy Resources, L.P. v. Cliff Hoskins, Inc., 345 S.W.3d 537, 551-52 (Tex.

App.—San Antonio 2011, no pet.).         As described above, the Leases at issue

conveyed mineral estates to ConocoPhillips for five and three year primary terms

and “as long thereafter as oil, gas, or other mineral is produced from said land or

land with which said land is pooled hereunder.” 7

       Furthermore, “an oil, gas and mineral lease is indivisible by its nature.

Production from any part of the lease keeps the lease in effect during the primary

term as for so long as oil, gas and other minerals are being produced as to all lands

described in the instrument.” Shown v. Getty Oil Co., 645 S.W.2d 555, 560 (Tex.

App.—San Antonio 1982, writ ref’d.); accord, Matthews v. Sun Oil Co., 425

S.W.2d 330, 333 (Tex. 1968); Humphrey v. Seale, 716 S.W.2d 620, 622 (Tex.

App.—Corpus Christi 1986, no writ). ConocoPhillips had completed more than

two hundred gas wells on the Leases by the time its continuous drilling program

ended. (CR:203).

       Accordingly, ConocoPhillips’ production from the two Leases entitles

ConocoPhillips to maintain the Leases in full force and effect until an event of

7
    Vaquillas attempted to minimize the legal effect of the Leases in the trial court,
    suggesting the Leases merely “transferred the rights to explore, drill, produce,
    and market the minerals to an oil and gas company with the skill and financial
    ability to do so.” (CR:206). No doubt the Leases did that, but as discussed
    above, they did more. They conveyed the mineral estate in fee simple
    determinable to ConocoPhillips. The significance is that, as discussed in this
    section of this Brief, the presumption against construing lease clauses to effect
    limitations on the grant is fully applicable to the retained acreage clause.
                                          28
defeasance, or limitation on the grant, occurs. The first limitation on the grant,

found in the habendum clause in Paragraph 2 of the Leases, is cessation of

production in paying quantities, which has not occurred. The second limitation on

the grant is in Sentence (1) of the retained acreage clause, which obligates

ConocoPhillips to release all but 640 acres around producing or shut-in gas wells.

ConocoPhillips has complied. Under Vaquillas’ erroneous argument, Sentence (2)

of the retained acreage clause would operate as a third, very substantial “limitation

on the grant.”     Consequently, in “limitation-on-the-grant” terminology, the

question posed by this appeal is whether because of Sentence (2), ConocoPhillips

forfeited and must now release over 15,000 additional acres because that

additional, alleged limitation on the grant caused ConocoPhillips to forfeit all but

40 acres around producing and shut-in gas wells?

       Texas law creates a strong presumption against giving Sentence (2) the

limitation-on-the-grant effect for which Vaquillas contends. As the Supreme Court

has held time and again, “we will not hold the lease’s language to impose a special

limitation on the grant unless the language is so clear, precise, and unequivocal that

we can reasonably give it no other meaning.” Anadarko Petroleum Corp., 94 S.W.

3d at 554; accord, Rogers v. Ricane Enterprises, Inc., 773 S.W.2d 76, 79 (Tex.

1989); Fox v. Thoreson, 398 S.W.2d 88, 92 (Tex. 1966); Knight v. Chicago

Corp., 188 S.W.2d 564, 566 (Tex. 1945).


                                         29
      When the Knight case was before this Court, Justice Norvell, then a member

of this Court, held that even if there are two reasonable constructions of a lease, the

Court will choose the one that does not result in “a forfeiture (or termination of the

estate upon limitation).” Knight v. Chicago Corp., 183 S.W.2d 666, 671 (Tex. Civ.

App.—San Antonio 1944), aff’d, 188 S.W.2d 564 (Tex. 1945).

      Texas courts apply the presumption against a limitation on the grant when

interpreting retained acreage clauses. See Chesapeake Exploration, L.L.C. v.

Energen Resources Corp., 445 S.W.3d 878, 883 (Tex. App.—El Paso 2014, no

pet.) (citing Anadarko Petroleum Corp., 94 S.W.3d at 554, and stating “adopting

the construction [of a retained acreage clause] urged by Chesapeake imposes an

unnecessary limitation on the kind and character of the estate the parties chose to

convey, i.e., an expansive one maintained by production from any part of pooled

lands unless limited by language so clear, precise, and un-equivocal that no other

conclusion could be reached.”); Tomlin v. Petroleum Corp. of Texas, 694 S.W.2d

441, 442 (Tex. App.—Eastland 1985, no writ) (citing Fox, 398 S.W.2d at 92, and

applying the presumption against a limitation on the grant to hold that retained

acreage clause expressly referring only to oil wells did not mandate release of

acreage around gas wells).

      ConocoPhillips requests the Court to apply the presumption in this appeal.

ConocoPhillips does not agree that Vaquillas’ construction of Sentence (2) is


                                          30
reasonable, equitable or unoppressive. Indeed, as described above in this Brief,

when one gives the words “establishing” and “established” their plain and ordinary

meaning, the exception in Sentence (2) is not triggered, and the general rule of

Sentence (1) prevails.     But whatever else one may say about Vaquillas’

interpretation of Sentence (2), one certainly cannot say that sentence, when viewed

in light of the Field Rules, is so clear and precise that no conclusion other than

Vaquillas’ proposed reading can be reached.             Consequently, Vaquillas’

interpretation of Sentence (2)—which would create a very significant additional

limitation on ConocoPhillips’ grant—should be rejected.

                            PRAYER FOR RELIEF
      ConocoPhillips prays this Court will reverse the trial court’s Amended order

on Cross-Motions for Summary Judgment                 (CR:433, App. B), grant

ConocoPhillips’ Motion for Summary Judgment, and deny Vaquillas’ Cross-

Motion for Partial Summary Judgment. The Court should reverse the declaration

on page 1 of the trial court’s Order and declare that ConocoPhillips did not breach

the Leases by retaining 640 acres per producing and shut-in gas wells when

ConocoPhillips’ continuous drilling program ended, and is not required to release

additional acreage, as Vaquillas contends.

      ConocoPhillips also prays for recovery of its costs on appeal, remand to the

trial court for determination whether ConocoPhillips is entitled to costs, including


                                        31
reasonable attorneys’ fees, under Texas Civil Practice & Remedies Code § 37.009,

and for all other relief to which it is entitled.

                                          Respectfully submitted,


                                          /s/ Michael V. Powell
                                          Michael V. Powell
                                            State Bar No. 16204400
                                            Email: mpowell@lockelord.com
                                          Cynthia K. Timms
                                            State Bar No. 11161450
                                            Email: ctimms@lockelord.com
                                          Elizabeth L. Tiblets
                                            State Bar No. 24066194
                                            Email: etiblets@lockelord.com
                                          Locke Lord LLP
                                          2200 Ross Avenue, Suite 2200
                                          Dallas, Texas 75201-6776
                                          Tel: 214-740-8520
                                          Fax: 214-740-8800

                                          Adolfo Campero
                                           State Bar No. 00793454
                                           Email: acampero@camperolaw.com
                                          Campero & Associates, P.C.
                                          315 Calle Del Norte, Suite 207
                                          Laredo, Texas 78041
                                          Tel: 956-796-0330
                                          Fax: 956-796-0399

                                          ATTORNEYS FOR APPELLANT
                                          CONOCOPHILLIPS COMPANY




                                             32
                     CERTIFICATE OF COMPLIANCE
       Pursuant to Texas Rule of Appellate Procedure 9.4(i)(3), as amended
effective December 1, 2012, the undersigned certifies that this Petition complies
with the length limitations of Rule 28.3(g) (which the undersigned understands
now to be stated in Rule 9.4(i)) and the typeface requirements of Rule 9.4(e).

      1.     Exclusive of the contents excluded by Rule 9.4(i)(1), this Brief
contains 7,189 words as counted by the Word Count function (including textboxes,
footnotes, and endnotes) of Microsoft Office Word 2010.
      2.    This Brief has been prepared in proportionally spaced typeface using:

            Software Name and Version: Microsoft Office Word 2010
            Typeface Name: Times New Roman
            Font Size: 14 point

                                     /s/ Michael V. Powell
                                     Michael V. Powell




                                       33
                         CERTIFICATE OF SERVICE
      I hereby certify that on the 9th day of April 2015, a true and correct copy of
Brief of Appellant, ConocoPhillips Company, was served by eFile Texas and/or
pdf on Appellees through its counsel of record listed below:

Gregg Owens                               Raul Leal
 Email: gregg.owens@haysowens.com          Email: rleal@rl-lawfirm.com
Robert G. Hargrove                        Raul Leal Incorporated
 Email: rob.hargrove@haysowens.com        5810 San Bernardo, Suite 390
Hays & Owens L.L.P.                       Laredo, Texas 78041
807 Brazos Street, Suite 500              Tel: 956-727-0039
Austin, Texas 78701                       Fax: 956-727-0369
Tel: 512.472.3993
Fax: 512.472.3883

A. Michael Jung                           Armando X. Lopez
 Email: michael.jung@strasburger.com       Email: mandox@rio.bravo.net
Strasburger & Price, LLP                  Law Offices of Armando X. Lopez
901 Main Street, Suite 4400               1510 Calle Del Norte, Suite 16
Dallas, Texas 75202-3794                  Laredo, Texas 78041
Tel: 214-651-4724                         Tel: 956-726-0722
Fax: 214-651-4330 (main)                  Fax: 956-726-6049
Fax: 214-659-4022 (direct)

Counsel for Vaquillas Unproven
Minerals, Ltd.



                                      /s/ Michael V. Powell
                                      Michael V. Powell




                                        34
                                        No. 04-15-00066-CV

                               In the Court of Appeals
                          for the Fourth District of Texas
                                San Antonio, Texas
                                   CONOCOPHILLIPS COMPANY,
                                                                                                  Appellant,
                                                           V.

                        VAQUILLAS UNPROVEN MINERALS, LTD.,
                                                                                                    Appellee.

                            From Cause No. 2014 CVQ000 438 D4
                       406th Judicial District Court, Webb County, Texas
                         Honorable Oscar J. Hale, Jr., Presiding Judge

                                  APPENDIX TO APPELLANT’S BRIEF

                                                                                                                    Tab
Court of Appeals Order Granting Petition for Permission to
 Appeal..........................................................................................................   A
Trial Court Amended Order on Cross-Motions for Summary Judgment........                                             B
Oil, Gas and Mineral Lease (26,622.79 acres).........................................                               C
Oil, Gas and Mineral Lease (6,740 acres).......................................................                      D
Railroad Commission Order Adopting Field Rules for the
  Vaquillas Ranch (Lobo Cons.) Field Dated February 24, 1998 ..................                                     E
Railroad Commission Final Order Amending Field Rules for the
  Vaquillas Ranch (Lobo Cons.) Field Dated November 2, 2010 ....................                                    F
Railroad Commission Statewide Rule 38.........................................................                      G




                                                           35
                                                                                        FILE COPY



       ConocoPhillips
     CompanyAppellant/s




                            Fourth Court of Appeals
                                   San Antonio, Texas
                                        February 13, 2015

                                      No. 04-15-00066-CV

                              CONOCOPHILLIPS COMPANY,
                                     Appellant

                                                v.

                       VAQUILLAS UNPROVEN MINERALS, LTD.,
                                    Appellee

                  From the 406th Judicial District Court, Webb County, Texas
                            Trial Court No. 2014CVQ000438-D4
                         Honorable Oscar J Hale, Jr., Judge Presiding

                                         ORDER
Sitting:       Sandee Bryan Marion, Chief Justice
               Karen Angelini, Justice
               Marialyn Barnard, Justice

       The appellant’s unopposed petition for permission to appeal from an interlocutory order
is GRANTED. TEX. R. APP. P. 28.3. “A separate notice of appeal need not be filed” as “a notice
of appeal is deemed to have been filed on [the date of this order].” Id. at 28.3(k). This appeal is
governed by the rules for accelerated appeals. Id.

        The clerk’s record is due no later than February 23, 2015. Id. at 35.1(b). The clerk of
this court is directed to file a copy of this order with the trial court clerk. Id. at 28.3(k).


                                                     _________________________________
                                                     Sandee Bryan Marion, Chief Justice

       IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the said
court on this 13th day of February, 2015.


                                                     ___________________________________
                                                     Keith E. Hottle
                                                     Clerk of Court
    :;


                                       CAUSE NO. 2014CVQ000438 D4

         VAQUILLAS UNPROVEN MINERALS,                    §       IN THE DISTRICT COURT
         LTD,                                            §
                                                         §                                         ....
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                Plaintiff,                               §                                         en
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         v.                                              §       WEBB COUNTY, T"""JU:>             N         - -< '"
                                                         §                     !                   CO
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         CONOCOPHILLIPS COMPANY,                         §                                         -U
                                                                                                   3.:
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                Defendant.                               §                                                    00
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                AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JU                                                              ..
                                                                                                                           ~




                On October 30,2014, Defendant's Motion for Summary Judgment and lai tiffs Cross-

         Motion for Partial Summary Judgment were heard. The Court, having reviewed the motion,

         briefs, responses, competent summary judgment evidence, and argument of counsel, rules on
"




         these motions as follows.

                IT IS ORDERED, ADJUDGED, AND DECREED that Defendant's Motion for

         Summary Judgment is DENIED.

                IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Plaintiffs Cross-

         Motion for Partial Summary Judgment is GRANTED. The Court DECLARES that Defendant

         has breached the 26,622.79-acre Lease and the 6,740-acre Lease by failing to release all acreage

         in excess of 40 acres for each producing and shut-in natural gas well capable of producing in

         paying quantities.

                This Order of the Court decides the central question in this case, which is the number of

         acres under two oil and gas leases that Defendant ConocoPhillips Company retains under the

         "retained acreage" clauses of the leases at the conclusion of ConocoPhillips' continuous drilling

         operations. The Court finds that the question decided by this order is a controlling question of



         AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT                                      PAGEl



                                                                                                           433
         law as to which there is a substantial ground for difference of opinion. The Court also fmds that

   I
.,'.'1
         immediate appeal of the order will materially advance the ultimate termination of this litigation.

                This Court's Order, and the underlying controlling question of law, involve the parties'

         competing legal interpretations of the language of the "retained acreage" clauses and certain

         Field Rules adopted by the Railroad Commission of Texas. Although the Court has ruled in

         favor of the Plaintiff lessor, Vaquillas Unproven Minerals, Ltd., the Court concludes there are

         substantial grounds for difference of opinion regarding whether the leases allow ConocoPhillips

         to retain 40 acres per well, as Plaintiff contends, or 640 acres, as ConocoPhillips contends.

                An immediate appeal from this Court's Order will materially advance the final

         conclusion of litigation. Plaintiff seeks judgment ordering ConocoPhillips to execute releases of

         over 15,000 acres described in the leases, as well as possible direct and consequential damages

         flowing from ConocoPhillips' alleged breach of the "retained acreage" clauses of the leases. If

         ConocoPhillips is forced to release the acreage but later wins an appeal determining that

         ConocoPhillips' original interpretation is correct, significant problems could develop. On the

.;       other hand, the lessor, Vaquillas Unproven Minerals, Ltd. is interested in having the release of
.,:]
         acreage as soon as possible.        Furthermore, the Court and the parties anticipate that a

         determination of Plaintiffs damages, if any, will be costly and time-consuming.

                ConocoPhillips desires to take an interlocutory appeal. The Court rules that such appeal

         shall be defined by the lease interpretation question addressed in the parties' cross-motions for

         summary judgment.      More specifically, the question is whether the leases' retained acreage

         clause allows ConocoPhillips Company to retain only 40 acres per each producing or shut-in gas

         well it has drilled on the two leases, or whether ConocoPhillips is allowed to retain 640 acres

         (Plus I 0% tolerance) for each wells.



         AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT                                         PAGE 2



                                                                                                              434
               IT IS HEREBY ORDERED that, pursuant to Texas Civil Practice & Remedies Code §

      51.014(d) (West. Supp. 2014) an interlocutory appeal is ALLOWED from this Order.

               IT IS FURTHER ORDERED that trial of this action is stayed pending the interlocutory

,j    appeal. The Court's Pre-Trial Guideline Order and Scheduling Order are hereby VACATED.
-:1

      The parties may proceed with discovery and pretrial proceedings by agreement or with leave of

      Court.

      SIGNED this   4-        day Of9"'=".jI.tAA-..,=="T\------' 2015.

                                                       ( )~,,~
                                                    Ho1:"Oscar 1. Hale, Jr.
                                                    Judge Presiding




      AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT                                  PAGE 3



                                                                                                  435
·,.,
'l
       APPROVED AS TO FORM:


                      '


."!
 .;



 I
          ~      ~~p'<..q
       Michael V Powell
        State Bar No. 16204400
        Email: mpowell@lockelord.com
-I     Elizabeth L. Tiblets
.,,     State Bar No. 24066194
        Email: etiblets@lockelord.com
.~
       LOCKE LORD LLP
       2200 Ross Avenue, Suite 2200
       Dallas, Texas 75201-6776
       Tel: 214-740-8520
       Fax: 214-740-8800

       Adolfo Campero
        State Bar No. 00793454
        Email: acampero@camperolaw.com
       CAMPERO & ASSOCIATES, P.c.
'I     315 Calle Del Norte, Suite 207
 I     Laredo, Texas 78041
 j
 ]     Tel: 956-796-0330
       Fax: 956-796-0399

       ATTORNEYS FOR DEFENDANT
       CONOCOPHILLIPS COMPANY




 )
 •




       AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT   PAGE 4



                                                                  436
            -   ---- - - - - - - -- -- ---




     APPROVED AS TO FORM:


I
-,    /s/ P. Michael lung
     P. Michael lung
      State Bar No. 11054600
      Email: michael.jung@strasburger.com
     STRASBURGER & PRICE, LLP
     901 Main Street, Suite 4400
     Dallas, Texas 75202-3794
     Tel: 214-651-4724
     Fax: 214-651-4330 (main)
     Fax: 214-659-4022 (direct)

     Gregg Owens
      State Bar No. 15383500
      Email: gregg.owens@haysowens.com
     Robert G. Hargrove        -
      State Bar No. 09303300
      Email: rob.hargrove@haysowens.com
 i
-I
     HAYS & OWENS L.L.P.
     807 Brazos Street, Suite 500
I    Austin, Texas 78701
-j   Tel: 512-472-3993
.1   Fax: 512-472-3883

     Annando X. Lopez
      State Bar No. 12562400
      Email: mandox@rio.bravo.net
     LA W OFFICES OF ARMANDO X. LOPEZ
     1510 Calle Del Norte, Suite 16
     Laredo, Texas 78041
     Tel: 956-726-0722
     Fax: 956-726-6049

     Raul Leal
      State Bar No. 24032657
      Email: rleal@rl-lawfirm.com
     RAUL LEAL INCORPORATED
     5810 San Bernardo, Suite 390
     Laredo, Texas 78041
     Tel: 956-727-0039
     Fax: 956-727-0369

     ATTORNEYS FOR V AQUILLAS
     UNPROVEN MINERALS, LTD.

     AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT   PAGES



                                                               437
  .'\" ~-'. '~wWi
             P'i>du~tn U {'"''                                                                                             ?O,~lnllnll ~ SI'lionlr, Co •• 1l0UI\0~. T'~II
                  uo ACAI PoOUnr- Pr:ovilion                                        _,           I
~!,    "                      OIL, GAS AND Mliu(RAL LEASE AMENDING OIL', GAS AND''ntNERAL.
                  LEASE DATED JUNE 15, 1974 (AS AMENDED) BETWEEN LESSOR-AND LESSEE HEREIN




                  26,622.79-acres of land, more or less, situated'in Webb County. Texas more
                  fully described in Exhibit "A" attacli"ed"'he'reto and made a part of this Lease
                  for all relevant purposes. including limitations upon warranty as specifically
                  set out therei~.




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            _.11. or '" tllt ,roo:Ilt ot r...10~ I..", Ult plpotU"",lo .. lIle" t.b. _Ira lal,. lot unnHLN I    Lt._
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                                                                                                             1111,. fro.r.a tll'lt 10 LIlli' pardi ... In,. fO,..II., 011 III Ito
            PO ...... /Oll. flo,.lnl·th,·nnr"t Price thltlto,"'Il..hllhi ·-tor tho n,rd _h_ro' roducocl on' lb, dat,·ot·pUrch ..u       (tI)         I 1.11.        •   f'       I




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".

                           ADDENDUM TO AMENDED OIL AND GAS LEASE
                            From Vagui11as Ranch Co., Ltd. et a1
                           To Conoco Inc., Oated November 1, 1987




          12.      Should Lessee be prevented from complying with covenants of this
     lease by reason of conditions or acts set forth in Paragraph '11' hereof,
     then Lessee agrees annually to pay to Lessor an amount equal to the delay
     rentals herein provided for during such period of prevention, whether same
     be during or subsequent to the primary term, and such payment shall be made
     at the end of each year of prevention either to Lessor or to the depository
     above named for credit to the account of Lessor.


          13.      This lease does not cover or include any right or privilege of
     hunting or fishing on any part of the above described land, cwd Lessee
     agrees with lessor that neither he nor his assigns or agents or employees
     of his aSSigns, will bring firearms or dogs upon the leased premises, and
     should this provision against hunting and fishing be violated by any
     agents   I   servants, employees or contractors of Lessee's assigns, any such
     person so Violating same shall have no further right to enter upon the
     leased premises, and such person shall be regarded as and shall be a
     trespasser on the premises of Lessor and be subject to the penalties
     imposed upon trespassers under the laws of the State of Texas.


          14.      It Is expressly agreed and understood that after production of

     oil and gas in commercial quantities is obtained from the leased premises,
     the mi nimum annua 1 income to Lessor from payment of renta 1s , shut- i n
     royalty and royalty on production shall be sum of not less than Two ($2.00)
     Dollars per acre on the total acreage retained and then covered by this
     lease, but this provision shall not impair the right and privilege of
     Lessee, his successors and aSSigns, to release and surrender any part of
     the above described leased premises as herein provided.           Lessee, his
     successors and aSSigns, shall determine within 90 days from the expiration
     of any lease year during which royalties have been paid on actual
     production the amount of any deficiency, and shall within said gO-day
     period pay such deficiency to Lessor or deposit same to Lessor's credit at

                                                   i-CIlP
                                                      - -0012146i
                                                          ----
                                             -1-
     GWB2/dm 130(1)


      ,               -,-                                              ,.. , ,        49
the depository hereinabove designated.            Default in the payment of such
deficiency shall "at operate to tenllinate this lease or any part hereof,
but Lessee, his successors and assigns, agrees to personally pay such
deficiency to Lessor at Laredo in Webb County, Texas, together with any
reasonable     cost,   including     attorney's   fees,    incurred   by   Lessor   in
collecting such deficiency if not paid within the gO-day period hereinabove
provided for.


     15.     Nothwithstanding any other provision herein contained, this oil,
gas and mineral lease is limited to oil, gas and sulphur and minerals
produced with oil and gas, and does not include minerals other than oil,
gas and sulphur and minerals produced with oil and gas, as Lessor herein
excludes from the leasehold estate herein granted,               and reserves unto
himself, his heirs and assigns, all minerals other than oil, gas and
sulphur and minerals that may be produced with oil and gas, but it is
expressly agreed that         'gas' as used herein includes gas, condensate,
distillate or any other gaseous substance or any other mineral produced
with oil and gas, including sulphur.


     16.     The right to pool under Paragraph '4' of this Oil, gas and
mineral lease shall be limited to lease or leases on land belonging ·to
Lessor herein, or in which lessor owns an interest in the oil, gas and
other minerals.


     17.     For the      purposes   of the   annual    renta 1 payments   due   under
paragraph 5, Lessor and Lessee agree that said payments have been timely

paid and      received,    and that this      Lease    is perpetuated, without the
necessity of further delay rental payments, until the expiration of the
primary term.



     18.     On November 1, 1990, Lessee covenants and agrees to execute and
deliver to Lessor a written release of any and all portions of this lease
which have not been drilled to a density of at least 40 acres for each
producing oil well and 640 acres for each producing or shut-in gas well,
except that in case any rule adopted by the Railroad Commission of Texas or
other regulating authority for any field on this lease provides for a


                                                          !CiiP" ooi21471
                                           -2-            -----~-----
GWB2/dm 130(1)

                                                                                         50
spacing or proration establishing different units of acreage per well, then
such established different units shall be held under this lease by such
production, in lieu of the 40 and 640-acre units above mentioned; provided,
however, that if at such date lessee is engaged in drilling or reworking
operations the date for the execution and delivery of such release shall be
postponed and the entire lease shall remain in force so long "as operations
on said well or wells are prosecuted with reasonable diligence, and if,
after the completion or abandonment of any such well lessee commences the
drilling of an additional well within Ninety (90) days from the completion
or abandonment of the preceding well, or continuously conducts drilling
operations in good faith and with reasonable diligence on said lease
"Without any cessation for longer than Ninety (90) days, said lease shall
remain in full force and effect during such drilling operations and until
the end of Ninety (90) days after the completion or abandonment of the
final well, at which time lessee shall execute and deliver to lessor said
written release, releasing all portions of the lease not then so developed.
Each retained unit shall contain at least one (1) well producing or capable
of producing oil or gas in paying quantities, and the acreage within a unit
shall be contiguous.


If, after the date the partial release called for under this Paragraph 18
takes affect, all production from a retained unit around a well or wells
cease to produce oil or gas in commercial or in paying quantities, Lessee
shall have one hundred eighty (180) days thereafter within which to
commence operations to establish or re-establish production therein in
commercial or paying quantities, whether such production be from the same
wellbore or other wellbore.     If such operations    result in commercial
producti on, then thi s 1ease, as it app 1 i es to such un it sha 11 continue
until such commercial or paying production again ceases.    However, if such
operations do not result in commercial production, then Lessee shall have
ninety (90) days after completion of such operations within which to
commence drilling or reworking operations within such unit, and this lease,
as it applies to said unit, shall remain in force so long as operations on
said well or for drilling or reworking of any additional well therein are
prosecuted with no cessation of more than ninety (90) consecutive days, and
if they result in the production of oil or gas therein, so long thereafter


                                                  lCOPOo121"~
                                     -3-          --------:--
GWB2/dm 130(1)
                                                                                51
as oil or gas is produced from said unit.        As to any unit upon which
commercial production may periodically terminate, the above right to timely
resume operations and continue this lease as to such unit shall be
reoccurring right.


The stipulation above as to the size of retained tracts around wells shall
never be construed as a satisfaction of Lessee's right, duty and obligation
to reasonably develop the leasehold held by Conoco or its successors or
assigns.   After November 1, 1990, Lessee agrees to drill such additional
wells on the leased premises or such portions thereof as may be in force

and effect from time to time, as may be necessary to reasonable develop the
same for the production of oil and/or gas as a reasonable prudent operator.


19. A portion of paragraph 3 has been deleted and the following is in lieu
thereof.


     (b) ,on gas, including caSinghead gas or other gaseous substances,

     produced from said land, the Lessors royalty shall be calculated and
     paid as follows:


     a)    Sales To Non-Affiliated Third Parties:
           In the event Lessee enters into a gas sales contract with a

           non-affiliated third party, Lessor's royalty shall be one-sixth
           (1/6) of the gross proceeds received by Lessee from the sale of
           such gas.



     b)    Sales To Related Or Affiliated Entities For Resale:
           In the event Lessee enters into a gas sales contract to sell gas
           to a related or affiliated entity, then Lessor's royalty shall be
           computed on the greater of the following:
           1.    One-sixth (1/6) of the gross proceeds received by lessee or
                 any affiliate or related entity from the sale of such gas to
                 the first non-affiliated entity, or


           2.    One-sixth (1/6) of the highest price reasonably obtainable
                 for gas by Lessee and other producers or operators in the



                                     -4-
GWB2/dm 130(1)
                                                                                52
                 east one-fourth of Webb County, Texas, who are producing gas

                 of like kind, quality and quantity.


                 In this regard, it is understood that the "highest price
                 reasonably   obtainable"     may    be   equal         to,    but   is   not
                 necessarily, the highest price then being obtained by other
                 producers or operators in          the east one-fourth Of Webb
                 County, Texas, who are producing gas of 11ke kind, quality
                 and quantity.


    c)   Taking, Selling Or Delivery Of Gas To Lessee Or Its Related Or
         Atfil iated Entities For Use (Not For Resale):
          In the event Lessee takes gas for its own use, or sells or
         transfers gas to a related or affiliated entity for use, then
         Lessor's     royalty shall     be computed on        tbe greater of the
         following:


          1.     One-sixth (1/6) of the highest price reasonably obtainable
                 for gas by Lessee and other producers            01"    operators in the
                 east one-fourth of Webb County, Texas, who are producing gas
                 of like kind, quality and quantity.


                 In this regard; it is understood that the "highest price
                 reasonably   obtainable"     may    be   equal         to     but   is   not
                 necessarily the highest price then being obtained by other
                 producers or operators       in    the   east one-fourth of Webb
                 County, Texas, who are producing gas of like kind, quality
                 and quantity, or


          2.     One-sixth (1/6) of the quarterly weighted average of the
                 pri ces being pa i d by "purchasers" (as here; nafter defi ned)
                 in   the east one-fourth of Webb County, Texas, who are
                 purchas i ng gas of 1i ke ki nd and qua 1i ty.          For the purposes
                 of calculating the average price under this Paragraph c2,
                 prices paid shall      be those as        reported           in the Energy
                 Planning Book publ ication or as reported to the State of



                                        -5-
GWB2/dm 130(1)
                                                                                                53
                 Texas for severence tax purposes.             uPurchasers" shall mean

                 the. three     largest   purchasers        based   on   volume     of    gas
                 purchased for such calendar quarter, in the east one-fourth
                 of Webb County, Texas.       For an example of the calculation of
                 the quarterly weighted average of such price, see Exhibit
                 UB"


       Lessor and Lessee shall meet within eleven (11)· months after the end
of each calander year.        At least thirty (30) days prior to such meeting,
Lessee should furnish to Lessor a statement or other documentation of the
basis upon which royalties accrued to lessor under the terms of the Lease
for the previous calender year.           Any additional royalties calculated by
Lessee to be due, if any, shall be paid at such meeting.                  Within one (1)
year    from   delivery   of    the   above      referred     to    statement     or     other
documentation, lessor shall notify Lessee of any discrepancies.                   Failure to
notify lessee timely of any discrepancies shall constitute final acceptance
of royalty payments as covered by such        s~atements      or other documentation.
The first period for which Lessee shall prepare such statements or other
documentation shall begin on April 1, 1988 and end on December 31, 1988.
Nothing in this paragraph shall preclude Lessor from claiming any royalty
which Lessor is entitled to as a result of mistake                       in computation,
oversight in computation, or error in computation of royalty or which may
result from the subsequent disclosure of a discrepancy.


       LESSOR'S royalty shall be without deduction for any costs. such as,
but not limited to, costs of producing, gathering, storing, separating,
treating, dehydrating, compreSSing, processing, transporting and otherwise
making the oil, gas and associated substances ready for sale or use, except
for a)    severance and related taxes, and b)                reasonable transportation
expenses which may be necessary to be paid to non-affiliated third parties
or entities to get Lessor's gas to a market or point of sale off the leased
premises and which sale or sales will result in a net price equal to or
higher than if said gas had been sold at the wellhead.


       LESSOR'S royalty on all production from depths below the stratigraphic
equivalent of the top of the Cretaceous System as seen at 12,810 feet

                                                      ---------
                                                      lcop 0012151 I
                                           -6-
GWB2/dm 130(1)

                                                                                                 54
in the electric log of the         Vaquillas #7 Well     located 260'      FNL and
1,700' FWL of Survey 987, A2061, Webb County, Texas, under the lands
now held by Lessee under this Lease shall be one-fifth (1/5)                instead
of one-sixth (1/6).


     LESSEE may submit a copy of a proposed gas sales contract to Lessor
which is acceptable to Lessee and request that Lessor approve same for
royalty computation purposes.      Lessor shall have thirty (30) days after
receipt of a gas contract to approve same.      If lessor approves same or does

not timely decline to do so, then lessor's royalty on gas sold under such
gas sales contract shall be based on the gross proceeds received under said
contract.


     GAS contracts with a term in excess of three (3) years shall contain a
provision for price redetermination no later than the end of the 3rd year
and subsequent price redeterminations thereafter at intervals no greater
than two (2) years apart.


     20.    Lessee agrees to fill all slush pits and level the same when they
have ceased to be used and to restore the land to as near its original
state as is practicable and to pay for damages to the surface of the land
and the improvements, water wells, growing crops and livestock thereon, and
to any other personal property of Lessor, Vaquillas Ranch Company, Ltd.,
occasioned by, arising out of, or resulting from operations by Lessee, his
agents, employees or independent contractors on the land hereby leased to
Lessee.     Lessee also agrees, when requested in writing by Lessor, to
divulge to Lessor true and correct information as requested by Lessor as to
all drilling, producing and marketing operations conducted under this lease
and to furnish to lessor copies of all electric well logs taken hereunder;
provfded,    however,   Lessee   shall   not   be   obligated   to    release   such
information until it has been released to the industry.


     21.    lessee hereby agrees to ensure that the two exit gates on F.M.
2895 (Forest Gate and Reynolds Gate) are guarded in an efficient and
prudent manner during drill ing, reworking or plugging operations and at
other times as mutually agreed to by Lessee and Lessor.              As to the exit


                                         -7-
GWB2/dm 130(1)

                                                                                       55
gate on the north side of U.S. Highway 59, Lessee agrees to use its best
efforts to work out an arrangement with other exploration companies using
such gate to ensure that it is guarded in an efficient and prudent manner
during drilling, reworking or plugging operations and other times as
mutually agreed to by Conoco and Lessor.       Further, Lessee agrees to use its
best efforts to work out an arrangement with TransAmerican Natural Gas
Corporation or its successors or assigns to ensure that the exit gate
located 9 miles north of Aguilares, Texas, on F.M. 2895 is guarded in an

efficient and prudent manner during drilling,             reworking or plugging
operations and at other times as mutually agreed to by Lessee and lessor.
In regard to gates used by Lessee and other exploration companies, Lessee
agrees to pay its share of the cost of guarding such gates when such gate
guards are required under this agreement.       Lessee shall not be obligated to
furnish a gate guard on any gate which has been abandoned or is not being
used by Lessee.


     22.    Lessee agrees that before abandoning any well drilled on said
lease for oil or gas purposes, it will notify the owner or the surface
estate in person or by telephone of its intention to do so, and it will
allow said owner of the surface estate a reasonable time, not exceeding
twenty-four (24) hours thereafter, within which to elect to take over the
hole for the purpose of attempting to make and complete a water well.
lessee agrees to consult with such surface owner as to the location of a
potential    water   zone,   without   any    liability   or   warranty   for   such
consultation.     Upon the owner of the surface estate election, within the
specified time, to attempt to complete the well as a water well                 and
complying with all rules and regulations of the Railroad Commission of
Texas and applicable statutes, Lessee will, at its expense, set all plugs
to just below the deSignated water sand as may be required by the Railroad
Corrmi ss ; on and thereafter deli ver the we 11 to sa i d owner of the surface
estate, leaving in such well all surface casing and such intermediate
casing as may have been run and set to at least the depth of the designated
water sand and thereafter the owner of the surface state shall own the well
and shall be responsible for all subsequent matters in connection with the
well and for compliance with the applicable statutes and regulations of all
regulatory agencies having jurisdiction.        Lessee shall have no liability to


                                        -8-
GWB2/dm 130( 1)                                --~-~---
                                                IcOP 0012153    I
                                               - -..- - -.- - -
                                                  ,   ,



                                                                                       56
              --
Lessor in connection with any of the operations which may be conducted by
the   owner      of    the      surface   estate     who   shall    thereafter   bear   all
responsibility and liability with respect thereto.                       It is expressly
understood that Lessee shall not be required to furnish any additional
casing or other equipment for any well plugged back at the request of the
owner of the surface estate under this paragraph.                  Should the owner of the
surface estate elect not to attempt to make a producing water well out of
any such hole, Lessee shall plug the well in accordance with all applicable
rules, regulations and statutes.


      23.     It is expressly agreed and understood that for the purposes of
this lease the following definitions shall apply:


              lICorranencesll   -   A well shall be deemed commenced on the
                                    date which the drilling bit enters the
                                    earth for the drilling of a well.
              IIAbandoned li    -   A well shall be deemed abandoned on the
                                    day when it is finally plugged as a dry
                                    hole.
              "Completed"       - A well shall be deemed completed thirty
                                  (30) days after the day the Lessee sets
                                    production casing.
      24.     Lessor and lessee agree to 1imit the commencement of actual

drilling during deer hunting season to 1) those wells drilled in areas
which would not disturb deer hunting, and 2) offset wells.                  If Lessee must
commence a well during deer hunting season to perpetuate said lease, then
Lessor will either a) not object to the drilling of such well during deer
hunting season or b) agree to extend the commencement date for such well to
a mutually agreeable date after deer hunting season ends.                  For the purposes
of this paragraph "deer hunting season II shall be that period defined by

State law.


      25.     Nothwlthstanding anything contained herein to the contrary, the
Lessor at any time and from time to time, upon not less than ninety (90)
days notice to the holder of this lease, may elect to require the payment
of any royalties accruing to such royalty owner under this lease to be made
 in kind; provided that any expenses incident to the exercise of such

 election shall be borne by Lessor and such election shall be for periods of
 not less than twelve (12) months.            Lessor shall only be allowed to take in


                                               -9-
 GW82/dm 130(1)
                                                                                              57
kind when lessee is producing for his own account.      In the event of such an
election by Lessor, Lessee shall cooperate fully with Lessor in allowing
Lessor to take their royalty in kind, including permitting Lessor to use
Lessee's wellhead equipment and, to the extent that Lessee has assignable
rights, the use of lessee's purchaser's transportation facilities in good
faith and not to exceed prevailing charges for similar services in the
industry at the time if Lessee or its affiliates are transporting the gas,
but if Lessee has a third party contract for the transport of said gas,
Lessor will be bound by said contract.       Should Lessee desire to enter into
a gas purchase contract having a term of more than one (1) year, then (a)
Lessee shall include in such contract a provision that allows Lessor to
elect to take its gas in kind and be released from such contract one
hundred twenty (120) days after notice, or (b) Lessor may approve of such
contract in writing, in which event, lessor may elect to tak.e its gas in
kind either at the end of such gas contact or one (1) year after notice to
Lessee, whichever happens sooner.        Any equipment installed by Lessor
necessary to take in kind must be approved by lessee and maintained
according to lessee's specifications.


     If Lessee is unable to obtain a more favorable gas contract because of
lessor's reservation of this election to take in kind, then lessee may
elect to give notice of its intention to sign a gas contract acceptable to
Lessee and request that lessor join in signing same, and if lessor elects
to Sign same, then Lessor's royalty share of revenue shall be bound by such
contract and Lessor may not elect to take its royalty in kind during the
term of such gas purchase contract.


     26.    This Amendment is applicable to only that leasehold interest
presently owned and held by Conoco Inc.       Nothing contained herein shall in
any way inure to the benefit of or be applicable to third parties who hold
or claim any interest in said 26,622.79 acre lease or who claim an
undivided    interest therin   either jointly or separately with Conoeo.
Nothing herein shan in any way prejudice any claim, demand or cause of
action which Vaquillas may have or assert against third parties holding any
leasehold interests in Vaquillas lands.       Nothing herein shall be construed
as a release or modification of any right, claim or cause of action which


                                      -10-                         i'cop.~ls51
GWB2/dm 130(1)                                                     ---~-------

                                                                                  58
Vaquillas may have aga.inst third parties who claim any interest in said
26,622.79 acre lease or any other Vaqui11as lease.


      27. Lessor does further RATIFY, CONFIRM and ADOPT all of the terms,
provisions and conditions of said June 15, 1974 Lease, as amended and as it
applies to those rights held by Conoco Inc. thereunder, and that such
lease, as amended and as it applies to Conoee Inc. is in full force and
effect as of this date.     Further, nothing contained herein shall in any way
inure to the benefit of or be' applicable to any interest held by third
parties in and to the June 15, 1974 Oil and Gas lease.




      DATED this   <51'~ day of January, 1988.
VAQUILLAS RANCH COMPANY, LTD.                   VAQUILLAS UNPROVEN MINERAL TRUST




                                                8y:


                                                By:




VAQUILLAS PROVEN MINERAL TRUST                    CONOCO INC.


           . Wal er, Jr.,   rustee          !jd   By:   ~.f~~~-Jl/~
By:   6: ,~og*~ &~ 'tl~
      E.     er
                    I
                   uiros,   ru tee
                                     )




                                         -11-
GWB2/dm 130(1)
                                                                                   59
                                                     EXH I 8 I T "A"

          .!!llir                    A8STRACT                CERTIFICATE             GRANTEE              ACRES

             16~9                       I'll 0                   llS8                eeso •        RGNG   640;0
             1651                       1112                     1159                eeso &        RGNG   640.0
             1652                       2876                     1159                \/. H. Taylor        640.0
             1661                       1122                     1164                CCSO & RGNG          640.0
             1663                       1123                     1165                ecso & RGNG          640.0
             1633                       1323                     4/808               GC & SF              640.0
             163~                      2252                      4/808               GC & SF              659.96
            1665                        1124                     1166                CCSO & RGNG          640.0
      5.1/21666                         2253                     1166                eeso & RGNG          328.75
      N.l/2 1666                        3142                     1166                ceso & RGNG          328.79
             468                        2255                      236                AS & H               659. '"
             467                         799                      236                AS • H               640.0
             1635                       1797                       17                TC Ry.               640.0
              865                       1438                     12/2541             H • GN               640.0
             1683                       1115                     1175                CCSO & RGNG          640.0
             1691                       1267                     5446                Ge • SF              640.0
             1696                       2418                     5448                GC • SF              640.0
             1695                       1268                     5448                Ge • SF              640.0
               279 (pt. only)           1353                     3702                GC & SF              458.2
             1004                       2421                     21105                J. Poi tevent       634.58
             1692                       2419                     5~~6                 GC • SF         .   613.04
             1693                       1269                     5447                 GC. SF              640.0
             2112                       2420     &   1925         631                 B.~F.    James      627.12
               276                      i552                     3700                 Ge & SF             640.23
               228                      2550                     134~, ..             CCSO ,& 'RGNG       636.93
              '227                      1133                     13W~                 ceso & RGNG         640.0
               988                      2593                     2/103                J •. Pol tevent     637.10
               987'                     2061                    .211,93'              J .. Poltevent      640.0
              213'                      1141                     13~9.                eeso & RGNG         640.0
            275'                        1336                     3700 '            , 'GC ',,& "SF'        640.0
          ·27H'                         1337                     3701                 cqQ& RGNG           640;0
  :~'.1/~ '31. BI9Ck 2                  1043                       453             ..eeso:,,& ,~GNG       320.0
           , 25. Block 2                1042                       ~52             'eeso & RGNG           640.0
          '232"                         2148                     1346                 CCSO & ReNe         462.70
           '233"                        1117                     1347                 ceso &ReNe          4~5.9
      N.H2     51. Block 2              1045                      460 .               ecso & ReNe         320.0
             ,259 (pt. only)            1137                     1074                 eeso &RGNG          600.0
             1955                       1328                     4526                 Ge & SF             640.0
             2057                        985                      302                 eeso & ReNG         652.25
             2060 (pt. only)            3329-30                   303                 CT & H              440.0
      LI/2 2059                          984                      303                 eT& H               320.0
      E.l/2 1953"                       1329                     4527                Ge& SF               320.0
             1627 (Pt. only)            1324                     4683                Ge & SF              160.0
             1629 (pt. only)            1275                     4682                GC & SF              292.65
      \/.1/2 1662                       2230                     1164                eeso     & RGNe
      E.l/21648                                                                                           329.31
      \/.1/21648
                                        24"                      1157                eeso     & RGNe      325.75
                                        3301                     1157                ceso     & ReNe      325.75
               26. Block 21'1                                     452                R. D •. Barnsley     640.0
            2335                        3025                     School              W. Brown              27.3
      E.l/2 1956*                       2560                     4526                Ge   &   SF          327.34
Lessor's·warranty hereunder as to all of Surveys 987,273,275,27],26, the E.l/Z of 1953,
E.I/2 of 1956 and ~Ol.9 acres out of Survey 233 (all except 54 acreS out of SW corner of said
Sur. 23;) Is expressly limited to 1/2 of the executIve rights In the 011. and gas rights In
and under said lands, and as to all of Survey 232 :I~ :e~pressly limited to 4/5 of the execut ive
rIghts In the oll.and gas rights.                .     .,

The following parts of surveys are expressly exc1uded'~eref~om, -vIz.·:.
(I)     The SE 1/4 of S~ 1/4, 511 1/4 of HE 1/4 (80 acs.L'andN ',1/2 of S~ I/~ and S\/ 1/4 of s~ 1/4
        (120 acs.) of CT&H Survey 2060.                            ..' .".', ..... ' ..

(2)     The w. 3/4 or GC~SF Survey 1627 described tn O&G Lse. to Daniel A. Pedrotti dated
        September 24, 1973, as a~ended.

        Any part of a survey listed herein not included \.,.Ithin any specific fraction.,1 reference
        preceding the su'rver refercnc;e.
(4)     The HE 160 acre' of GC&SF Survey 279.
(5)    ·Block 11 as per the E.D.Claggett Subdivision of rccord 2 Plat Records 29, Wcbh County,
        contiJinlng ~O acre~ tl~in9 the N\I I/lf of SE Ill; of CCSO & RGNG Survl'~' 259.
                                I

(6)     All of the \"I. 320 ;l.:r~'i> of Survey 1629 d(.'scribl!d and included In O&G lsc. tu l),lIllel A.
        Pedrotti dated $"j'\.';:lh\.'r 2~, 1973, a,s amcndt"d,
                                                                                 T~OPOOI2i57:.
                                                                                 --~---~-.---                       60
                                                     EXlIlIlT •


    C.lculatlon of toy.hy to b. SNld on ,II d.. ~I't'.nd to L..... or ,utill.tll for UII ,.M
nn for 1' . . . 1.') In ,,"cardlne. vlth p.,.,rlp)! 19.

    "lnclp.h             ,.y L.llor roy.Uy b.nd on thl ,r ..ttr of th' v.l;ht.d .v.,.;. price
                         ptld by th. th,u lar, .. t volUdtrtc pUrchllra for the ".l.nd,r qulner
                         In the .. at q\lIrttl' of v.bb Covnty 01' the 1III10"ttll 'Yin'll' of th. pr!c; ..
                         us.d by tilt L... or for roy., lY P')'MAt pIoIrpD . . . .




     Oat. Sourc.s        [n...vy 'luvdn; loot publication or IS reported to til.                 nu.      of tun hlr
                         IIv.rene. tax pvrpaa.,.

sup 1.     [lIlc;ul". th. v.I'IIht.d IIV'1'II0' prln tor the IIMth for ,lIc;h of tllll 'hI''' ttr..,."
           volu-. P\lrc;hllll. for til quirt., 11"_ the tax r.carda.




           Pureh .... fro .. 's!I!P'ny A

                   L.ne ,                    100,000              2.00       ZOO,a63
                   Unit 14                    ao,ooo              1.51       120,eOO



                                             leO,ezt              I."        29t,733


           TOtAL Unftltd T....               360,ez,
                 Tren._I .. ton


                                                          613,396/160,e21 • SI.70/MMltu.

           IIp .. t pl'oc.du,. for      reNlnln~     two lIantlll for thll purch ... r .nd for remaining tlla
           purch .......

 Step 2.   Calcul't. the vahllt.d IVerl\l' prle. of the thr ••              Ilrv.n     va\ulII.trlc    pur!;""'"        lor
           the qulrllt u.lno JIIOntilly VII" .. troll IUp 1.


                     "onth·J'oy,ry '9!§                Month· ,ebruuy 19815               Honth , H.reh IfIU!

 Emb.WL            VOlUM       Prlca    Extension      VO\\nI'    Pr!c.   Exten.lon      Val~.         Prlc.     Ext.nslan
                    Me'        l/HCf         •         MCf        S/HC'     •            Me'           S/KC'        •
 United Tax..     360,821       1.10     613,396      397,130     1.515    627,465      3Z0,l06        1.58      506,083
 TUMIII .. lon

 UTUO!
 South Gulf

 Tot.l.
                   'oo,m
                  ill..222 LH
                 1,136,044
                                1.5$     620,346
                                         ~
                                                      =
                                                      350,723


                                        1,833,74Z 1,047,009
                                                                  1.60
                                                                  WI.
                                                                           561,157
                                                                           lll.m
                                                                                        500,1261.55
                                                                                        ~.'~,5~'"--o'~~~'~'"'

                                                                          1,613,255 1,121,432
                                                                                                                 775,195


                                                                                                                1,756,658


                           SUI! of Volu.."           lUll ot ExUn,'o!\,          Vefghud    Ayerai'      P~!c,



 Toul.                       3,304,485                   5,263,855                          1.59

 sup 3.      tlleulu. w.IGht.d ,v,nv' prtu und by L..... to calcul'tI roy.lty p'YIII,nta on
             ' " d,llvered to L..... or .HtI"t .. and not for 1' . . . 1••

                         Month.January 'filII            Month.February 191111                 Mgnth·Mush 1988

                   Voh...      Pl'lc.    Extln.fan     vatu-.     Prfc.    Ext.n.lon     \/01101IIII   Prlc.      Exun,lon
                   MCf         '/IICf        •         Kef        SIMCf
                                                                             •           'Of           $-/Her
                                                                                                                    •
                  155,000      1.60       248,000      140,000 1.62         Z26,aOO     155,000        l.se        244,900




            III! 9' YoIV .."                         SUP' 9' ClIun.'on.          ""phtrd Aysrur Pelu

                                                          719,100                          1.60


 IUp 4.     COIIPIr. w.l,ht.d 'Y'l"Ig. price c,IGullt.d In Sup 2 to lh. 1I.!vhud ..... r.'. , .....
            prlc. c,lcul.ud In n.p 3.

            SI.60IHCf I, lraUer th.n St.59/KCf '0 no .ddltlon.t !"Oy.lty P.YIII,/1t •• r, requlrad
            10r th h qull'ur.




            VOIUIIII .nc! prlc" v"d In thlt t . . .pl. Itl Utld for IIlunl'ulan .nd ... y nat b.
            nfl'''I .... ' of .ctu.1 condltlona.

                                                                                                                              61
THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §
                                                                     <.{iL
     This instrument was acknowledged before me on the q           day of
January, 1988, by J. O. WALKER, JR., General Partner of Vaquillas Ranch
Co., Ltd., A Texas Limited Partnership, on behalf of said partnership.


                                ~    .. &LA," *~V{'~
                                Notary Public in an or
                                     The State of Texas.                        <)C)
                                     My COl11llission Expires       7-3-        0   ,


                                        Lt:l\lRA    BA    LL€vJ
                                      Printed/stamped name of Notary.

THE STATE OF TEXAS   §
                     §
COUNTY   OF WEBB     §
                                                                oy--L
     This instrument was acknowledged before me on the          I             day of
January, 198B, by E. WALKER QUIROS, General Partner of Vaquillas Ranch Co.,
Ltd., A Texas Limited Partnership, on behalf of said partnership.




THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §

     This instrument was acknowledged before me on the          9~ day of
January, 1988, by GENE S. WALKER, General Partner of Vaqulilas Ranch Co.,
Ltd., A Texas Limited Partnership, on behalf of said partnership.



                                          ~ ub~in and for
                                      The State of Texas.           J-          09'
                                      My Comission Expires          7- 3- "
                                           ~fI<)RA       804 usvJ
                                      Printed/stamped name of Notary.

THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §

     This instrument was acknowledged before me on the      9~     day of
January, 1988, by EVAN B. QUIROS, General Partner of Vaquillas Ranch Co ..
Ltd., A Texas Limited Partnership, on behalf of said partnership.

                                    d.cblJ ~,J(1,,'}j
                                      Notary Public in and for
                                      The State of Texas.
                                      My COI11Ilisslon Expires '1-3-&,,9
                                           /v,q v I~/I   t5A LUi         vJ
                                      Printed/stamped     name      of        Notary.
                                   -12-
GWB2/dm 130( I)
                                                                                        62
THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §
                                                                    ~
     This instrument was acknowledged before me on the CJ        day of
January, 1988, by J. O. WALKER, JR .. Trustee for The Vaquillas Unproven
Mineral Trust.

                                  c~          . itA- .~fi. flu.if
                                    Notary    ~ublic   in   a~for
                                    The State of Texas.                   00
                                    My Commission Expires:          7- 3- 6 I

                                          LA) t>RA     b>A UEN
                                    Printed/stamped name of Notary.

THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §
                                                                    ~
     This instrument was acknowledged before me on the         7'
                                                               day of
January, 1988, by E. WALKER QUIROS, Trustee for the Vaquillas Unproven
Mineral Trust.


                                  ~"~4~~
                                    Notary Pu lie 1n and for
                                    The State of Texas.
                                    My Commission Expires: 7-:3-         8'9
                                          0A tJfG,4    HI! LLEvJ
                                     Printed/stamped name of Notary.


THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §
                                                               n~
     Thi 5 instrument was acknowledged before me on the    -,       day of
January, 1988, by GENE S. WALKER, Trustee of the Vaquillas Unproven Mineral
Trust.


                                   ~"94~," oOr"t
                                      ~Pub ie in and for
                                     The State of Texas
                                     My Commission Expires:         '1- 3- 111
                                          /""1IUi2A    1:54 LLSvJ
                                     Printed/stamped name of Notary.


THE STATE OF TEXAS §
                     §
 COUNTY OF WEBB      §

     This instrument was acknowledged before me on the           day of
January, 1988, by EVAN B. QUIROS, Trustee of Vaquillas Unproven Minera 1
Trust.                                             ~ "
                                   -  ~   !! ), a"
                                  ~y Public in and for
                                                      4J! 0,,,9-'
                                     The State of Texas
                                     My Commission Expires: '7-3-117
                                          Lc,[)f(,a    15", LLe:vJ
                                     Printed/stamped name of Notary.



                                   -13-
 GWB2/dm 130(1)

                                                                                 63
THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §

     This instrument was acknowledged before me on the  '1 ~ day of
January, 1988, by J. O. WALKER, JR., Trustee of Vaquillas Proven Mineral
Trust.



                                    NOtarY ic in and for
                                    The State of Texas                          "
                                    My Commission Expires: 7-3- i?{
                                           IvAM.A /2,,</ LIE vJ
                                    Prlnted/stamped name of Notary.


THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §
                                                                       yh
                                                            the    9          day of
January, 1988, by E.                                              Proven Mineral Trust.

                                   (.~~~~~~~~~~~--
                                    otary u ic 1n and for
                                    The State of Texas
                                    My Commission Ex~es:               7-.:3- ~'l
                                           L4tJ!<A           &      Li..GvJ
                                     Printed/stamped name of Notary.


THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §

     This instrument was acknowledged                       the    9   'ti0 day of
January, 1988, by GENE S.WALKER, Trust                       Proven Mineral Trust.

                                         otary ub   lC 1n    an for
                                     The State of Texas
                                     My Commission Expires:            7-.3 - 'g'1
                                           ivA iJ/2A BA LL;;;.,J
                                     Printed/stamped name of Notary.



THE STATE OF TEXAS   §
                     §
COUNTY OF WEBB       §

                                             on the
     This instrument was acknowledged before me         9      day of
                                                                       L
January, 1988, by EVAN B. QUIROS, Trustee of Vaquill as Proven Mineral
Trust.

                                     Notary Public in and for
                                     The State of Texas
                                     My COnInission Expires:           7-3- :;;J
                                           .LAuRA      8-4 LLevV
                                     Printed/stamped name of Notary.




                                   -14-
GWB2/dm 130(1)
                                                                                          64
......


         THE STATE OF TEXAS   §
                              §
         COUNTY OF WEBB       §

              This instrument was acknowledged before me on the 'l-J-b day of
         January, 1988, by       Iefi c. • .s"--;;l er                            ,
         Attorney·in-Fact for CONO(? INC., ali aware corporation, on behalf of said
         corporation.



                                             The State of Texas
                                             My Commission Expires: '7-I&" qg'
                                                  LJ e.11"" /J'la. Y' Ke. rt-
                                             Printedlstamped name of Notary.




                                           ·15·
         GWB2/dm 130(1)
                                                                                      65
                                                    ·r...".... .
.,
     •••••


     •


     J":
             '._ A


         'i • It.odIlUU U (1"1)
             .. i.J:I UD ACI" 1'00111\11: PrO>'b!t.on

                                                            •
                                                        OIL, GAS AND MINERAL LEASE
                 THIS AGltEEKENT mat. lbb,-1.~ .. _ _ _ _ _ _ .4&T ot. Novemb~L ____ R__ R. __ 'R. __ .. __ ._...lI..!!?_. ,*_11
               Vaguillas Rancl!SomruillY.t.-Ltd.; Vaqui11~Jm.p.roven_MinJrral Tn,tst i ...Y!9..l!.!.+1.~!"9.Y.~!L
             ~~ral-1.~ust..LI!f:..t,!!!~nd thr.g.H8!L.!~f!...&rulenLPJ!r..t.~ ....-h..JLr.....IDt1.lter. Jr ~._. ___ ._. _
             _ ~. Wal~r.-JlU-..!~,~~~~!!$~L~M_~"!!!J_I.. ....Q.\!ill_I!·            ,                     . ___._.'._.____ ..'

              ;::.~:~ 0111 ~ IrIOra) ...boN add .....           lu_ .,    p..!.~o:-i~;J:D86:-~p Texa!                              7804i=~===_====_~
              and      __G..?.!!~~.£:..z.y_~_~ox 219L..Jlo'!~!Q..lh_~~!lP_..l.1.£?_~____ ,. __ ._. ___ .•                    t.-. WlTNESS!:TH1
                     -I. ~ III ccmaW...,LlOII ot......!en Dollar"§._!lE.Q._.9,~J~~~!,-o_4....rul!Ly'~.!..\@blt;L~..QJ!§.!~.E~!!2.!L._R'-_...»oIl&r,
               II...! 0.00                             ) In bDd paM!,. ot Lbe lO,llUII bu.ln Pf'OyIW. Illd of  u..  Apft_t. of LMaw blf'lln toat.lM4, bereb, paa,ta.
              kuM L114 lott.o uclual....,. viii,;·L.'_ fur tb. rnupoM 01 IlIn,UaIUlla. t:XpJ.orllll'. Pr'OtPlCltill•• kDU ... u>d mIlIllI&' lor ...d. Pf'Odud.n.. 011. "" I.N!
              all otb ... mIr.lra", COII41Kt.1D.S p;plor.~n. noIo.le and I'toph,.1c&1 .",....,.. b,. ~a»b, COra UIl. 1'n.'Pi&;r &114, 1n&.. n.tl • - ...~:~~.
              au, ...tv ant! ~Ir flllld ......01 air lIIto ...bnrt.... nratl, II}'I .... pipe Una. bullcUl" ..-da "nita,. ~ ItILlD.... te _ _ U11M III _ ' - IlnIoo
              hIr'M tbtr.ull IIII!. 0.. , O.... r end. Urwl ludi _1IId or claim.:! b, Lutor adlac&llt alii! _ il INO     't~ to prod.\I~ "VI, tat. cer. or, kNot.
              t.ralI.IlJOl1. &114 _" laid llrodtlcb, ud. boaf;lll&' It. IIIIplonn. ~ toU_IN!' duenbtcl Iud hL __ H~  W   _ _ _ _ _ _ _• _ _• ___       Co"II~. T...... ""..I"


                      6~740 acres of land~ more or less~ situated in Webb County, Texas, more fully
                     described in Exhibit "AI] attached hereto and made a part of this Lease for all
                     relevant purposes, including limitations upon warranty as specifically set out
                     therein,




                                                                                                                                                                                 67
.'




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               GI.. " ulld" l1li' bud al'l4 lilt&! or ofnoe.,   u. .. u... ___ -U7 ot _ _ ._ _ _ _ _ _            ~   __________ • A. D. 11. ____ .••

                                                                                                                             --_.__._--_           ....
                                                                                   NotaQ Publlll   h~   fAd for          .----~~.   -----
                                                                     T&1UJ'OlNr A.CKHOWLJmOMEHT

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                                                                                                                                                               68
                          •   ADDENDUM TO OIL AND GAS LEASE
                                                            •
                           From Vaquillas Ranch Co., Ltd. et al
                          To Conoco Inc., Dated November 1, 1987




         12. Should Lessee be prevented from complyin9 with covenants of this
    lease by reason of conditions or acts set forth in Paragraph '11' hereof,
    then Lessee agrees annually to pay to Lessor an amount equal to the delay
    rentals herein provided for during such period of prevention, whether same
    be during or subsequent to the primary term, and such payment shall be made
    at the end of each year of prevention either to Lessor or to the depository
    above named for credit to the account of Lessor.


         13. This lease does not cover or Include any right or privilege of
    hunting or fishing on any part of the above described 1and, and Lessee
    agrees with Lessor that neither he nor his aSSigns or agents or employees
    of his assigns, will bring firearms or dogs upon the leased premises, and
    should this provision against hunting and fishing be violated by any
    agents, servants J employees or contractors of Lessee IS ass igns, any such
•
    person so Violating same shall have no further right to enter upon the
    1eased   prem1 ses,   and such person sha 11   be   rega rded as   and   sha 11   be a

    trespasser on the premises of Lessor and be subject to the penalties
    imposed upon trespassers under the laws of the State of Texas.


         14.   It is expressly agreed and understood that after production of                   .,

    oil and gas in corrmercial Quantities is obtained from the leased premises,                  ~C'I

    the minimum annual       income to Lessor from payment of rentals, shut-in                       0   1 )



    royalty and royalty on production shall be sum of not less than Two_($2.00)
    Do1lars per acre on the total acreage retained and then covered by this

    lease, but this proviSion shall not impair the right and privilege of
    Lessee, his successors and aSSigns, to release and surrender any part of

    the above described leased premises as herein provided.                  Lessee, his
    successors and aSSigns, shall detennine within 90 days from the expiration
    of any lease year during which royalties             have been paid on actual
    production the amount of any deficiency, and shall within said 90-day

    period pay such deficiency to lessor or deposit same to Lessor's credit at



    GW82/dm 124(7)
                                                                             ""'I JUt 1 4   ~                  69
     ..
".        ,.



               the depository hereinabove designated.
                                                                              •
                                                                      Default in the payment of such
               deficiency shall not operate to terminate this lease or any part hereof.
               but Lessee. his successors and assigns. agrees to personally pay such
               deficiency to Lessor at Laredo in Webb County. Texas. together with any
               reasonable     cost,     including        attorney's   fees,    incurred   by   Lessor     in

               collecting such deficiency if not paid within the gO-day period hereinabove
               provided for.


                    15.     Nothwlthstanding any other provision herein contained. this oil.
               gas and mineral lease is limited to oil. gas and sulphur and minerals
               produced with oil and gas. and does not include minerals other than oil.
               gas and sulphur and minerals produced with oil and gas. as Lessor herein
               excludes from the        leasehold estate herein granted,             and reserves       unto
               himself. his heirs and assigns. all minerals other than Oil. gas and
               su1 phur and mi nera 1s that may be produced with oil and gas. but it is
               expressly agreed that            Igas'    as used herein includes gas, condensate,
               distillate or any other gaseous substance or any other mineral produced
               with oil and gas, including sulphur.


                    16.     The right to pool under Paragraph '4' of this oil. gas and
               mineral lease shall be limited to lease or leases on land belonging to
               lessor herein, or in which lessor owns an interest in the Oil, gas and
               other minera 1s .


                    17.     For the     purposes        of the   annual   rental   payments    due   under
               paragraph 5, lessor and lessee agree that said payments have been timely
               paid and     received.     and     that    this   Lease is     perpetuated. without       the
               necessity of further delay rental payments. until' the expiration of the
               primary term.



                    18.     At the end of the primary tenn hereof, lessee covenants and                        L ()?
               agrees to execute and deliver to lessor a written release of any and all
               portions of this lease which have not been drilled to a density of at least
               40 acres for each producing 011 well and 640 acres for each producing or
               shut-in gas well. except that in case any rule adopted by the Railroad
               Commission of Texas or other regulating authority for any field on this




               GWB2/dm 124(7)
                                                                                                                       70
                    •                               •
lease provides for a spacing or proration establ1shing different units of
acreage per well, then such established different units shall be held under
~e~se by - su~h production, in 1ieu of the 40 and 640-acre units above
mentioned; provided, however, that if at such date lessee is engaged in

drilling or reworking operations the date for the execution and delivery of
such release shall be postp~n;d a~d the entire Tease shall remain in force
so long as operations on said well or wells are prosecuted with reasonable
diligence, and if, after the completion or abandonment of any such well
                                                                                 ~.)   :
Lessee commences the drilling of an additional well within Ninety (90) days
 from the completion or abandonment of the preceding welT, or continuously
conducts drilling operations in good faith and with reasonable diligence on
 said lease without any ces?atjon for longer than Ninety (90) days, said
 lease shall remain in full force and effect during such drilling operations
 and until the end of Ninety (90) days after the completion or abandonment
 of the final well, at which time Lessee shall execute and deliver to Lessor
 said written release, releasing all portions of the lease not then so
 developed.     Each retained unit shall contain at least one (1) well
 producing or capable of producing oil or gas in paying quantities, and the
 acreage within a unit shall be contiguous.


 If, after the date the partial release called for under this Paragraph 18
 takes affect, all production from a retained unit around a well or wells

 cease to produce 011 or gas in commercial or in paying quantities, Lessee

 shall have one hundred eighty (180) days thereafter within which to
 commence operations to establish or re-establish production therein in

 cormnercial or paying quantities, whether such production be from the same
 well bore or other wellbore.     If such operations result in commercial
 product; on, then thi s 1ease, as it app 1; es to such uni t sha 11 conti nue
 until such commercial or paying production again ceases.    However, if such
 operations do not result in commercial production, then Lessee shall have
 ni nety (90) days after comp 1et i on of such operati ons within whi ch to
 commence drilling '·or reworking operations within such unit, and this lease,
 as it applies to said unit, shall remain in force so long as operations on
 said well or for drilling or reworking of any additional well therein are
 prosecuted with no cessation of more than ninety {gO} consecutive days, and
 if they result in the production of oil or gas therein, so long thereafter



 GWB2/ dm 124 (7)
                                                                                           71
                                 •                                   •
",   .   ,.




              as oil or gas is produced from said unit.        As to any unit upon which
              commercial production may periodically terminate, the above right to timely
              resume operations and continue this lease as to such unit shall be
              reoccurring right.


              The stipulation above as to the size of retained tracts around wells shall
              never be construed as a satisfaction of Lessee's right, duty and obligation
              to reasonably develop the leasehold held by Canoe a or its successors or
              ass 19ns.   After November I, 1990, Lessee agrees to dri 11 such add i tiona 1
              wells on the leased premises or such portions thereof as may be in force
              and effect from time to time, as may be necessary to reasonable develop the
              same for the production of oil and/or gas as a reasonable prudent operator.


              19. A portion of paragraph 3 has been deleted and the following Is in lieu
              thereof.


                    (b) on gas, including casinghead gas or other gaseous substances,
                   produced from said land, the Lessors royalty shall be calculated and
                   paid as follows:


                   a)     Sales To Non-Affiliated Third Parties:
                          In the event Lessee enters into a gas sales contract with a
                          non-affiliated third party, Lessor's royalty shall be one-fifth
                          (l/5) of the gross proceeds received by Lessee from the sale of
                          such gas.


                   b)     Sales To Related Or Affiliated Entities For Resale:
                          In the event Lessee enters into a gas sales contract to sell gas
                          to a related or affiliated entity, then Lessor's royalty shall be
                          computed on the greater of the following:
                          1.   One-fifth (1/5) of the gross proceeds received by Lessee or
                               any affiliate or related entity from the sale of such gas to
                               the first non-affiliated entity, or


                          2.   One-fifth (1/5) of the highest price reasonably obtainable
                               for gas by lessee and other producers or operators in the


                                                    -4-
              GWB2/dm 124(7)
                                                                                               72
                       •                                   •
                  east one-fourth of Webb County, Texas, who are producing gas
                  of like kind, quality and quantity.


                  In this regard, it is understood that the IIhighest price

                  reasonably   obtainable"     may    be   equal     to,       but    is   not
                  necessarily, the highest price then being obtained by other
                  producers or operators       in the east one-fourth of Webb
                  County. Texas. who are producing gas of like kind, quality
                  and quantity.


     c)   Taking, Selling Or Delivery Of Gas To lessee Or Its Related Or
          Affiliated Entities For Use (Not For Resale):
          In     the event Lessee takes gas          for its own use, or sells or

          transfers gas to a related or affiliated entity for use, then
          lessor's      royalty shall   be    computed on      the    greater of the
          following:


          1.      One-fifth (1/5) of the highest price reasonably obtainable
                  for gas by lessee and other producers or operators in the
                  east one-fourth of Webb County, Texas, who are producing gas
                  of like kind. quality and quantity.


                  In this regard, it is understood that the "highest price
                  reasonably   obtainable"     may    be   equal     to        but    is   not

                  necessarily the highest price then being obtained by other
                 producers or operators in the east one-fourth of Webb
                  County, Texas, who are producing gas of like kind, quality
                 and quantity, or



          2.     One-fifth (l/5) of the quarterly weighted average of the
                 prices being paid by "purchasers" (as hereinafter defined)
                  in   the east one-fourth of Webb County, Texas, who                      are

                 purchasing gas of like kind and quality.             For the purposes
                 of calculating the average price under this Paragraph e2.

                 prices paid shall      be    those as     reported       in    the    Energy
                 Planning Book publ ication or as reported to the State of



                                        -5-
GWB2/dm 124(7)
                                                                                                 73
                   •
                 Texas for severence tax purposes.
                 the   three      largest    purchasers
                                                              • "Purchasers II sha 11 mean
                                                             based    on   volume        of     gas
                 purchased for such calendar quarter, in the east one-fourth
                 of Webb County. Texas.           For an example of the calculation of
                 the quarterly weighted average of such price, see Exhibit




       Lessor and Lessee shall meet within eleven (11) months after the end
of each calander year.          At least thirty (30) days prior to such meeting,
lessee should furnish to Lessor a statement or other documentation of the
basis upon which royalties accrued to Lessor under the terms of the Lease
for the previous calender year.             Any additional royalties calculated by
Lessee to be due, if any, shall be paid at such meeting.                    Within one (1)
year    from   del ivery   of     the   above     referred    to     statement      or        other
documentation, Lessor shall notify Lessee of any discrepancies.                  Failure to
notify Lessee timely of any discrepancies shall constitute final acceptance
of royalty payments as covered by such statements or other documentation.
The first period for which Lessee shall prepare such statements or other
documentation shall begin on April I, 1988 and end on December 31, 1988.
Nothing in this paragraph shall preclude Lessor from claiming any royalty
which Lessor is entitled to as a result of mistake                         in computation,
overSight 1n computation, or error in computation of royalty or which may
result from the subsequent disclosure of a discrepancy.


       LESSOR'S royalty shall be without deduction for any costs, such as,
but not limited to, costs of producing. gathering, storing, separating,
treating, dehydrating, compreSSing, proceSSing, transporting and otherwise
making the Oil, gas and associated substances ready for sale or use, except
for a)    severance and related taxes, and b)                reasonable transportation
expenses which may be necessary to be paid to non-affiliated third parties
or entities to get Lessor's gas to a market or pOint of sale off the leased
premi ses and wh1 ch sa 1e or sa 1es wi 11 result in a net pri ce equa 1 to or                        r"
higher than if said gas had been sold at the wellhead.                                                " I



       LESSEE may submit a copy of a proposed gas sales contract to Lessor
which is acceptable to Lessee and request that Lessor approve same for


                                            -6-
GW82/dm 124(7)
                                                                                                            74
".   -




                             •
         roya lty computation purposes.
                                                                      •
                                             Lessor sha 11 have thirty (3D) days after
         receipt of a gas contract to approve same.             If Lessor approves same or does
         not timely decline to do so, then Lessor's royalty on gas sold under such
         gas sales contract shall be based on the gross proceeds received under said
         contract.


                GAS contracts with a term in eXcess of three (3) years shall contain a
         provision for price redetermination no later than the end of the 3rd year
         and subsequent price redeterminations thereafter at intervals no greater
         than two (2) years apart.


                20.   Lessee agrees to fill all    slu~h   pits and level the same when they
         have ceased to be used and to restore the land to as near its original
         state as is practicable and to pay for damages to the surface of the land
         and the improvements, water wells, growing crops and livestock thereon, and
         to any other personal property of Lessor, Vaquillas Ranch Company, Ltd.,
         occasioned by. arising out of, or resulting from operations by Lessee, his
         agents, employees or independent contractors on the land hereby leased to
         Lessee.      Lessee also agrees. when requested in writing by Lessor. to
         divulge to Lessor true and correct information as requested by Lessor as to
         all drilling, producing and marketing operations conducted under this lease
         and to furnish to Lessor copies of all electric well logs taken her.eunder;
         provided.     however,   lessee   shall   not     be     obligated   to    release   such
         information until it has been released to the industry.


                21.   Lessee hereby agrees to ensure that the two exit gates on F.M.
         2895   (Forest Gate and Reynolds Gate) are guarded in an efficient and
         prudent manner during drilling, reworking or plugging operations and at
         other times as mutually agreed to by Lessee and Lessor.                   As to the exit
         gate on the north side of U.S. Highway 59, Lessee agrees to use its best
         efforts to work out an arrangement with other exploration companies using
         such gate to ensure that it is guarded in an efficient and prudent manner
         during drilling, reworking or plugging operations and other times as
         mutually agreed to by Lessee and lessor.          Further, Lessee agrees to use its
         best efforts to work out an arrangement with TransAmerican Natural Gas
         Corporation or its successors or assigns to ensure that the exit gate


                                                   -7-
         GWB2/dm 124(7)
                                                                                                     75
                             •                                       •
....

       located 9 miles north of Aguilares, Texas, on F.M. 2895 is guarded in an
       efficient and        prudent manner during drilling, reworking or plugging
       operations and at other times as mutually agreed to by Conoco and Lessor.
       In regard to gates used by lessee and ather exploration companies, Lessee
       agrees to pay its share of the cost of guarding such gates when such gate
       guards are required under this agreement.           lessee shall not be obligated to
       furnish a gate guard on any gate which has been abandoned or is not being

       used by Lessee.


             22.   Lessee agrees that before abandoning any well drilled on said                  d; 'p':)
       lease for oil or gas purposes, it will notify the owner or the surface
       estate in person or by telephone of its intention to do so, and it will
       allow said owner of the surface estate a reasonable time, not exceeding

       twenty-four (24) hours thereafter, within which to elect to take over the
       hole for the purpose of attempting to make and complete a water well.
       lessee agrees to consult with such surface owner as to the location of a
       potentia 1 water        zone.   without   any    1iabil ity    or warranty   for    such
       consultation.        Upon the owner of the surface estate election, within the
       specified time, to attempt to complete the well as a water well and
       complying with all rules and regulations of the Railroad Commission of
       Texas and applicable statutes, Lessee will, at its expense, set all plugs
       to just below the designated water sand as may be required by the Railroad
       Commission and thereafter deliver the well to said owner of the surface
       estate, leaving in such well all surface casing and such intennediate
       casing as may have been run and set to at least the depth of the designated
       water sand and thereafter the owner of the surface state shall own the well
       and shall be responsible for all subsequent matters in connection with the
       well and for compliance with the applicable statutes and regulations of all
       regulatory agencies having jurisdiction.           Lessee shall have no liability to
       Lessor in connection with any of the operations which may be conducted by
       the   owner     of    the   surface   estate     who   shall    thereafter   bear   all
       responsibility and liability with respect thereto.                   It is expressly
       understood that lessee shall not be required to furnish any additional
       casing or other equipment for any well plugged back at the request of the
       owner of the surface estate under this paragraph.              Should the owner of the
       surface estate elect not to attempt to make a producing water well out of


                                                  -8-
       GWB2/dm 124(7)
                                                                                                             76
"   ..

                              •
         any such hole. Lessee shall plug the well in accordance with all applicable
         rules. regulations and statutes.


              23.     It is expressly agreed and understood that for the purposes of
         this lease the following definitions shall apply:


                      "Cormnences"     -   A well shall be deemed corranenced on the
                                           date which the drilling bit enters the
                                           earth for the drilling of a well.
                      IIAbandoned ll   -   A well shall be deemed abandoned on the
                                           day when it is finally plugged as a dry
                                           hole.
                      "Completed"      - A well shall be deemed completed thirty
                                         (30) days after the day the Lessee sets
                                         production casing.
              24.     Lessor and Lessee agree to limit the commencement of actua I Ao~
         drilling during deer hunting season to 1) those wells drilled in areas
         which would not disturb deer hunting. and 2) offset wells.            If Lessee must

         commenCe a well during deer hunting season to perpetuate said lease, then
         Lessor will either a) not object to the drilling of such well during deer
         hunting season or b) agree to extend the commencement date for such well to
         a mutually agreeable date after deer hunting season ends.           For the purposes
         of this paragraph "deer hunting season" shall be that period defined by
         State law.


              25.     Nothwithstanding anything contained herein to the contrary. the
         lessor at any time and from time to time, upon not less than ninety (90)

         days notice to the holder of this lease, may elect to require the payment

         of any royalties accruing to such royalty owner under this lease to be made
         in kindj provided that any expenses               incident to the exercise of such

         election shall be borne by Lessor·and such election shall be for periods of
         not 1es5 than twelve (12) months.           Lessor shall only be allowed to take in
         kind when Lessee is producing for his own account.           In the event of such an

         election by Lessor, Lessee shall cooperate fully with Lessor in allowing
         Lessor to take their royalty in kind, including permitting lessor to use

         lessee's wellhead equipment and, to the extent that lessee has assignable
         rights, the use of Lessee's purchaser'S transportation facilities in good

         fa ith and not to exceed preva i1 i ng charges for s imil ar servi ces in the

         industry at the time if lessee or its affiliates are transporting the gas,



                                                     -9-
         GWB2/dm 124( 7)
                                                                                                77
....   . '.
                                  .,                                  •
              but if Lessee has a third party contract for the transport of said gas,
              Lessor will be bound by said contract.       Should Lessee desire to enter into
              a gas purchase contract having a term of more than one (1) year, then (a)
              Lessee shall include in such contract a provision that allows Lessor to
              elect to   ta~e    its gas in kind and be released from such contract one
              hundred twenty (120) days after notice, or (b) Lessor may approve of such
              contract in writing, in which event, Lessor may elect to take its gas in
              kind either at the end of such gas contact or'one (1) year after notice to
              Lessee, whichever happens sooner.        Any   equipment installed by lessor
              necessary to take in kind must be approved by Lessee and maintained
              according to Lessee's specifications.


                    If Lessee is unable to obtain a more favorable gas contract because of
              Lessor's reservation of this election to take in kind, then Lessee may
              elect to give notice of its intention to sign a gas contract acceptable to
              Lessee and request that Lessor join in signing same, and if Lessor elects
              to sign same, then lessor's royalty share of revenue shall be bound by such
              contract and Lessor may not elect to take its royalty in kind during the
              term of such gas purchase contract.




                    DATED this    91Jr   day of January, 1988.



              VAQUILLAS RANCH COMPANY, LTD.                  VAQUILLAS UNPROVEN MINERAL TRUST



              BY~.~                                          Bti?~ge
                                                              ·~~r.,ru~tee


              By:   g~~
                     hra
                    E.
                         ~~w
                          eriliros
                                                             By:     g.
                                                                    E. Wa



                                                             By:




                                                             By:
                                                                   ""=:--.



                                                    -10-
              GWB2/dm 124(7)
                                                                                                78
                              •                               •
.. ,   ...




             VAQUILLAS PROVEN MINERAL TRUST              CONOCO INC.


             BY~~4                                   rif1BY: "':'{!fd:::=f:f¥:f1ia";;ct~--~
             By:   c$:Wy!'~~f(: Tr~




                                              -11-
             GWB2/dm 124(7)
                                                                                              79
'   ..

                                                                                  ,I'i :
                                                                                (; {'e...'
                                                                                           "1:j
                                                                               ,_,




            SURVEY          ABSTRACT      CERTIFICATE       GRANTEE                  ACRES


             ·1652            2876             1159         w. H. TAYLOR         640.0
            -1661             1122             1164         CCSD &  RGNG         640.0
           -1663              1123             1165         CCSD &  RGNG         640.0                  ~
                                                                                                       .y
         ~-."t63"3 .          1323              4/808       GC & SF              640.0 ,
            -'"1634           225..7_. __ ._.4/.8.08____ GC L~F._._· ...... __ 6_59.!-96...,
            =-n65             1124             1166         CCSD & RGNG          640.0
          ""~
         -~d635_              1797                17        TC RY;               640.0--.
           - 2060 (SE/4       3329-30       .- '303 . -"---CT--&'M'    -- ----r6-0":-0.·
                    only)
           -1953 (E 1/2)      1329            4527           GC & SF                 320.0
             1627 (pt.        1324            4683           GC L SF                 160.0
                    only)
           -1629 (pt.         1275            4682           GC & SF                 264.65
                    only)
             1662 (W 1/2)     2230            1164          CCSD & RGNG              329.31
             1648 (E 1/2)     2441            1157          CCSD &- RGNG             325.75
             1648 (W 1/2)     3301            1157          CCSD & RGNG              325.75
             2335             3025            SCHOOL        W. BROON                  27.3
           • 1956 (E 1/2)     2560            4526          GC & SF                  327.34


            The      following parts of surveys are expressly eXCluded herefrom,
            viz. :
            (1) The SE 1/4 of SW 1/4, SW 1/4 of NE 1/4 (80 acs.) and N 1/2
            of SW 1/4 and SW 1/4 of SW 1/4 (120 acs.) of €T & M Survey 2060.
             (2)  The W. 3/4 of GC & SF survey 1627 described in O&G Lease to
             Daniel A. Pedrotti dated September 24, 1973, as amended.

             (3)   All  of the W. 320 ~cres of Survey 1629 described and
             included in O&G Lease to Daniel A. Ped~otti dated September 24,
             1973, as amended.




                                                                                                  80
I\O~   for   ,,,.t,)
                              •
       ,.{cul.tlon of roy,lty n b. p.td on gn d.~IY.,.d to
                        In "'ardlne. vllh p.t.,r.ph 19.
                                                            lXlllllt •




                              'ty L"lot roy.lty ~.nd on th. "nUt of the v.l,hud ''1ln" prl"
                                                                                           I. .....
                                                                                                      •
                                                                                                      or Affllh'n for UII (.nd



                              p.lel by till tnr .. hr,.n Yol~trlC pur~ ... n hr th. nt.nd" qUtrUt
                              In th. un II.U,tUt of lI,bb CO\ll\~Y or tbt 1i,Iebtld IVlnu 01 'hi prln'
                              uud by ,h. LUlOr for roYllty P')'IIMt P'o/t'P0un

        C.1cul.tlon:          Oet,,..lnl .ddltlon.l roytlty p')'II.nu, If ,ny.

                              lnlrlY 'hMlnt loot publication or II reporud to ,h.                               st."       of Tun lor
                              "'IlrI""         Ull purpo ....

sup     1.     ,.1culiU th. v.llbUd                lY'u,.
                                               ptlet for th • .onth tor nch of th. tht ..                                        ,,,,.n
               vol\,a, pureh .... for "" qultU,. fro. th. tlX ncord ••

                                                            M2Mb·     J."y.,y     IOA§




                         I. .... 1                   100,000              Z.OO              ZOO,86)
                         Unit '4                       eo,ooo             1.51              1Z0,800

               'v.-ch" .. fC!!III     '2"'p,ny ,

                         \lIU '2                     180,821              1.62


               TOllL Vnlud Tun                       360,1121
                     TUM.lnlon


                                                                   611,396/360,1121 • $1.7o/MIt"~.

               llput prondun tor nllllning tvo _linIn, hI' thl. pur~h"lr t.mI tor rtlulnlng '.,,0
               purch, .. r ••

  "'P Z.       C.lc:",ln. lb, .",Ight,d .VIr.gl prlu of thl thrll I.r,nt vohlll.tric purch .. ln hr
               thl qu.rtlr Ulln" IIOnthly '1.11,111 trOll sup 1.


                                                                                                                    ~    Mereh 1900
                           M0nSb·J·oy'CY         12"            Montb • hbrupry 1!1I11                    Month


  ~                     Volva'       Prll::t    !xnn.lon        VOIUNI    PrlCi       !xtlnlhn           VoIUIII,       'ric:,    ElIuntlOn
                          Kef        S/Mcr
                                                    •           "Of       • /ltef
                                                                                            •            "Of            .s/Her       •
  Unlud hx ..           ~60,'Z1       1.70       611,~96     3PT,Uo       1,$1             617,465      nO,306          1.51S     506,083




                                                 -
  Tra""alulon

  UIIAoe                                         620,346                                   561,157      500,1261.n                175,195
  South Cult                                                                               l1Lill       Ul..2.22    'WJ,IIL..£"tll.J11I'22
                       1,136,044               '.83l,7n 1,047,009                    1,67],lS5 1,121,432                         1,756,858


                                'v- 0' VoIUlo"              Su.. of [!It$'l'IJlgn,              v.lghulf "Ylr.S' hiS!


  10ul.                                                                                                     '.59

   sup 3.        C,I;III.te ".I,hud .V'I'IVI prln "'ltd b.,. L..... to ulc:ulu. roytlt.,. p.YII.nu on
                 VIt dlllVlrtd to L..... or ,,,lIln .. Inc! not for ,"'1 ••

                              t!0n,b·J,nytcy 1911!!               IConth."bruary 19M                           Monfh'H!Ireh 19M


                         Yolu.I      'rln       htlnllon        VolulI'   PriCI        Eltlnllon         VotU-I         Prlc-.     Extrnllon
                        "Of          $IltC1
                                                    •           HCf       S/MCr
                                                                                            •            "Of            .s/MC'

                        155,000       1.60       241,000        140,000    1,62            126,800      ISS,oOO         l.sa        2U,900




                h,.    of V2'u.,,..                         SUI! 2' huC! '2n.

                                                                   719,700                                 1.60


  u.p '.        CPptr, .."I,hUd .... ".,' pd;, Clleul.tld In .sup Z to thl IIIhhud .... .,.g. ~"nl
                pd" ni;ui.t.d             'n
                                      ,up 3.

                '1,60/)lC1 'I ,r.n.r 111 .... $l.S9/MCf .0 no .ddlttOMt roy.lty p.y.tI\U ' f ' rtq\l.lftd
                tor this qUlrt,r,



 IIOUt          '101",-", IIId prlu. Ulld 'n tbl. 'XI.,l • • t I                 "'. . d   for IIlunrnlon .nd ••.,. not b.
                tlH,nlvI of ICtu.1              c:~hlont,

                                                                                                                                               81
,   .   ~




         ,
        , .                                THE STATE OF TEXAS
                                            COUNTY OF WEBB
                                                                   •
                                                                   §
                                                                   §
                                                                   §
                                                                                                 •
                                                This instrument was acknowledged before me on the               9~day
                                                                                                                  of
                                           January, 1988, by J. O. WALKER, JR., General Partner of Vaquillas Ranch
                                           Co., Ltd., A Texas Limited Partnership, on behalf of said partnership,



              $.-.1"
                                      .......
                     :':,".. ', ".- ..•.
                   ...
                                                ~;~.­
                                     ,- ~.. ... .
                                                     ...........
                                                                             ~!~
                                                                              ota+Y ~600.'S-
                                                                                          ~lC in and for
              i~/                                          . ..                  The State of Texas.
              \               :
                                                                                 My Coomission Expires
                                                                                                 6A LLGvJ
                                                                                                                7- B - '89
               '. '"'......... ._...... .
               ~
                                   ~..
                                                                                     .0A!J/?,q
                                                                                  Printed/stamped name of Notary.

                                            THE STATE OF TEXAS     §
                                                                   §
                                            COUNTY OF WEBB         §

                                                  This instrument was acknowledged before me on the 9Y+- day of
                                            January. 1988, by E. WALKER QUIROS, General Partner of Vaqulllas Ranch Co.,
                                            Ltd •• A Texas Limited Partnership. on behalf of said partnership.


               . •:!o"
                                                 .. f .
                                                          ""
                                                                               ~h~al2~J[y
                                                                                otarYublic in and for
              i . .~~/                                                           The State of Texas.
              § ~i                                                               My COlllllission Expires
                                                                                                                        (;I
                                                                                                               '7-:3 - 0 9
              •,                                                                      ~IJ.O)RA ~        LLEW
              \          ..       '~~':-- ..... -.                                Printed/stamped name of Notary.


                                            THE STATE OF TEXAS     §
                                                                   §
                                            COUNTY OF WEBB         §

                                                  This instrument was acknowledged before me on the 't'-II- day of
                                            January, 1988, by GENE S. WALKER. General Partner of Vaquillas Ranch Co.,
                                            Ltd .. A Texas Limited Partnership, on behalf of said partnership.


                                                                               ~~~~,,;y
                                                                                    an
                                                                                 NOtarYUbfc in           or
                                                                                 The State of Texas.
                                                                                 My COlllllission Expires 7- 3-89
                                                                                     L4tJt<A      13-4 LLevJ
                                                                                 Printed/stamped name of Notary.

                                            THE STATE OF TEXAS     §
                                                                   §
                                            COUNTY OF WEBB         §

                                                 This instrument was acknowledged before me on the          Cf 'I-k-
                                                                                                               day of
                                            January, 1988, by EVAN B. QUIROS, General Partner of Vaquillas Ranch Co.,
                                            Ltd., A Texas Limited Partnership, on behalf of said partnership.


                                                                                 ~ ublic in and for
                                                                                 The State of Texas.
                                                                                 My Commission Expires    7-3-89
                                                                                     LA IJi<A     &4 LLCJyj
                                                                                 Printed/stamped     name       of     Notary.
                                                                              -12-
                                           GWB2/dm 130(!)
                                                                                                                                 82
    •   ..   '   .




\




                 83
'.   .-
 - • .                              •
                   THE STATE OF TEXAS
                   COUNTY OF WEBB
                                        §
                                        §
                                        §
                                                                      •
                        This instrument was acknowledged before me on the         9+L
                                                                                   day of
                   January, 1988, by J. O. WALKER, JR_, Trustee for The Vaquillas Unproven
                   Mineral Trust.

                                                     ~,~           ~a~{2gd}-
                                                      Offi'YPu1C in ancrror
                                                       The State of Texas -                    CIa
                                                       My CORmission Expires:         7- 3-a     I

                                                             LA~R.A    t>,,,, LLe"J
                                                        Printed/stamped name of Notary.

                   THE STATE OF TEXAS       §
                                            §
                   COUNTY OF WEBB           §

                        This instrument was acknowledged before me on the g~ day of
                   January, 1988, by E. WALKER QUIROS, Trustee for the Vaquillas Unproven
                   Mineral Trust.

          -   '.
                                                     ~~2ht~~
                                                       The State of Texas.                      9
                                                       My Conmission Expires:        '7-:3- g
                                                             LlluRA BAU,£vJ
                                                        Printed/stamped name of Notary.


                   THE STATE OF TEXAS       §
                                            §
                   COUNTY OF WEBB           §

                        This instrument was acknowledged before me on the        9 --r/:...J
                                                                                       day of
                   January, 1988, by GENE S. WALKER, Trustee of the Vaquillas Unproven Mineral
                   Trust.


                                                       Notary Pu ~in and for
                                                       The State of Texas
                                                       My Commission Expires:        7-3- 'i?'7
                                                             LA ORA     3,0 LLE:vJ
                                                        Printed/stamped name of Notary.


                   THE STATE OF TEXAS §
                                        §
                   COUNTY OF WEBB       §
                                                                                     '-f-L;
                        This instrument was acknowledged before me on the        9  day of
                   January, 1988, by EVAN B. QUIROS, Trustee of Vaquillas Unproven Mineral
                   Trust.

                       -.:/~                         ~c~n~Y
                                                        The State of Texas                      a
                                                        My Commission Expires:        7-3-f? I
                                                             JvMR/i     J:3A LLevJ
                                                        Printed/stamped name of Notary.



                                                      -13-
                   GWB2/dm 130(1)
                                                                                                     84
•   •   -,   ,.




             ---  85
Co· ._




     , ,

                               COUNTY OF WEBB
                                                  •
                               THE STATE OF TEXAS §
                                                    §
                                                    §
                                                                                 .
                                                                                        •       o~
                                    This instrument was acknowledged before me on the ,-,-::-.:-'--0'==-, day of
                               January, 1988, by J. O. WALKER, JR., Trustee of Vaquillas Proven Mineral
                               Trust.



           {~?/
                    .,- <: :;        ~ j

                                  ..-"<;                             ~         ~~ OCk.ft---
                                                                     atarYUiC'in an for
                                                                       The State of Texas
                                                                       My Coomission Expires:        '7'-:3 - J?9
           ~
           \ .. /~                                                         LA ORA ~ UBvJ
                ~"
                   ,...       - ......                                 Printed/stamped name of Notary.
                              .

                               THE STATE OF TEXAS §
                                                     §
                               COUNTY OF WEBB        §

                                    This instrument was acknowledged before me on the  day of       9'f1-,
                               January, 1988, by E. WALKER QUIROS, ~: vaqu~ Proven Mineral Trust.

                                   _' t,
                                     "," ,
                                                                       Notary putiM in
                                                                       The State of Texas
                                                                                           an~                00
                                                                       My Commi ss i on Expi res:     7- 3 - tJ   f

                                                                          LfiIJ/(,q     13A L1..HvJ
                                                                       Printed/stamped name of Notary,


                               THE STATE OF TEXAS §
                                                     §
                               COUNTY OF WEBB        §

                                    This instrument was acknowledged before me on the               9-tV
                                                                                                    day of
                               January, 1988, by GENE S.WALKER, Trustee of Vaquillas Proven Mineral Trust.


           }'
               ",
                     ~.                    .~
                                                                     ~~~d~~l(y
                                                                       The State of Texas
                '"        .                                            My Commission Expires!        7-3-/?9
                                                                            i..JAOI2A   BA     U_~ vJ
           '   ..
               -:.        "                                            Printed/stamped name of Notary_
               "




                                  THE STATE OF TEXAS §
                                                     §
                               COUNTY OF WEBB        §
                                                                                                      ~'
                                    This instrument was acknowledged before me on the 9      day of
                               January, 1988, by EVAN B. QUIROS, Trustee of Vaquillas Proven Mineral
                               Trust.

                                                                     ~uh4         ~" O~.a-='
                                                                     Notary Public in and for
                                                                       The State of Texas                     OQ
                                                                       My Conmission Expires:         7-3-0       I

                                                                             0Mi(A         80'1     LLBv.j
                                                                       Printed/stamped name of Notary.




                                                                     -14-
                               GWB2/dm 130( 1)
                                                                                                                      86
•   •   .,..
            ,.




                 87
..

     THE STATE OF TEXAS
                        • §
                          §
                                               •
     COUNTY OF WEBB       §

          Thi s instrument                              '1 cit .   day of
     Attorney·in-Fact
     corporation.



                                The State of Texas
                                My Commission Expires: 9-/8' -yf'
                                     L)e//«.   fl1<>. Y'A-"er27
                                Printed/Stamped name of Notary.




                              ·15-
     GWB2/dm 130(1)
                                                                            88
-
                             RAILROAD COMMISSION OF TEXAS
                              OFFICE OF GENERAL COUNSEL

    OIL AND GAS DOCKET
    NO. XX-XXXXXXX

                                 FINAL ORDER
             CONSOLIDATING VARIOUS FIELDS INTO A NEW FIELD CALLED
                 THE VAQUILLAS RANCH (LOBO CONS.) FIELD AND
                        ADOPTING FIELD RULES FOR THE
                     VAQUILLAS RANCH (LOBO CONS.) FIELD
                             WEBB COUNTY, TEXAS

           The Commission finds that after statutory notice in the above-numbered docket
    heard on October 8, 1997, the presiding examiner has made and filed a report and
    recommendation containing findings of fact and conclusions of law, for which service was
    not required; that the proposed application is in compliance with all statutory
    requirements; and that this proceeding was duly submitted to the Railroad Commission
    of Texas at conference held in its offices in Austin, Texas.

           The Commission, after review and due consideration of the examiner's report and
    recommendation, the findings of fact and conclusions of law contained therein, hereby
    adopts as its own the findings of fact and conclusions of law contained therein, and
    incorporates said findings of fact and conclusions of law as if fully set out and separately
    stated herein.

            Therefore, it is ordered by the Railroad Commission of Texas that the following
    fields located in Webb County, Texas, are hereby combined into a new field called the
    Vaquillas Ranch (Lobo Cons.) Field (No. q3~t 5 400                ):

                 BALTAZAR (LOBO 6 10470) FIELD                            05357400
                 BARNSLEY (LOBO 10900) FIELD                              05791 800
                 BARNSLEY (LOBO) FIELD                                    05791 400
                 BONEBRAKE (LOBO 6) FIELD                                 10419 500
                 BONEBRAKE (UPPER LOBO) FIELD                             10419 800
                 CALICHE CREEK (LOBO) FIELD                               14735225
                 CARR (LOBO 10100) FIELD                                  15874 350
                 CARR (LOBO 8300) FIELD                                   15874 235
                 CARR (LOBO 8600) FIELD                                   15874 250
                 CARR (LOBO 8700) FIELD                                   15874275
                 CARR (LOBO) FIELD                                        15874200
                 CARR (WILCOX 8200) FIELD                                 15874 600
                 CARR (WILCOX 8300) FIELD                                 15874 700
                 CARR (WILCOX) FIELD                                      15874 500
                 CATTO (LOBO 9900) FIELD                                  16405400
                 CATTO (LOBO 10200) FIELD                                 16405 500

                                                                                        EXHIBIT
                                                                                           A-4
                                                                                             245
    OIL AND GAS DOCKET NO. XX-XXXXXXX                                             PAGE 2

                 DESPARADO (LOBO 6) FIELD                             24394500
                 DIAMONDBACK (LOBO 3) FIELD                           24574400
                 GATO CREEK (9800) FIELD                              34238400
                 GATO CREEK (LOBO 1) FIELD                            34238 300
                 GATO CREEK (LOBO 1-SEGA) FIELD                       34238 325
                 GATO CREEK (LOBO 3) FIELD                            34238 350
                 GATO CREEK (LOBO 6 SEGMENT A) FIELD                  34238 375
                 GATO CREEK, SE (9800) FIELD                          34242 980
                 GATO CREEK, SE (LOBO 1) FIELD                        34242 500
                 GATO CREEK, SE (UP. LOBO STRAY) FIELD                34242 750
                 HIRSCH (LOBO 9746) FIELD                             41659075
                 JURASCHEK (LOBO) FIELD                               47740 500
                 JURASCHEK (WILCOX 11600) FIELD                       47740600
                 LUNDELL (LOBO 9200) FIELD                            55755 180
                 LUNDELL (LOBO) FIELD                                 55755 175
                 MCLEAN (LOBO) FIELD                                  59725500
                 MUJERES CREEK (LOBO 1) FIELD                         63668 300
                 MUJERES CREEK (LOBO 3) FIELD                         63668400
                 MUJERES CREEK (LOBO 6) FIELD                         63668500
                 MUJERES CREEK (LOBO) FIELD                           63668250
                 MUJERES CREEK, SOUTH (LOBO) FIELD                    63670500
                 NICHOLSON (LOBO 3) FIELD                             65469020
                 NORDAN (LOBO) FIELD                                  65934500
                 POZO (LOBO) FIELD                                    72838500
                 RANCHO VIEJO, S. (LOBO 6) FIELD                      74570 100
                 RANCHO VIEJO (LOBO 3) FIELD                          74568680
                 RANCHO VIEJO (LOBO 6) FIELD                          74568700
                 VAQUILLAS RANCH (LOBO 8100) FIELD                    93215450
                 VAQUILLAS RANCH (UP. LOBO STRAY) FIELD               93215600
                 VAQUILLAS RANCH (WALKER 8300) FIELD                  93215680
                 VAQUILLAS RANCH (WALKER 8600) FIELD                  93215690
                 VAQUILLAS RANCH (WALKER, N.) FIELD                   93215670
                 VAQUILLAS RANCH (WILCOX 11,100) FIELD                93215 700
                 VAQUILLAS RANCH (WILCOX 11,600) FIELD                93258750
                 VAQUILLAS RANCH (WILCOX 11,900) FIELD                93215 725
                 VAQUILLAS RANCH (YARSA) FIELD                        93258 900
                 VENADA (9800) FIELD                                  93436 800
                 VENADA (LOBO) FIELD                                  93436300
                 VERGARA (LOBO 9300) FIELD                            93537750
                 VERGARA (LOBO) FIELD                                 93537 500

      It is further ordered that the following rules are adopted for the Vaquillas Ranch (Lobo
Cons.) Field:




                                                                                      246
                                                                                                       r
                                                                                                       !
                                                                                                       I
    OIL AND GAS DOCKET NO. XX-XXXXXXX                                                  PAGE 3

       RULE 1:     The entire Lobo Formation from the Lobo Unconformity to the top of the Wills
Point (Midway Shale) and including the above listed fields in Webb County, Texas, shall be
designated as a single reservoir for proration purposes and be designated as the Vaquillas
Ranch (Lobo Cons.) Field.

        RULE 2: No gas well shall hereafter be drilled nearer than FOUR HUNDRED SIXTY
 SEVEN (467) feet to any property line, lease line or subdivision line and no well shall be drilled
nearer than ONE THOUSAND TWO HUNDRED (1,200) feet to any applied for, permitted or
completed well in the same reservoir on the same lease, pooled unit or unitized tract. The
aforementioned distances in the above rule are minimum distances to allow an operator flexibility
in locating a well, and the above spacing rule and the other rules to follow are for the purpose
of permitting only one well to each drilling and proration unit. Provided however, that the
Commission will grant exceptions to permit drilling within shorter distances and drilling more wells
than herein prescribed whenever the Commission shall have determined that such exceptions
are necessary either to prevent waste or to prevent the confiscation of property. When exception
to these rules is desired, application therefore shall be filed and will be acted upon in accordance
with the provisions of Commission Statewide Rule 37 and 38, which applicable provisions of said
rule are incorporated herein by reference. Provided however, that persons who are presumed
to be affected by a request for an exception to the between-well spacing requirement shall be
limited to the operators and ownersllessees of tracts, lease or units within one mile or less of the
proposed well.

       In applying this rule the general order of the Commission with relation to the subdivision
of property shall be observed.

        RULE 3: The daily allowable production of gas from individual wells completed in the
subject field shall be determined by allocating the allowable production, after deductions have
been made for wells which are incapable of producing their gas allowables, among the individual
wells in the following manner:

      TEN percent (10%) of the total field allowable shall be allocated equally among the
      individual wells producing from this field.

      NINETY percent (90%) of the total field allowable shall be allocated among the individual
      wells in the proportion that the deliverability of such well, as evidenced by the most recent
      G-10 test filed with the Railroad Commission bears to the summation of the deliverability
      of all proratable wells producing from this field.

        It is further ordered by the Railroad Commission of Texas that the allocation formula for
the Vaquillas Ranch (Lobo Cons.) Field be suspended. The allocation formula may be reinstated
administratively if the market demand for gas in the Vaquillas Ranch (Lobo Cons.) Field drops
below 100% of deliverability. If the market demand for gas in the Vaquillas Ranch (Lobo Cons.)
Field drops below 100% of deliverability while the allocation formula is suspended, the operator
shall immediately notify the Commission and the allocation formula shall be immediately




                                                                                                           11

                                                                                            247


                                                                                                       J
    OIL AND GAS DOCKET NO. XX-XXXXXXX                                              PAGE 4

reinstated. Failure to give such notice to the Commission may result in a fine (as provided for
in Tex. Nat. Res. Code §86.222) for eac day the operators fail to give notice to the Commission.

      Effective this   d/f ~ay of                                  ,   19q9 .




                                        COMMISSIO~
                                    a:zON




                                                                                        248
           <AILROAD COMMISSION OF TEXAS
  T;' 'TT:
       ~
.' ' [ \   OT'r TEXAS
           G


 :CUNTY OF TRAVIS                                                         '
         .          I hereby certify that the i~t:0rmation on the, 'l ' 'I r) ,,~::'\r;
l'2\'crse sIde hereof, and on the securely attached additIOnal .3 a";" ~. ..        ,,~ "",;1;
  ':1;(,S identified by certification #      J 05 37(, ar~trUe ,an 4. ~'.               ~.
:'::1'l'cc1 copies of dOGuments on file with Railroad Commissio~f'fe'/C~r, i ......:,~ ",   ~"
":d I f:lrthcr certify th~t I am the le~al, custodian 0ft,he r~~d6,r ; .. ,¥("., .. } '. ~ ,
    i:S (':d <.'n1 of the Railroad CommlsslOn of Texas.         Cl' ,\ \      ",:                 t, .
           .
                   +5 ~ I
               ~ ~"~-r- 0                          <:'~('~';"'~'::T~~-'"
                                                                          '"~"{:,,,          I    '    -'

                                                                                             ' .••.. , .....
                                                                                                       , ',,/.
               -".-   -'~                          u u " " ' L , -, ',1     ,'j              """~'$P':'
                                                                  , """ ,\~~: ;;', ,\~\'~i~,';
                                                                                        '\ ""         . 'Wi,;':,
                                                                                        '~                 ~'\;
                                                                                  249
                                                                                                1



                          RAILROAD COMMISSION OF TEXAS
                           OFFICE OF GENERAL COUNSEL

   OIL AND GAS DOCKET                           IN THE VAQUILLAS RANCH (LOBO
   NO. XX-XXXXXXX                               CONS.) FIELD, WEBB COUNTY, TEXAS


                                 FINAL ORDER
                        AMENDING FIELD RULES FOR THE
                      VAQUILLAS RANCH (LOBO CONS.) FIELD
                             WEBB COUNTY, TEXAS
       The Commission finds that after statutory notice in the above-numbered docket
heard on September 23, 2010, the presiding examiner has made and filed a report and
recommendation containing findings of fact and conclusions of law, for which service was
not required; that the proposed application is in compliance with all statutory requirements;
and that this proceeding was duly submitted to the Railroad Commission of Texas at
conference held in its offices in Austin, Texas.

       The Commission, after review and due consideration of the examiner's report and
recommendation, the findings of fact and conclusions of law contained therein, hereby
adopts as its own the findings of fact and conclusions of law contained therein, and
incorporates said findings of fact and conclusions of law as if fully set out and separately
stated herein.

       Therefore, it is ordered by the Railroad Commission of Texas that Rule 2 of the field
rules adopted in Final Order No. XX-XXXXXXX, effective February 24, 1998, for the Vaqui/las
Ranch (Lobo Cons.) Field, Webb County, Texas, is amended as hereafter set out:

        RULE 2: No well shall hereafter be drilled nearer than FOUR HUNDRED SIXTY
SEVEN (467) feet to any property line, lease line or subdivision line and no well shall be
drilled nearer than ONE THOUSAND TWO HUNDRED (1,200) feet to any applied for,
permitted or completed well in the same reservoir on the same lease, pooled unit or
unitized tract. Provided, however, there is no minimum between-well spacing requirement
between a well being permitted at least 660 feet from the nearest property line, lease line
or subdivision line, and the other wells permitted, drilled or completed on the same lease,
pooled unit or unitized tract. A well being permitted at a distance less than SIX HUNDRED
SIXTY (660) feet from the nearest property line, lease line or subdivision line must be a
minimum of ONE THOUSAND TWO HUNDRED (1,200) feet from any applied for,
permitted or completed well in the same reservoir on the same lease, pooled unit or
unitized tract, or an exception to Rule 37 must be obtained.

       The aforementioned distances in the above rule are minimum distances to allow an
operator flexibility in locating a well, and the above spacing rule and the other rules to
follow are for the purpose of permitting only one well to each drilling and proration unit.
Provided however, that the Commission will grant exceptions to permit drilling within

 . '"   ,~,                                                                       EXHIBIT

                                                                                    A-5   254
OIL AND GAS DOCKET NO. XX-XXXXXXX                                                  Page 2

 shorter distances and drilling more wells than herein prescribed whenever the Commission
shall have determined that such exceptions are necessary either to prevent waste or to
prevent the confiscation of property. When exception to these rules is desired, application
therefore shall be filed and will be acted upon in accordance with the provisions of
Commission Statewide Rule 37 and 38, which applicable provisions of said rule are
incorporated herein by reference. Provided however, that persons who are presumed to
be affected by a request for an exception to the between-well spacing requirement shall
be limited to the operators and ownersllessees of tracts, lease or units within one mile or
less of the proposed well.

       In applying this rule the general order of the Commission with relation to the
subdivision of property shall be observed.

      Done this 2nd day of November, 2010.

                                                RAILROAD COMMISSION OF TEXAS

                                                (Order approved and signatures
                                                affixed by OGe Unprotested Master
                                                Order dated November 2,2010)




                                                                                        255
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                                                                                                                                             Filed
                                                                                                                         10/29/20149:51:53 AM
                                                                                                                              Esther Degollado
          «Prev Rule                                                                                                     Next Ru~i§~ct Clerk
                                          Texas Administrative Code                                                                 ebb District
                                                                                                                          2014   cvaooo438 D4
                               TITLE 16                ECONOMIC REGULATION
                               PART 1                  RAILROAD COMMISSION OF TEXAS
                               CHAPTER 3               OIL AND GAS DIVISION
                               RULE §3.38              Well Densities


          (a) Definitions. The following words and terms. when used in this section. shall have the following
          meanings. unless the context clearly indicates otherwise.

           (I) Commission designee--Director of the Oil and Gas Division or any Commission employee designated in
          writing by the director or the Commission.

            (2) Drilling unit--The acreage assigned to a well for drilling purposes.

           (3) Proration unit--The acreage assigned to a well for the purpose of assigning allowables and allocating
          allowable production to the well.

           (4) Substandard acreage--Less acreage than the smallest amount established for standard or optional drilling
          units.

            (5) Surplus acreage--Substandard acreage within a lease, pooled unit, or unitized tract that remains
          unassigned after the assignment of acreage to each applied for, permitted, or completed well in a field , in an
          amount equaling or exceeding the amount established for standard or optional drilling units. Surplus acreage
          is distinguished from the term "tolerance acreage,"in that tolerance acreage is defined in context with
          proration regulation, while surplus acreage is defined by this rule only in context with well density
          regulation.

           (6) Tolerance acreage--Acreage within a lease, pooled unit, or unitized tract that may be assigned to a well
          for proration purposes pursuant to special field rules in addition to the amount established for a prescribed or
          optional proration unit.

          (b) Density requirements.

            (1) General prohibition. No well shall be drilled on substandard acreage except as hereinafter provided.

            (2) Standard units.

             (A) The standard drilling unit for all oil, gas , and geothermal resource fields wherein only spacing rules,
          either special , country regular, or statewide, are applicable is hereby prescribed to be the following.

          Attached Graphic

             (B) The spacing rules listed in subparagraph (A) of this paragraph are not exclusive. If any spacing rule
          not listed in subparagraph (A) of this subsection is brought to the attention of the commission, it will b e E ]
          gi ven an appropriate acreage assignment.                                                                  EXHIBIT
                                                                                                                                          3
          (c) Development to final density. An application to drill a well for oil , gas, or geothermal resource on a
          drilling unit composed of surplus acreage, commonly referred to as the "tolerance well," may be granted as
                                                                                                                               409


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          regular when the operator seeking such permit certifies to the commission in a prescribed form the necessary
          data to show that such permit is needed to develop a lease, pooled unit, or unitized tract to final density, and
          only in the following circumstances:

           (I) when the amount of surplus acreage equals or exceeds the maximum amount provided for tolerance
          acreage by special or county regular rules for the field, provided that this paragraph does not apply for a
          lease, pooled unit, or unitized tract that is completely developed with optional units and the special or county
          regular rules for the field do not have a tolerance provisions expressly made applicable to optional proration
          units;

           (2) if the special or county regular rules for the field do not have a tolerance provision expressly made
          applicable to optional proration units, when the amount of surplus acreage equals or exceeds one-half of the
          smallest amount established for an optional drilling unit; or

           (3) if the applicable rules for the field do not have a tolerance provision for the standard drilling or proration
          unit, when the amount of surplus acreage equals or exceeds one-half the amount prescribed for the standard
          unit.

          (d) Applications involving the voluntary subdivision rule.

           (I) Density exception not required. An exception to the minimum density provision is not required for the
          first well in a field on a lease, pooled unit, or unitized tract composed of substandard acreage, when the
          leases, or the drill site tract of a pooled unit or unitized tract:

            (A) took its present size and shape prior to the date of attachment of the voluntary subdivision rule
          (§3.37(g) of this title (relating to Statewide Spacing Rule)); or

             (B) took its present size and shape after the date of attachment of the voluntary subdivision rule (§3.37(g)
          of this title (relating to Statewide Spacing Rule)) and was not composed of substandard acreage in the field
          according to the density rules in effect at the time it took its present size and shape.

            (2) Density exception required. An exception to the density provision is required, and may be granted only
          to prevent waste, for a well on a lease, pooled unit, or unitized tract that is composed of substandard acreage
          and that:

             (A) took its present size and shape after the date of attachment of the voluntary subdivision rule (§3.37(g)
          of this title (relating to the Statewide Spacing Rule)); and

            (B) was composed of substandard acreage in the field according to the density rules in effect at the time it
          took its present size and shape.

           (3) Unit dissolution.

             (A) If two or more separate tracts are joined to form a unit for oil or gas development, the unit is accepted
          by the Commission, and the unit has produced hydrocarbons in the preceding twenty (20) years, the unit may
          not thereafter be dissolved into the separate tracts with the rules of the commission applicable to each
          separate tract if the dissolution results in any tract composed of substandard acreage for the field from which
          the unit produced, unless the Commission approves such dissolution.

             (B) The Commission shall grant approval only after application, notice, and an opportunity for hearing.
                                                                                                                        410


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          The applicant seeking the unit dissolution shall provide a list of the names and addresses of all current
          lessees and unleased mineral interest owners of each tract within the joined or unitized tract at the time the
          application is filed. The Commission shall give notice of the application to all current lessees and unleased
          mineral interest owners of each tract within the joined or unitized tract. Additionally, if one or more wells on
          the unitized tract has produced from the field within the l2-month period prior to the application, the
          applicant shall include on the list all affected persons described in subsection (h)(I)(A) of this section, and
          the Commission shall give notice of the application to these affected persons.

             (C) A Commission designee may grant administrative approval if the Commission designee determines
          that granting the application will not result in the circumvention of the density restrictions of this section or
          other Commission rules, and if either:

              (i) written waivers are filed by all affected persons; or

              (ii) no protest is filed within the time set forth in the notice of application.

          (e) Application involving unitized areas with entity for density orders. An exception to the minimum density
          provision is not required for a well in a unitized area for which the commission has granted an entity for
          density order, if the sum of all applied for, permitted, or completed producing wells in the field within the
          unitized area, multiplied by the applicable density provision, does not exceed the total number of acres in the
          unitized area. The operator must indicate the docket number of the entity for density order on the application
          form.

          (f) Exceptions to density provisions authorized. The Commission, or Commission designee, in order to
          prevent waste or, except as provided in subsection (d)(2) of this section, to prevent the confiscation of
          property, may grant exceptions to the density provisions set forth in this section. Such an exception may be
          granted only after notice and an opportunity for hearing.

          (g) Filing requirements.

            (I) Application. An application for permit to drill shall include the fees required in §3.78 of this title
          (relating to Fees and Financial Security Requirements) and shall be certified by a person acquainted with the
          facts, stating that all information in the application is true and complete to the best of that person's
          knowledge.

            (2) Plat. When filing an application for an exception to the density requirements of this section, in addition
          to the plat requirements in §3.5 of this title (relating to Application to Drill, Deepen, Reenter, or Plug Back)
          (Statewide Rule 5), the applicant shall attach to each copy of the application a plat that:

            (A) depicts the lease, pooled unit, or unitized tract, showing thereon the acreage assigned to the drilling
          unit for the proposed well and the acreage assigned to all current applied for, permitted, or completed oil,
          gas, or oil and gas wells in the same field or reservoir which are located within the lease, pooled unit, or
          unitized tract;

             (B) on large leases, pooled units, or unitized tracts, if the established density is not exceeded as shown on
          the face of the application, outlines the acreage assigned to the well for which the permit is sought and the
          immediately adjacent wells on the lease, pooled unit, or unitized tract;

            (C) on leases, pooled units, or unitized tracts from which production is secured from more than one field,
          outlines the acreage assigned to the wells in each field that is the subject of the current application;
                                                                                                                          411


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             (D) corresponds to the listing required under subsection (g)(1)(A) of this section.

            (E) is certified by a person acquainted with the facts pertinent to the application that the plat is accurately
          drawn to scale and correctly reflects all pertinent and required data.

            (3) Substandard acreage. An application for a permit to drill on a lease, pooled unit, or unitized tract
          composed of substandard acreage must include a certification in a prescribed form indicating the date the
          lease, or the drill site tract of a pooled unit or unitized tract, took its present size and shape.

            (4) Surplus acreage. An application for permit to drill on surplus acreage pursuant to subsection (c) of this
          section must include a certification in a prescribed form indicating the date the lease, pooled unit, or unitized
          tract took its present size and shape.

           (5) Certifications. Certifications required under paragraphs (3) and (4) of this subsection shall be filed on
          Form W-lA, Substandard Acreage Certification.

            (A) The operator shall file the Form W-IA with the drilling permit application and shall indicate the
          purpose of filing. The operator shall accurately complete all information required on the form in accordance
          with instructions on the form.

            (B) The operator shall list the field or fields for which the substandard acreage certification applies in the
          designated area on the form. If there are more than three fields for which the certification applies, the
          operator shall attach additional Forms W-IA and shall number the additional pages in sequence.

             (C) The operator shall file the original Form W-IA with the Commission's Austin office and a copy with
          the appropriate district office, unless the operator files electronically through the Commission's Electronic
          Compliance and Approval Process (ECAP) system.

             (D) The operator or the operator's agent shall certify the information provided on the Form W-IA is true,
          complete, and correct by signing and dating the form, and listing the requested identification and contact
          information.

             (E) Failure to timely file the required information on the appropriate form may result in the dismissal of
          the application.

          (h) Procedure for obtaining exceptions to the density provisions.

           (1) Filing requirements. If a permit to drill requires an exception to the applicable density provision, the
          operator must file, in addition to the items required by subsection (g) of this section:

             (A) a list of the names and addresses of all affected persons. For the purpose of giving notice of
          application, the Commission presumes that affected persons include the operators and unleased mineral
          interest owners of all adjacent offset tracts, and the operators and unleased mineral interest owners of all
          tracts nearer to the proposed well than the prescribed minimum lease-line spacing distance. The Commission
          designee may determine that such a person is not affected only upon written request and a showing by the
          applicant that:

              (i) competent, convincing geological or engineering data indicate that drainage of hydrocarbons from the
          particular tracts subject to the request will not occur due to production from the proposed well; and

                                                                                                                        412


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              (ii) notice to the particular operators and unleased mineral interest owners would be unduly burdensome
          or expenSIve;

             (B) engineering and/or geological data, including a written explanation of each exhibit, showing that the
          drilling of a well on substandard acreage is necessary to prevent waste or to prevent the confiscation of
          property;

             (C) additional data requested by the Commission designee.

           (2) Notice of application. Upon receipt of a complete application, the Commission will give notice of the
          application by mail to all affected persons for whom signed waivers have not been submitted.

            (3) Approval without hearing. If the Commission designee determines, based on the data submitted, that a
          permit requiring an exception to the applicable density provision is justified according to subsection (f) of
          this section, then the Commission designee may issue the exception permit administratively if:

             (A) signed waivers from all affected persons were submitted with the application; or

             (B) notice of application was given in accordance with paragraph (2) of this subsection and no protest was
          filed within 21 days of the notice; or

             (C) no person appeared to protest the application at a hearing scheduled pursuant to paragraph (4)(A) of
          this subsection.

           (4) Hearing on the application.

            (A) If a written protest is filed within 21 days after the notice of application is given in accordance with
          paragraph (2) of this subsection, the application will be set for hearing.

            (B) If the application is not protested and the Commission designee determines that a permit requiring an
          exception to the applicable density provision is not justified according to subsection (f) of this section, the
          operator may request a hearing to consider the application.

          (i) Duration. A permit is issued as an exception to the applicable density provision shall expire two years
          from the effective date of the permit; unless drilling operations are commenced in good faith within the two
          year period.


          Source Note: The provisions of this §3.38 adopted to be effective November 1, 1989, 14 TexReg 5255;
          amended to be effective April 21, 1997,22 TexReg 3404; amended to be effective July 10,2000,25 TexReg
          6487; amended to be effective June 11,2001,26 TexReg 4088; amended to be effective February 13,2002,
          27 TexReg 906; amended to be effective September 1,2004,29 TexReg 8271


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         Figure: 16 TAC §3.38(b)(2)(A)



                                                     Acreage Requirement
                            Spacing Rule
         I                                      II                                         I

                                (1) 150 - 300                 2
                                                I                                          I
                                (2) 200 - 400                 4



                                (3) 330 - 660                10



                                (4) 330 - 933                20
         I
                                (5) 467 - 933                20



                            (6) 467 - 1200                   40



                            (7) 660 - 1320                   40




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HYPERLINKED MATERIAL
                                                                                                            Page 1

403 S.W.2d 325
(Cite as: 403 S.W.2d 325)

                                                                Hamilton, Pope, and Griffin, JJ., dissented.


             Supreme Court of Texas.                                           West Headnotes
    Mildred Mitchell JONES et vir, Petitioners,
                       v.                                   [1] Mines and Minerals 260          79.1(5)
   S. H. KILLINGSWORTH et al., Respondents.
                                                            260 Mines and Minerals
                 No. A—10243.                                   260II Title, Conveyances, and Contracts
                  Dec. 8, 1965.                                    260II(C) Leases, Licenses, and Contracts
Rehearing Denied and Dissenting Opinion Filed April                    260II(C)3 Construction and Operation of
                    20, 1966.                               Oil and Gas Leases
                                                                          260k79 Rent or Royalties
     Action by oil, gas, and mineral lessors against                         260k79.1 In General
lessee's assignee and of owners of neighboring leases                             260k79.1(5) k. Community
to obtain judgment declaring lease terminated at ex-        Leases, Unitization, or Pooling Arrangements. Most
piration of primary term, to remove cloud on title, and     Cited Cases
to obtain title to and possession of leased premises.          (Formerly 260k79(1))
The District Court, Henderson County, Jack Y.
Hardee, J., entered judgment for defendants, and the             Ascertainment of parties' true intention under oil,
lessors appealed. The Tyler Court of Civil Appeals,         gas, and mineral lease as to lessee's authority to pool
Twelfth Supreme Judicial District, 379 S.W.2d 362,          leased land into oil unit containing 170.86 acres would
affirmed the judgment, and the lessors brought error.       require consideration of all pooling provisions con-
The Supreme Court, Smith, J., held that lease pooling       tained in lease and rules and regulations governing
clause limiting units pooled for oil to area not sub-       field in which leased land was located.
stantially exceeding 40 acres but permitting units to
conform with size of those prescribed by govern-            [2] Mines and Minerals 260          79.1(5)
mental regulations if government prescribes or per-
mits larger units did not authorize a 170.86 acre unit
                                                            260 Mines and Minerals
where rule governing field provided that no proration
                                                                260II Title, Conveyances, and Contracts
unit should consist of more than 80 acres but permitted
                                                                   260II(C) Leases, Licenses, and Contracts
operators to elect to assign an additional 80 acres, and
                                                                       260II(C)3 Construction and Operation of
that lease habendum clause permitting extension
                                                            Oil and Gas Leases
based on pooling could not be used to extend lease
                                                                          260k79 Rent or Royalties
beyond primary term where lands had been pooled
                                                                             260k79.1 In General
without authority.
                                                                                  260k79.1(5) k. Community
                                                            Leases, Unitization, or Pooling Arrangements. Most
     Judgments reversed, and judgment terminating           Cited Cases
lease and awarding title and possession rendered.              (Formerly 260k79(1))




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                                                                                                          Page 2

403 S.W.2d 325
(Cite as: 403 S.W.2d 325)

     Oil, gas, and mineral lease pooling clause limiting    by lessor with those of other lessors.
units pooled for oil to area not substantially exceeding
40 acres but permitting units to conform in size with       [5] Mines and Minerals 260          73.5
those prescribed by government regulations if gov-
ernment prescribes or permits larger units did not
                                                            260 Mines and Minerals
authorize a 170.86 acre unit, where rule governing
                                                                260II Title, Conveyances, and Contracts
field provided that no proration unit should consist of
                                                                   260II(C) Leases, Licenses, and Contracts
more than 80 acres but permitted operators to elect to
                                                                       260II(C)3 Construction and Operation of
assign an additional 80 acres and receive allowable
                                                            Oil and Gas Leases
credit of not more than 160 acres.
                                                                          260k73.5 k. Term. Most Cited Cases
                                                               (Formerly 260k731/2, 260k73)
[3] Mines and Minerals 260          92.79
                                                                 Oil, gas, and mineral lease habendum clause de-
260 Mines and Minerals                                      scribing term of lease as 10 years and so long there-
    260III Operation of Mines, Quarries, and Wells          after as oil was produced from land with which leased
       260III(A) Statutory and Official Regulations         land was pooled could not be used to extend term of
          260k92.78 Unitization                             lease beyond 10-year primary term where lands had
              260k92.79 k. In General; Procedure.           been pooled without authority.
Most Cited Cases
   (Formerly 260k92.78)
                                                            [6] Mines and Minerals 260          92.79

    Oil and gas well field rules adopted by Railroad
                                                            260 Mines and Minerals
Commission require a proration unit of at least 80
                                                               260III Operation of Mines, Quarries, and Wells
acres but permit larger units of not more than 160
                                                                  260III(A) Statutory and Official Regulations
acres.
                                                                     260k92.78 Unitization
                                                                         260k92.79 k. In General; Procedure.
[4] Mines and Minerals 260          79.1(5)                 Most Cited Cases

260 Mines and Minerals                                           Railroad Commission's orders cannot compel
    260II Title, Conveyances, and Contracts                 pooling agreements not agreed upon by parties to oil,
       260II(C) Leases, Licenses, and Contracts             gas, and mineral lease; the commission has no power
           260II(C)3 Construction and Operation of          to determine property rights.
Oil and Gas Leases
              260k79 Rent or Royalties
                                                            *326 John A. Pace, Edward Kliewer, Jr., Dallas, for
                 260k79.1 In General
                                                            petitioners.
                      260k79.1(5) k. Community
Leases, Unitization, or Pooling Arrangements. Most
                                                            Ralph Shank, Prentice Wilson, Dallas, Murph Wilson,
Cited Cases
                                                            F. Wilbert Lasater, Ramey, Brelsford, Hull & Flock,
   (Formerly 260k79(1))
                                                            Frank L. McClendon, with above firm, Tyler, for
                                                            respondents.
     Absent express authority, oil, gas, and mineral
lessee has no power to pool interests in estate retained




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                                                                                                              Page 3

403 S.W.2d 325
(Cite as: 403 S.W.2d 325)

SMITH, Justice.                                             this unit as though it contains only 160 acres.
         ON MOTION FOR REHEARING
     Our opinion delivered on June 23, 1965, is with-            It was stipulated that the unit owners commenced
drawn and the following opinion is substituted there-       drilling operations on the West Poynor Unit and
for.                                                        completed a producing oil well on or about August 16,
                                                            1961, which ‘unit well’ has continued to produce oil in
     The question presented for our determination is        paying quantities. It was agreed that ‘no well in search
whether or not the lands owned by the petitioner,           of oil, gas or other minerals has been drilled by S. H.
Mildred Mitchell Jones, and described in an oil, gas        Killingsworth and the other defendants on the lands
and mineral lease executed by Mildred Mitchell Jones        actually described by metes and bounds in the Long
and her husband, Harry C. Jones, as lessors, to S. S.       lease, and that no oil, gas or other minerals in paying
Long, as lessee (later assigned to S. H. Killingsworth),    quantities has been produced from any well actually
on August 16, 1951, were effectively pooled into what       located on the lands actually described in the Long
is known as the Hunt Oil Company et al.—West                lease.’
Poynor Unit. The trial court, without a jury, held that
Killingsworth effectively pooled the acreage covered             Although lessors contend that they are not bound
by the lease in accordance with authority granted in        by the terms of the Unit Declaration and the Amended
the lease, and for that reason the lease did not termi-     Unit Declaration, it is agreed that Killingsworth and
nate on August 16, 1961, the date of the expiration of      the other unit owners in the unit acted in good faith in
the primary term. A take-nothing judgment rendered          forming the unit, in securing a permit to drill and in
against the petitioners has been affirmed by the Court      drilling the well on the unit.
of Civil Appeals. 379 S.W.2d 362.
                                                                The habendum clause of the Mitchell-Long lease
    The judgments of both the trial court and the           provides that:
Court of Civil Appeals are reversed and judgment is
rendered for the petitioners.
                                                                 'Subject to the other provisions herein contained,
                                                            this lease shall be for a term of ten (10) years from this
     Mildred Mitchell Jones and her husband filed this      date * * * And as long thereafter as oil * * * is pro-
suit against S. H. Killingsworth and owners of leases       duced from * * * land with which said land is pooled
in the immediate vicinity of the Mitchell-Long lease.       hereunder.'
These owners will be referred to as ‘Hunt Petroleum
Corporation.’ On July 12, 1961, at a time when the
                                                                 The pertinent pooling provisions of the lease are
Mitchell-Long lease was in effect and was owned by
                                                            to be found in the first two sentences of paragraph 4 of
and the title thereto was vested in S. H. Killingsworth,
                                                            the Mitchell-Long lease. These sentences read as
subject to certain overriding royalty interests, Kill-
                                                            follows:
ingsworth, joined by the above-mentioned owners of
other leases, entered into a pooling agreement estab-
                                                                 ‘Lessee, at its option, is hereby given the right and
lishing a unit hereinafter referred to as the ‘West
                                                            power to pool or *327 combine the acreage covered by
Poynor Unit.’ The two tracts of land described in the
                                                            this lease, or any portion thereof as to oil and gas, or
Mitchell-Long lease were included within this unit
                                                            either of them, with other land, lease or leases in the
designation. These tracts contained, in the aggregate,
                                                            immediate vicinity thereof to the extent, hereinafter
20.55 acres. It was stipulated that the created unit
                                                            stipulated, when in Lessee's judgment it is necessary
contained 170.86 acres. However, the parties deal with




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                                                                                                              Page 4

403 S.W.2d 325
(Cite as: 403 S.W.2d 325)

or advisable to do so in order properly to develop and      with those Prescribed by governmental regulations.’
operate said leased premises in compliance with the         (Emphasis added.) Absent this proviso, perhaps it
spacing rules of the Railroad Commission of Texas, or       could well be said that the lessee was given authority
other lawful authority, or when to do so would, in the      to pool the lessor's land for oil only in units not sub-
judgment of Lessee, promote the conservation of oil         stantially exceeding 40 acres in area for either the
and gas from said premises. Units pooled for oil            purpose of complying with spacing rules or to promote
hereunder shall not substantially exceed 40 acres each      the conservation of oil, the two situations mentioned
in area, and units pooled for gas hereunder shall not       in the first sentence wherein the power to pool is left
substantially exceed in area 640 acres each plus a          exclusively to lessee's judgment. In order to ascertain
tolerance of 10% Thereof, provided that should gov-         the true intention of the parties to this lease, the Court
ernmental authority having jurisdiction prescribe or        should take into consideration all of the pooling pro-
permit the creation of units larger than those specified,   visions contained therin, as well as the rules and reg-
units thereafter created may conform substantially in       ulations governing the Fairway (James Lime) Field in
size with those prescribed by governmental regula-          which lessors' land is located. (The rules adopted by
tions.’                                                     the Railroad Commission governing that field have
                                                            the express purpose of ‘permitting only one well to
     [1][2][3][4][5] The issue in this case is not          each eighty (80) acre proration unit.’ The field rules
whether the pooling clause granted authority to pool        only encourage larger units by Permitting an operator
the Jones' land into an oil unit consisting of more than    ‘to assign tolerance of not more than eighty (80) acres
40 acres. The issue, properly defined, is whether the       of additional unassigned lease acreage to a well on an
pooling clause granted authority pool the Jones' land       eighty (80) acre unit and shall in such event receive
into an oil unit containing 170.86 acres. The lessors       allowable credit for not more than one hundred sixty
take the position that authority to pool their land into    (160) acres.’) It is argued that these Railroad Com-
an oil unit consisting of 170.86 acres was not granted      mission rules provide for proration units of not less
by the lease, and that the attempt to pool did not ef-      than 80 acres more than 160 acres, and that by reading
fectively extend the term of the lease beyond the ter-      the rules into the lease contract, paragraph 4 of the
minal date provided therein. We agree with the lessee       lease would read: ‘the size of the units thereafter cre-
that the pooling provision confers authority on the         ated may not be substantially less than 80 acres nor
lessee to pool the lessors' land, but, we do not agree      substantially more than 160 acres.’ We disagree with
that the Extent to which the power to pool may be           this construction of the lease *328 contract. The les-
exercised is entrusted solely to the lessee's judgment.     sors did not consent to enlarge an oil proration unit to
The lessors' land may be pooled only to the extent          any size Permitted by governmental regulations. They
stipulated in the lease. The second sentence of the         gave their consent to enlarge a unit of substantially 40
pooling provision provides that ‘units pooled for oil *     acres, but only to the extent of the size of units Pre-
* * shall not substantially exceed 40 acres each in area,   scribed by the regulatory authority. The fact that the
and units pooled for gas * * * shall not substantially      Railroad Commission may Permit a much larger unit
exceed in area 640 acres each plus a tolerance of 10%       cannot be read into the lease contract when, as here,
Thereof. * * *’ However, this provision must be con-        the authority to create larger oil units is expressly
strued in the light of the further provisions which is to   limited to units of the size Prescribed by the Railroad
the effect that in the event a governmental authority       Commission. The Commission Prescribed a unit of 80
having jurisdiction should ‘prescribe or Permit the         acres. (The field rules clearly say that there Must be a
creation of units larger than those specified units         proration unit of at least 80 acres, and there May be
thereafter created may conform substantially in size        larger units of not more than 60 acres.) It is true that




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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)

the pooling provision contains the word ‘permit’ as           (1943); Nale v. Carroll, 155 Tex. 555, 289 S.W.2d 743
well as the word ‘prescribe.’ It is not unreasonable to       (1956).
assume that the parties to the lease contract intended,
by the use of both words, to give each a distinctly               (The judgments of the trial court and the Court of
different meaning. The parties obviously knew when            Civil Appeals are both reversed and judgment is ren-
the lease contract was executed that a Permitted oil          dered declaring the Mitchell Long lease terminated as
proration unit could conceivably be much larger in            of August 16, 1961, and the title and possession of the
area than one Prescribed by governmental authority.           lands described in said lease is awarded to Mildred
To say that a lessee can pool lessors' land with units of     Mitchell Jones. Respondents' motion for rehearing is
any size Permitted by the Railroad Commission would           overruled. A second motion for rehearing may be filed
defeat the intention of the parties to restrict the size of   within fifteen days.)
the units to the size Prescribed by governmental au-
thority. Absent express authority, a lessee has no
                                                              GRIFFIN, HAMILTON and POPE, JJ., dissenting.
power to pool interests in the estate retained by the
lessor with those of other lessors. See Brown v. Smith,
                                                              HAMILTON, Justice (dissenting).
141 Tex. 425, 174 S.W.2d 43 (1943); Gulf Oil Cor-
                                                                   I withdraw the dissenting opinion heretofore filed
poration v. Marathon Oil Co., 137 Tex. 59, 152
                                                              in this cause on June 23, 1965, and file the following
S.W.2d 711 (1941); Knight v. Chicago Corporation,
                                                              opinion, respectfully dissenting:
144 Tex. 98, 188 S.W.2d 564 (1945). Since the lands
were pooled without authority, the habendum clause
in the Mitchell-Long lease cannot be used to extend                I disagree with the Court's construction of the
the term of the lease beyond August 16, 1961, the             pooling agreement in the oil and gas lease under con-
terminal date of the primary term of the lease.               sideration and with the application of the pooling
                                                              agreement to the rules and regulations adopted by the
                                                              Railroad Commission. Construing the pooling*329
      [6] Killingsworth and the Hunt Petroleum Cor-
                                                              agreement in its entirety simply means that the lessee
poration contend that the pooling clause in the
                                                              was given authority to pool the lessor's land with other
Mitchell-Long lease created a relationship of principal
                                                              land in units, the size of which are controlled by the
and agent, or at least created a relationship similar to
                                                              rules and regulations of the Railroad Commission.
the of principal and agent, and that performance by the
lessee is to be measured by the standard of good faith.
It is true that the lessee acted in good faith. It is true        The applicable rules and regulations for the de-
that the lessee was given authority to pool. It is equally    velopment of the Fairway (James Lime) Field, in
true that the permit granted by the Railroad Commis-          which the pooling unit in question is located, are set
sion is unquestionably valid. Even so, the acts of the        out in Railroad Commission Order No. 6—45, 322.
Railroad Commission cannot be said to operate ef-             Rules 1 and 2 of that order are as follows:
fectively to extend the restrictive terms of the lease.
The orders of the Railroad Commission cannot com-                  ‘RULE 1: No well for oil or gas shall hereafter be
pel pooling agreements that the parties themselves do         drilled nearer than eighteen hundred fifty (1850) feet
not agree upon. The Railroad Commission has no                to any well completed in or drilling to the same res-
power to determine property rights. See Ryan Con-             ervoir on the same lease, unitized tract or farm, and no
solidated Petroleum Corp. v. Pickens, 155 Tex. 221,           well shall be drilled nearer than six hundred sixty
285 S.W.2d 201 (1955); Magnolia Petroleum Co. v.              (660) feet to any property line, lease line or subdivi-
Railroad Commission, 141 Tex. 96, 170 S.W.2d 189              sion line; provided, however, that the Commission




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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)

will, in order to prevent waste or to prevent the con-      eighty (80) acre unit and shall in such event receive
fiscation of property grant exceptions to permit drill-     allowable credit for not more than one hundred sixty
ing within shorter distances than herein prescribed         (160) acres.
whenever the Commission shall have determined that
such exceptions are necessary either to prevent waste            ‘Operators shall file with the Commission certi-
or to prevent the confiscation of property. When ex-        fied plats of their properties in said field, which plats
ception to this rule is desired, application therefor       shall set out distinctly all of those things pertinent to
shall be filed and will be acted upon in accordance         the determination of the acreage credit claimed for
with the provisions of Commission Statewide Rules           each well; provided that if the acreage assigned to any
37 and 38, which applicable provisions of said rules        proration unit has been pooled, the operator shall
are incorporated herein by reference.                       furnish the Commission with such proof as it may
                                                            require as evidence that interests in and under such
     ‘The aforementioned distances in the above rule        proration unit have been so pooled.’
are minimum distances to allow an operator flexibility
in locating a well, and the above spacing rule and the          The petitioner does not contend, nor does the
other rules to follow are for the purpose of permitting     opinion say, that the proration unit in *330 question
only one well to each eighty (80) are proration unit.       does not comply with the regulations of the Railroad
                                                            Commission. The opinion simply assumes, without
     ‘In applying this rule, the general order of the       giving a reason why, that the regulations of the Rail-
Commission with relation to the subdivision of prop-        road Commission under which the unit in question
erty shall be observed.                                     was created were not Prescribed by governmental
                                                            regulations.
     ‘RULE 2: The acreage assigned to the individual
oil well for the purpose of allocating allowable oil             The court, in discussing the provisions of the
production thereto shall be known as a proration unit.      regulations, does not fully cover all the size units
No proration unit shall consist of more than eighty         provided in said regulations. Since the authority given
(80) acres except as hereinafter provided, and the two      by lessor to pool is governed largely by these regula-
farthermost points in any proration unit shall not be in    tions, it is thought that it well be helpful to more fully
excess of forty two hundred (4200) feet removed from        analyze them.
each other; provided, however, that in the case of long
and narrow leases or in cases where because of the               At the time the unit in question was formed,
shape of the lease such is necessary to permit the          Railroad Commission Order No. 6—45, 322 was in
utilization of tolerance acreage the Commission may         effect and governed the Fairway (James Lime) Field.
after proper showing grant exceptions to the limita-        One of the Commission's preliminary findings set out
tions as to the shape of proration units as herein con-     in the order, preceding the adoption of field rules, was
tained. All proration units, however, shall consist of      an express finding to the effect that certain observa-
continuous and contiguous acreage which can rea-            tions and calculations made with reference to the
sonably be considered to be productive of oil.              discovery well in the field had indicated that the well
                                                            was producing oil in an area outside the radius of a
     ‘Provided, however, that operators may elect to        160-acre circle around the well. From this and other
assign tolerance of not more than eighty (80) acres of      findings the Commission proceeded to adopt proration
additional unassigned lease acreage to a well on an         rules which established a maximum proration unit of




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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)

160 acres for which full acreage allowable credit                The pooling unit in question comes squarely
would be given. Thus, it was implicit that the Com-          within the limits as to size with the provisions of the
mission had determined that the basic drainage pattern       governmental regulations just as much so as does the
for the field was 160 acres or, in other words, that a       80-acre unit referred to above.
160-acre unit would be reasonably drained by a single
well.                                                             This brings us to a discussion of the interpretation
                                                             to be given the proviso of the pooling unit, which we
     The Commission order did something more. It             here quote:
expressly recognized that smaller units would also be
given full acreage allowable credit, if they met certain          ‘* * * provided that should governmental author-
requirements. One of the provisions of the rules es-         ity having jurisdiction prescribe or permit the creation
tablished, in effect, that if an operator had as much as     of units larger than those specified, units thereafter
80 acres in a single lease, 80 acres would then be           created may conform substantially in size with those
considered as the minimum proration unit, the inclu-         prescribed by governmental regulations.’
sion of additional acreage, up to the total maximum of
160 acres, being optional with the operator. But an-
                                                                  The first clause of the proviso governs the condi-
other provision, relating to distance spacing, also
                                                             tion under which the lessee may create units larger
established that, still without the necessity of any
                                                             than those specified, *331 (40 acres), that is, when
hearing or exception, any square tract of 40 acres or
                                                             government authority has prescribed rules and regu-
more would also serve as an acceptable proration unit,
                                                             lations for the creation of larger units or when gov-
if that were all the acreage the operator possessed in
                                                             ernmental authority has permitted the creation of
the particular property, and if there had been no illegal
                                                             larger units. Under the facts of this case the govern-
subdivision. The 40-acre minimum standard was
                                                             mental authority has prescribed rules and regulations
implicit in the rule that no well be drilled nearer than
                                                             providing for the creation of larger units, but it has not
660 feet from any property line. Thus, the Commis-
                                                             permitted the creation of larger units. No permit was
sion Order in effect recognized that, without special
                                                             requested nor was one needed. As a general rule the
hearing and exception, the maximum standard prora-
                                                             Railroad Commission permits the creation of units
tion unit, i.e., the area which could reasonably be
                                                             only as exceptions to established rules and regulations.
drained by a single well, was 160 acres, while the
                                                             The last clause of the proviso governs the size of units
minimum standard unit, i.e., the smallest to be al-
                                                             created under either prescribed regulations or gov-
lowed, was 40 acres. Pickens v. Railroad Commis-
                                                             ernmental authority permission. As said above, it is
sion, 387 S.W.2d 35, 38, 39 (Tex.Sup.Ct.1965).
                                                             not questioned but that this unit was created in com-
                                                             pliance with the established regulations and not by
     The court's opinion says ‘The Commission pre-           permission of the Railroad Commission as an excep-
scribed a unit of 80 acres', inferring that all other size   tion to the regulation.
units provided for in said regulations were permitted
by the Railroad Commission or permitted by the reg-
                                                                   It has been argued before this court that since the
ulations, I am not sure which. To be sure, an 80-acre
                                                             first clause in said proviso uses the term ‘permit’ and
unit is prescribed by the regulations. But I do not agree
                                                             the second clause does not use the term, that ‘pre-
that it is the only unit prescribed. As shown above, the
                                                             scribed’ must necessarily have a special meaning of
regulations provide for units from 40 acres to 160
                                                             ‘required’ in order to leave room for permissive units
acres in size.
                                                             to be formed, and since the last clause did not establish




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403 S.W.2d 325
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a size for permissive units, no authority was given to        liberal interpretation should be given to the pooling
form any permissive units. This reasoning seems to be         provision to accomplish the purpose for which it was
the basis of the court's holding. Under this line of          intended, that is, to promote conservation beneficial
reasoning we wonder why the parties used the term             both to the lessor and the lessee. It can be reasonably
‘permit’ at all in the first clause of the proviso. It is     concluded that from said pooling provision the parties
fundamental that in contracts all the terms used should       intended for the authority to pool to extend to any unit
be given meaning if possible. Should a governmental           size substantially conforming to any unit standard
authority lay down rules and regulations for the crea-        officially established by the Railroad Commission in
tion of larger units, it is reasonable to say the gov-        the exercise of its spacing proration function.
ernmental authority has Prescribed. If the govern-
mental authority allows the creation of a larger unit as           This court, in construing an oil and gas lease in
an exception to the prescribed rules and regulations it       the recent case of Grady L. Fox et al. v. Julia Thore-
can be said that governmental authority has Permitted         son, 9 Tex.Sup.Ct.J. 26 (1965), used the following
the creation of larger units. In fact, the term ‘permit’ is   language:
the universal term applied to authority granted as an
exception to regular rules and regulations governing
                                                                   ‘* * * Another sound rule of interpretation is that
the development of oil and gas fields. The fact that the
                                                              language used by *332 the parties to an oil and gas
word ‘permit’ is not used in the second clause of the
                                                              lease will not be held to impose a special limitation on
proviso does not destroy the import of the word
                                                              the grant unless it is clear and precise and so une-
‘permit’ in the first clause.
                                                              quivocal in nature that it can reasonably be given no
                                                              other meaning.’
     This construction of the proviso allows us to give
the usual and ordinary meaning to the word ‘prescribe’
                                                                   The court's opinion in the instant case has given a
as defined by Webster:
                                                              narrow and restricted meaning to the pooling provi-
                                                              sion in question when there is no language in said
    ‘prescribe (L. praescribere, praescriptum, fr.prae        pooling provision which compels such construction to
before—scribere to write, see scribere.) * * *                be placed thereon. So long as the lessor's pooling unit
                                                              is confined to the size of the pooling units authorized
     ‘2. To lay down authoritatively as a guide direc-        by the rules and regulations of the Railroad Commis-
tion or rule of action; to impose as a peremptory order;      sion, it can reasonably be said that the unit complies in
to dictate; direct; ordain; as, to prescribe regular hours    size with the prescribed regulations. This would be a
of study. 3. To keep within limits or bounds; to re-          reasonable construction of the pooling provision ra-
strain; to confine * * *.                                     ther than a strained one.


    ‘Syn.—Limit, control, order, guide.’                          In Texaco, Inc. v. Letterman, 343 S.W.2d 726,
                                                              732 (Tex.Civ.App.1961), the court in construing a
    I think that the authority granted by the lessor for      pooling provision in an oil and gas lease said:
pooling necessarily had to be stated in broad and
general terms because it could not be foreseen what               ‘That pooling or unitizing of oil and gas leases is a
the circumstances in the future might be, what the            standard practice in the industry can not be ques-
regulations of the Railroad Commission might be nor           tioned. It is equally recognized that unitization is often
in what terms they might be stated. For that reason a         a more feasible method of operation from an engi-




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403 S.W.2d 325
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neering and scientific point of view. Unitization can       should be upheld, although the grant of power is in
be said to be advantageous to both lessors and lessees.     general terms, because it is subject to implied terms
We think these facts lead to the conclusion that in the     that will prevent arbitrary and unfair dealing, will
absence of clear language to the contrary, pooling          require compliance with the implied covenants in the
clauses should not be construed in a narrow or limited      lease for the benefit of the lessor and will impose a
sense.’                                                     rigid standard of good faith on the part of the lessee.’


    And in Tiller v. Fields, 301 S.W.2d 185, 187                 In construing this pooling provision of the oil and
(Tex.Civ.App.1957), the court said:                         gas lease we should recognize that this does not only
                                                            affect the litigants involved here, but affects the oil
     ‘Anticipatory provisions in leases for the com-        industry as a whole for the simple reason that the form
mittment by the lessee of such leases to unitization, of    of the pooling unit used is in wide *333 use in Texas
necessity must be in general terms. Neither the lessor      and has been for many years. [FN1]
nor the lessee has any way of knowing at the time the
lease is taken the facts with respect to which it will be            FN1. The form of pooling provision is in
necessary for the lessee to apply his power. It is not               lease forms in Walker, Cases on Oil and Gas,
practicable for the lessee to await the ascertainment of             Vol. 2, Second form following page 895,
such facts. He knows from experience that because of                 publication 1948, lease form dated April,
the possibility of many changes in ownership of the                  1946; Stayton Texas Forms, 1960, Sec. 4026,
lessor's interest as time goes on, it may be difficult to            Vol. 7, p. 254; Huie, Walker and Woodward,
effect an agreement if the right to unitize is not in-               Oil & Gas, American Casebook Series, 1960,
cluded in the lease itself. Phillips Petroleum Co. v.                first form in the Appendix, p. 807, offered by
Peterson, 10 Cir., 218 F.2d 926. The Texas courts, as                the authors as a form ‘selected for the pur-
well as other courts, have recognized these basic facts,             pose of acquainting the student with the
and have consistently sustained the basic validity of                general nature of the instruments discussed in
lease pooling provisions and units formed under their                the cases,’ and printed by permission of
authority.’                                                          Pound Printing & Stationery Co., Houston;
                                                                     Williams, Oil & Gas Law, 1962, Vol. 4, p.
    In Phillips v. Petroleum Co. v. Peterson, 218 F.2d               635, Sec. 699.7.
926, 933, (10th Cir. 1954), the court reasoned as fol-
lows:                                                            The pooling clause which we have before us for
                                                            construction has been in use in Texas for many years.
     ‘Thus, it will be seen that unitization is a con-      Tolerance type proration units have been prescribed
servation measure which benefits both lessor and            for various oil and gas fields in Texas for many years.
lessee and tends to prevent waste of a natural resource.    The result has been the creation of many pooled units
***                                                         in numerous fields which are now shadowed. The
                                                            confusion, uncertainty, and possible title failure is not
                                                            limited to the lessee who may have formed the unit. It
     ‘The practice of unitization by a power granted
                                                            extends to royalty owners in the unit, overriding roy-
the lessee in advance, if faithfully carried out, will be
                                                            alty owners, and to some extent to the purchasers of
fair and profitable both to the lessor and lessee, and is
                                                            production and the financial institutions which furnish
vital to the oil and gas industry in the interests of the
                                                            capital for the development and enjoyment of the
conservation of both natural and material resources. It
                                                            mineral resources. Furthermore, there is affected by




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403 S.W.2d 325
(Cite as: 403 S.W.2d 325)

the court's opinion the new Texas Compulsory Pool-               The thrust of our opinion is that the Commission
ing Act by the Legislature, Art. 6008c,                     ‘prescribes' certain things, and it also ‘permits' certain
Rev.Civ.Stat.Ann. (1965). See discussion by Ernest E.       things. The majority then tries to determine which the
Smith, Tex.Law Rev. Vol. 43 pp. 1003—1021.                  Commission did in this instance and holds that the
                                                            Commission ‘prescribed’ eighty acres but did not
    I think a reasonable's construction of the pooling      ‘prescribe’ 160 acres. The fact is that the Commission
clause does not require that we strike it down, and I       passed its rules without regard to whether it was
would affirm the judgments of the trial court and           ‘prescribing’ or ‘permitting,’ as those terms are used
Court of Civil Appeals.                                     by the private contracting parties. The term ‘permit-
                                                            ted’ actually does two things: It permits but it also
                                                            prohibits all that is beyond that which is permitted.
GRIFFIN, J., joins in this dissent.POPE, Justice (dis-
                                                            Every permit carries an inherent prescription, pro-
senting).
                                                            scription, and prohibition of things beyond the permit.
      The fault that I find with our holding in this case
                                                            What the Commission did in passing its Rule 2 was to
is that we are trying to fit the meaning of terms used by
                                                            authorize certain units. Those units could be formed
private parties to a lease into a supposed technical
                                                            *334 without any further recourse to the Commission.
terminology used by the Railroad Commission in
                                                            To the extent that Rule 2 was complied with, a unit
making its rules and orders. This is the sequence of
                                                            was authorized. To the extent that it was beyond what
events. First the parties made the oil and gas lease and
                                                            Rule 2 authorized, it was prohibited. To the extent that
in it they provided:
                                                            it was prohibited, it was ‘prescribed,’ if we want to
                                                            squeeze the Commission order into the contractual
     'Units pooled for oil hereunder shall not substan-
                                                            mold. In my opinion the word ‘prescribed’ is more
tially exceed 40 acres each in area, and units pooled
                                                            applicable to the 160-acre unit than the 80-acre unit
for gas hereunder shall not substantially exceed in area
                                                            because the only prohibition or direction is against
640 acres plus a tolerance of 10% Thereof, provided
                                                            creating a unit of more than 160 acres.
that should governmental authority having jurisdiction
Prescribe or permit the creation of units larger than
                                                                I respectfully dissent.
those specified, units thereafter created may conform
substantially in size with those Prescribed by gov-
ernmental regulations.'                                     TEX 1966.
                                                            Jones v. Killingsworth
                                                            403 S.W.2d 325
    Several years later the Commission order was
passed which stated:
                                                            END OF DOCUMENT
     '* * * No proration unit shall consist of more than
eighty (80) acres except as hereinafter provided, * * *
‘Provided, however, that operators may elect to assign
tolerance of not more than eighty (80) acres of addi-
tional unassigned lease acreage to a well on an eighty
(80) acre unit and shall in such event receive allowable
credit for not more than one hundred sixty (160)
acres.’




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694 S.W.2d 441
(Cite as: 694 S.W.2d 441)



                                                                 Language used by parties to a contract should be
             Court of Appeals of Texas,                     given its plain grammatical meaning unless it defi-
                      Eastland.                             nitely appears that intention of the parties would
                                                            thereby be defeated.
       J.E. TOMLIN et ux., Appellants,
                    v.                                      [2] Mines and Minerals 260         73
 PETROLEUM CORPORATION OF TEXAS, Ap-
                 pellee.                                    260 Mines and Minerals
                                                                260II Title, Conveyances, and Contracts
                No. 11–85–039–CV.                                  260II(C) Leases, Licenses, and Contracts
                  June 13, 1985.                                       260II(C)3 Construction and Operation of
                                                            Oil and Gas Leases
     Lessors of oil and gas lease brought declaratory                     260k73 k. In General; General Rules of
judgment action concerning their rights and status          Construction. Most Cited Cases
under the lease. The 90th District Court, Stephens             (Formerly 260k73(1))
County, R.E. Thornton, J., granted lessee oil compa-
ny's motion for summary judgment, and lessors ap-                Language used by parties to oil and gas lease will
pealed. The Court of Appeals, McCloud, C.J., held           not be held to impose special limitation on the grant
that paragraph of lease which began by stating that         unless it is clear and precise and so unequivocal in
“each producing oil well drilled on said land * * *         nature that it can reasonably be given no other mean-
shall hold forty (40) acres * * *” contained no refer-      ing.
ence to producing gas well and did not apply to
acreage held by gas well, and thus, did not operate as      [3] Mines and Minerals 260         73
amendment to habendum clause so as to prevent gas
well from maintaining the lease in force beyond end of      260 Mines and Minerals
primary term of the lease.                                      260II Title, Conveyances, and Contracts
                                                                   260II(C) Leases, Licenses, and Contracts
    Affirmed.                                                          260II(C)3 Construction and Operation of
                                                            Oil and Gas Leases
                   West Headnotes                                         260k73 k. In General; General Rules of
                                                            Construction. Most Cited Cases
                                                               (Formerly 260k73(1))
[1] Contracts 95      152

95 Contracts                                                     In oil and gas lease in which specific things are
   95II Construction and Operation                          followed by some general term, such general term
                                                            must refer to things of the same kind.
       95II(A) General Rules of Construction
         95k151 Language of Instrument
             95k152 k. In General. Most Cited Cases         [4] Mines and Minerals 260         78.1(7)




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694 S.W.2d 441
(Cite as: 694 S.W.2d 441)

                                                            perpetuated as to only forty (40) acres around any
260 Mines and Minerals                                      producing well, whether oil or gas.
    260II Title, Conveyances, and Contracts
        260II(C) Leases, Licenses, and Contracts                 Both parties filed motions for summary judgment.
           260II(C)3 Construction and Operation of          The trial court granted summary judgment to PETCO,
Oil and Gas Leases                                          stating that the subject lease remains in full force and
              260k78 Testing or Working                     effect. The Tomlins appeal. We affirm.
                  260k78.1 Construction, Breach, and
Penalties                                                        The December 3, 1974, oil, gas, and mineral lease
                     260k78.1(7) k. Place or Portion        consists of a printed form, together with a typed rider
Developed; Pooled or Unitized Tracts. Most Cited            containing five (5) additional paragraphs relating to
Cases                                                       PETCO's operations under the lease. The granting
                                                            clause grants PETCO the right to “(produce) oil, gas,
     Paragraph of oil and gas lease stating that “each      and all other minerals” found in the covered 326.5
producing oil well drilled on said land * * * shall hold    acres of leased land. The habendum clause states that
forty (40) acres * * *” contained no reference to a         *442 “(S)ubject to the other provisions herein con-
producing gas well and did not apply to acreage held        tained, this lease shall remain in force for a term of
by gas well, and thus, did not operate as amendment to      three (3) years ... (called ‘primary term’), and so long
habendum clause so as to prevent gas well from              thereafter as oil, gas, or other mineral is produced
maintaining the lease in force beyond end of primary        from said land.” Paragraph 16, one of the five para-
term of the lease.                                          graphs contained in the typed rider, states the fol-
                                                            lowing:
*441 John R. Cook, Thompson & Cook, Brecken-
ridge, for appellants.                                          At the end of the primary term hereof each pro-
                                                              ducing oil well drilled on said land by Lessee shall
Frank L. Jennings, Jennings, Dies, Turner & Knight,           hold 40 acres, to be designated by Lessee, and the
Graham, for appellee.                                         balance of the acreage shall be released to Lessor;
                                                              and after the primary term hereof, any acreage so
                                                              held by a producing well shall be considered as
McCLOUD, Chief Justice.
                                                              covered by a separate lease from any other acreage
     J.E. Tomlin and his wife, Betty Tomlin, lessors,
                                                              held by any other producing well, so that production
sued Petroleum Corporation of Texas (PETCO), les-
                                                              from any such well shall not thereafter continue this
see, seeking a declaratory judgment under the Uni-
                                                              lease in effect as to acreage which was held by an-
form        Declaratory          Judgment          Act,
                                                              other producing well at the expiration of the primary
TEX.REV.CIV.STAT.ANN. art. 2524–1 (Vernon
                                                              term hereof. (Emphasis added)
1965) concerning their rights and status under an oil,
gas, and mineral lease entered into by the parties. The
Tomlins alleged that the lease terminated for failure to        PETCO drilled a gas well on the premises, which
produce “oil.” Alternatively, they contended that the       was producing gas at the expiration of the primary
lease is ambiguous and the case should be reversed          term of the lease.
and remanded so that parol evidence may be intro-
duced to show that the parties intended that upon               The Tomlins argue that paragraph 16 operates as
expiration of the primary term, the lease would be          an amendment to the habendum clause, the effect of




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                                                                                                            Page 3

694 S.W.2d 441
(Cite as: 694 S.W.2d 441)

which is to prevent a gas well from maintaining the
lease in force beyond the end of the primary term.               The Tomlins' conditionally submitted second
They contend that only a producing “oil well” will          point of error, seeking a remand of this case, is over-
hold any acreage of the lease beyond the primary term,      ruled. We hold that the lease is not ambiguous. Only a
with “the balance of the acreage,” including that sur-      question of law is involved; no genuine issue of fact
rounding a gas well, to be “released to Lessor.” We         exists. Therefore, the trial court's rendition of sum-
disagree.                                                   mary judgment in favor of PETCO was proper.

     [1][2] In determining proper construction of a             The judgment of the trial court is affirmed.
contract, the court usually examines the entire docu-
ment. Language used by the parties should be given its
                                                            Tex.App. Eastland 1985.
plain grammatical meaning unless it definitely appears
                                                            Tomlin v. Petroleum Corp. of Texas
that the intention of the parties would thereby be de-
                                                            694 S.W.2d 441
feated. Language used by the parties to an oil and gas
lease will not be held to impose a special limitation on
                                                            END OF DOCUMENT
the grant unless it is clear and precise and so une-
quivocal in nature that it can reasonably be given no
other meaning. Fox v. Thoreson, 398 S.W.2d 88
(Tex.1966).


     [3][4] Paragraph 16 begins by stating that “each
producing oil well drilled on said land ... shall hold
forty (40) acres....” (Emphasis added) The provision
contains no reference to a producing gas well. Where
specific things are followed by some general term,
such general term must refer to things of the same
kind. Fleming Foundation v. Texaco, 337 S.W.2d 846
(Tex.Civ.App.—Amarillo 1960, writ ref'd n.r.e.).
Phrases such as “any acreage so held by a producing
well” and “any such well” refer only to any oil wells
which are producing at the expiration of the primary
term of the subject lease. Paragraph 16 does not apply
to acreage held by a gas well. The language urged by
the Tomlins as imposing a special limitation on the
grant is not clear, precise, and “so unequivocal in
nature that it can reasonably be given no other mean-
ing.” Fox v. Thoreson, supra at 92.

     Therefore, the habendum clause alone governs
the right of the parties when a gas well is producing at
the end of the primary term. Accordingly, the gas well
maintains the lease in full force and effect as to all
326.5 acres.




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                                                                                                          Page 1

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

                                                                  (Formerly 233k37)


             Supreme Court of Texas.                            Construing an unambiguous lease is a question of
  ANADARKO PETROLEUM CORPORATION,                           law for the court.
                   Petitioner,
                       v.                                   [2] Appeal and Error 30       893(1)
    Phillip THOMPSON, et al., Respondents.
                                                            30 Appeal and Error
                  No. 01–0261.                                 30XVI Review
             Argued March 6, 2002.                                30XVI(F) Trial De Novo
              Decided July 3, 2002.                                  30k892 Trial De Novo
     Opinion Denying Rehearing Jan. 30, 2003.                            30k893 Cases Triable in Appellate
                                                            Court
     Lessor sought declaration that gas lease had ter-                     30k893(1) k. In general. Most Cited
minated, and sought damages. The District Court,            Cases
Moore County, Ron Enns, J., granted partial summary
judgment for lessor, and after a bench trial, awarded            Appellate court reviews lease-construction ques-
damages to lessor for lessee's post-termination con-        tions de novo.
version of gas. Lessee appealed. The Court of Ap-
peals, Quinn, J., 60 S.W.3d 134, affirmed. After            [3] Landlord and Tenant 233        593
granting lessee's petition for review, the Supreme
Court, Baker, J., held that: (1) gas mining lease did not
                                                            233 Landlord and Tenant
terminate when actual production ceased longer than
                                                                233II Leases and Agreements in General
60 days but well was still actually capable of pro-
                                                                   233II(B) Construction and Operation
ducing gas, and (2) well is “capable of production” if it
                                                                      233k593 k. Intention of parties. Most Cited
is capable of producing in paying quantities without
                                                            Cases
additional equipment or repairs.
                                                               (Formerly 233k37)

    Reversed and remanded.
                                                                In construing an unambiguous lease, court's pri-
                                                            mary duty is to ascertain the parties' intent as ex-
                   West Headnotes                           pressed within the lease's four corners.

[1] Landlord and Tenant 233           611                   [4] Landlord and Tenant 233        596

233 Landlord and Tenant                                     233 Landlord and Tenant
    233II Leases and Agreements in General                     233II Leases and Agreements in General
       233II(B) Construction and Operation                        233II(B) Construction and Operation
          233k611 k. Questions of law or fact. Most                  233k596 k. Ordinary or technical language.
Cited Cases




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                                                                                                            Page 2

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

Most Cited Cases                                            Mining Leases
  (Formerly 233k37)                                                        260k62.1 k. Premises demised and
                                                            rights acquired. Most Cited Cases
     Court gives a lease's language its plain, gram-
matical meaning unless doing so would clearly defeat        Mines and Minerals 260          73.1(3)
the parties' intentions.
                                                            260 Mines and Minerals
[5] Landlord and Tenant 233          598                        260II Title, Conveyances, and Contracts
                                                                   260II(C) Leases, Licenses, and Contracts
233 Landlord and Tenant                                                260II(C)3 Construction and Operation of
    233II Leases and Agreements in General                  Oil and Gas Leases
       233II(B) Construction and Operation                                260k73.1 Premises Demised and Rights
          233k598 k. Construction as a whole. Most          Acquired
Cited Cases                                                                  260k73.1(3) k. Interest in real estate.
   (Formerly 233k37)                                        Most Cited Cases


     Court examines the entire lease and attempts to             A mineral lease grants a fee simple determinable
harmonize all its parts, even if different parts appear     to the lessee.
contradictory or inconsistent, because court presumes
that the parties to a lease intend every clause to have     [8] Mines and Minerals 260          63
some effect.
                                                            260 Mines and Minerals
[6] Landlord and Tenant 233          590                       260II Title, Conveyances, and Contracts
                                                                  260II(C) Leases, Licenses, and Contracts
233 Landlord and Tenant                                               260II(C)2 Construction and Operation of
    233II Leases and Agreements in General                  Mining Leases
       233II(B) Construction and Operation                               260k63 k. Term. Most Cited Cases
          233k590 k. In general. Most Cited Cases
   (Formerly 233k37)                                        Mines and Minerals 260          73.5

     Court will not hold a lease's language to impose a     260 Mines and Minerals
special limitation on the grant unless the language is          260II Title, Conveyances, and Contracts
so clear, precise, and unequivocal that court can rea-             260II(C) Leases, Licenses, and Contracts
sonably give it no other meaning.                                      260II(C)3 Construction and Operation of
                                                            Oil and Gas Leases
[7] Mines and Minerals 260         62.1                                   260k73.5 k. Term. Most Cited Cases


260 Mines and Minerals                                          Lessee's mineral estate may continue indefinitely,
   260II Title, Conveyances, and Contracts                  as long as the lessee uses the land for its intended
      260II(C) Leases, Licenses, and Contracts              purpose.
          260II(C)2 Construction and Operation of




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                                                                                                            Page 3

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

[9] Mines and Minerals 260        63
                                                            [11] Mines and Minerals 260           78.1(8)
260 Mines and Minerals
   260II Title, Conveyances, and Contracts                  260 Mines and Minerals
      260II(C) Leases, Licenses, and Contracts                  260II Title, Conveyances, and Contracts
          260II(C)2 Construction and Operation of                   260II(C) Leases, Licenses, and Contracts
Mining Leases                                                          260II(C)3 Construction and Operation of
             260k63 k. Term. Most Cited Cases               Oil and Gas Leases
                                                                          260k78 Testing or Working
Mines and Minerals 260         73.5                                           260k78.1 Construction, Breach, and
                                                            Penalties
260 Mines and Minerals                                                           260k78.1(8) k. Extent of produc-
    260II Title, Conveyances, and Contracts                 tion, paying quantities, and marketing. Most Cited
       260II(C) Leases, Licenses, and Contracts             Cases
           260II(C)3 Construction and Operation of
Oil and Gas Leases                                              A typical Texas mineral lease that lasts “as long
              260k73.5 k. Term. Most Cited Cases            as oil or gas is produced” automatically terminates if
                                                            actual production permanently ceases during the
    Mineral estate will automatically terminate if the      secondary term.
event upon which it is limited occurs.
                                                            [12] Mines and Minerals 260           63
[10] Mines and Minerals 260           63
                                                            260 Mines and Minerals
260 Mines and Minerals                                         260II Title, Conveyances, and Contracts
   260II Title, Conveyances, and Contracts                        260II(C) Leases, Licenses, and Contracts
      260II(C) Leases, Licenses, and Contracts                        260II(C)2 Construction and Operation of
          260II(C)2 Construction and Operation of           Mining Leases
Mining Leases                                                            260k63 k. Term. Most Cited Cases
             260k63 k. Term. Most Cited Cases
                                                            Mines and Minerals 260         73.5
Mines and Minerals 260         73.5
                                                            260 Mines and Minerals
260 Mines and Minerals                                          260II Title, Conveyances, and Contracts
    260II Title, Conveyances, and Contracts                        260II(C) Leases, Licenses, and Contracts
       260II(C) Leases, Licenses, and Contracts                        260II(C)3 Construction and Operation of
           260II(C)3 Construction and Operation of          Oil and Gas Leases
Oil and Gas Leases                                                        260k73.5 k. Term. Most Cited Cases
              260k73.5 k. Term. Most Cited Cases
                                                                 Although the habendum clause generally controls
     Lease's habendum clause defines the mineral es-        the mineral estate's duration, other clauses may extend
tate's duration.                                            the habendum clause's term.




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                                                                                                            Page 4

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

                                                            260 Mines and Minerals
[13] Landlord and Tenant 233          890                       260II Title, Conveyances, and Contracts
                                                                    260II(C) Leases, Licenses, and Contracts
                                                                       260II(C)3 Construction and Operation of
233 Landlord and Tenant
                                                            Oil and Gas Leases
    233IV Particular Kinds of Tenancies and Attrib-
                                                                          260k78 Testing or Working
utes Thereof
                                                                              260k78.1 Construction, Breach, and
       233IV(F) Termination
                                                            Penalties
          233IV(F)1 In General
                                                                                 260k78.1(8) k. Extent of produc-
             233k890 k. In general. Most Cited Cases
                                                            tion, paying quantities, and marketing. Most Cited
   (Formerly 233k93)
                                                            Cases

     When a lease terminates is always a question of
                                                                 Completion of a gas well capable of producing in
resolving the intention of the parties from the entire
                                                            paying quantities but shut-in due to lack of pipe line
instrument.
                                                            facilities or for other reasons is not considered “pro-
                                                            duction” and therefore does not sustain a mineral
[14] Mines and Minerals 260         78.1(8)                 interest that lasts as long as oil or gas “is produced.”

260 Mines and Minerals
                                                            [16] Mines and Minerals 260          78.1(8)
    260II Title, Conveyances, and Contracts
        260II(C) Leases, Licenses, and Contracts
                                                            260 Mines and Minerals
           260II(C)3 Construction and Operation of
                                                                260II Title, Conveyances, and Contracts
Oil and Gas Leases
                                                                    260II(C) Leases, Licenses, and Contracts
              260k78 Testing or Working
                                                                       260II(C)3 Construction and Operation of
                  260k78.1 Construction, Breach, and
                                                            Oil and Gas Leases
Penalties
                                                                          260k78 Testing or Working
                     260k78.1(8) k. Extent of produc-
                                                                              260k78.1 Construction, Breach, and
tion, paying quantities, and marketing. Most Cited
                                                            Penalties
Cases
                                                                                 260k78.1(8) k. Extent of produc-
                                                            tion, paying quantities, and marketing. Most Cited
     Gas mining lease, which contained habendum             Cases
clause stating that lease would remain in force as long
as “gas is or can be produced,” did not terminate when
                                                                A well is “capable of production” if it is capable
actual production ceased longer than 60 days but well
                                                            of producing in paying quantities without additional
was still actually capable of producing gas, despite
                                                            equipment or repairs.
cessation-of-production clause providing for 60-day
period to resume operations after cessation of pro-
duction; cessation-of-production clause only applied        [17] Mines and Minerals 260          78.1(8)
if well holding lease became incapable of production.
                                                            260 Mines and Minerals
[15] Mines and Minerals 260         78.1(8)                    260II Title, Conveyances, and Contracts
                                                                  260II(C) Leases, Licenses, and Contracts
                                                                      260II(C)3 Construction and Operation of




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                                                                                                            Page 5

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

Oil and Gas Leases                                          Oil and Gas Leases
             260k78 Testing or Working                                   260k78 Testing or Working
               260k78.1 Construction, Breach, and                          260k78.1 Construction, Breach, and
Penalties                                                   Penalties
                   260k78.1(8) k. Extent of produc-                            260k78.1(8) k. Extent of produc-
tion, paying quantities, and marketing. Most Cited          tion, paying quantities, and marketing. Most Cited
Cases                                                       Cases

     Gas well was still “capable of production in               In the case of a marginal gas well, the standard by
paying quantities” under mineral lease terms, even          which paying quantities, under a mineral lease, is
though there were periods during which there was no         determined is whether or not under all relevant cir-
production, where the well was connected to pipeline        cumstances a reasonably prudent operator would, for
facilities, and there was no question that well was         the purpose of making a profit and not merely for
capable of producing in paying quantities.                  speculation, continue to operate a well in the manner
                                                            in which the well in question was operated.
[18] Mines and Minerals 260         78.1(8)
                                                            [20] Mines and Minerals 260         78.1(8)
260 Mines and Minerals
    260II Title, Conveyances, and Contracts                 260 Mines and Minerals
        260II(C) Leases, Licenses, and Contracts                260II Title, Conveyances, and Contracts
           260II(C)3 Construction and Operation of                  260II(C) Leases, Licenses, and Contracts
Oil and Gas Leases                                                     260II(C)3 Construction and Operation of
              260k78 Testing or Working                     Oil and Gas Leases
                  260k78.1 Construction, Breach, and                      260k78 Testing or Working
Penalties                                                                     260k78.1 Construction, Breach, and
                     260k78.1(8) k. Extent of produc-       Penalties
tion, paying quantities, and marketing. Most Cited                               260k78.1(8) k. Extent of produc-
Cases                                                       tion, paying quantities, and marketing. Most Cited
                                                            Cases
     For a gas well to produce in paying quantities, or
to be capable of producing in paying quantities, there           In a mineral lease involving a gas well, the term
must be facilities located near enough to the well that     “paying quantities” involves not only the amount of
it would be economically feasible to establish a con-       production, but also the ability to market the gas at a
nection so that production could be marketed at a           profit.
profit.
                                                            [21] Mines and Minerals 260         78.2
[19] Mines and Minerals 260         78.1(8)
                                                            260 Mines and Minerals
260 Mines and Minerals                                          260II Title, Conveyances, and Contracts
   260II Title, Conveyances, and Contracts                         260II(C) Leases, Licenses, and Contracts
      260II(C) Leases, Licenses, and Contracts                         260II(C)3 Construction and Operation of
          260II(C)3 Construction and Operation of           Oil and Gas Leases




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                                                                                                             Page 6

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

             260k78 Testing or Working                      itable returns from the well is the test; if the quantity
                260k78.2 k. Forfeiture for breach in        be sufficient to warrant the use of the gas in the mar-
general. Most Cited Cases                                   ket, and the income therefrom is in excess of the actual
                                                            marketing cost, and operating costs, the production
Mines and Minerals 260          78.7(6)                     satisfies the term “paying quantities.”


260 Mines and Minerals                                      [23] Mines and Minerals 260           78.1(8)
    260II Title, Conveyances, and Contracts
         260II(C) Leases, Licenses, and Contracts           260 Mines and Minerals
           260II(C)3 Construction and Operation of              260II Title, Conveyances, and Contracts
Oil and Gas Leases                                                  260II(C) Leases, Licenses, and Contracts
               260k78 Testing or Working                               260II(C)3 Construction and Operation of
                 260k78.7 Actions                           Oil and Gas Leases
                      260k78.7(6) k. Judgment and                         260k78 Testing or Working
relief; damages. Most Cited Cases                                             260k78.1 Construction, Breach, and
                                                            Penalties
     Remedy for breach of implied covenant to market                             260k78.1(8) k. Extent of produc-
production under oil and gas lease agreement is not         tion, paying quantities, and marketing. Most Cited
forfeiture or termination of lease; breach of implied       Cases
covenant in oil and gas lease does not automatically
terminate the estate, but instead subjects breaching             Gas mining lease, containing clause stating that
party to liability for monetary damages, or, in ex-         lease would remain in force as long as “gas is or can be
traordinary circumstances, remedy of conditional            produced,” did not mean lease would remain in effect
decree of cancellation.                                     only as long as gas “is produced”; “can be produced”
                                                            did not mean actual production.
[22] Mines and Minerals 260          78.1(8)
                                                            *552 Eric Anthony Hillerman,Harlow Sprouse,
260 Mines and Minerals                                      Charles Wade Miller, Sprouse *553 Smith & Rowley,
    260II Title, Conveyances, and Contracts                 Amarillo, J. Kyle McClain, Anadarko Petroleum
        260II(C) Leases, Licenses, and Contracts            Corp., David M. Gunn, Hogan Dubose & Townsend,
           260II(C)3 Construction and Operation of          L.L.P., Houston, for Petitioner.
Oil and Gas Leases
              260k78 Testing or Working                     Joe L. Lovell, Lovell Lovell & Newsom, Amarillo,
                  260k78.1 Construction, Breach, and        Donald M. Hunt, Mullin Hoard Brown Langston Carr
Penalties                                                   Hunt & Joy LLP, Lubbock, J.R. Lovell, Lovell &
                     260k78.1(8) k. Extent of produc-       Lyle, Dumas, for Respondents.
tion, paying quantities, and marketing. Most Cited
Cases                                                       Justice BAKER delivered the opinion of the Court.
                                                                 In this case, we decide whether a gas mining lease
     In determining whether gas well under mineral          terminated when actual production ceased longer than
lease is producing in paying quantities, test is whether    sixty days. The lease expressly states that it lasts for
there is a reasonable basis for the expectation of prof-    one year and “as long thereafter as gas is or can be




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                                                                                                             Page 7

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

produced.” The lease also provides that, if production      1936. However, it is undisputed that production totally
ceases for any reason, the lease “shall not terminate       ceased for sixty-one days in 1981 and ninety-one days
provided lessee resumes operations for drilling a well      in 1985 while the gas purchaser conducted pipeline
within sixty (60) days from such cessation.” The les-       repairs. In 1997, Thompson sued for a declaration that
sees began producing gas in 1936. However, in 1981          the lease terminated when production ceased in 1981
and again in 1985, actual production ceased longer          and for conversion damages.
than sixty days. The court of appeals held that these
cessations terminated the lease. 60 S.W.3d 134, 141.             On Thompson's motion, the trial court granted
We disagree. We conclude that a well that is capable        partial summary judgment that the lease terminated
of production sustains this particular lease even if        due to one or more cessations of production. After a
actual production ceases longer than sixty days. Ac-        bench trial, the court rejected Anadarko's affirmative
cordingly, we reverse the court of appeals' judgment        defenses of limitations, laches, quasi-estoppel, unjust
and remand to the trial court for further proceedings       enrichment, adverse possession, revivor, judicial es-
consistent with this opinion.                               toppel, and promissory estoppel. Accordingly, the trial
                                                            court awarded damages and attorney's fees to
                 I. BACKGROUND                              Thompson.
    In 1936, Thompson's and Anadarko's predeces-
sors entered into a lease “for the purpose of mining              Anadarko appealed. After considering the lease's
and operating for and producing gas.” The lease al-         implicit and explicit objectives, language in the lease's
lows either production or the lessees' beginning drill-     continuous operations clause, and other jurisdictions'
ing operations to maintain the lease beyond its             case law, the court of appeals construed the lease's
one-year primary term.                                      habendum clause to require actual production in
                                                            paying quantities. 60 S.W.3d at 140–41. Accordingly,
    Two provisions in the lease are pertinent here.         it affirmed the trial court's partial summary judgment
The lease's “habendum clause” states:                       that the lease terminated when *554 actual production
                                                            ceased longer than sixty days. 60 S.W.3d at 141. The
  This lease shall remain in force for a term of one (1)    court of appeals also determined that the evidence
  year and as long thereafter as gas is or can be pro-      supported the trial court's denying Anadarko's af-
  duced.                                                    firmative defenses. 60 S.W.3d at 145.


     The lease also has a “cessation-of-production               We granted Anadarko's petition to consider
clause,” which provides:                                    whether the court of appeals properly construed the
  If, after the expiration of the primary term of this      lease to conclude that it terminated.
  lease, production on the leased premises shall cease
  from any cause, this lease shall not terminate pro-                      II. APPLICABLE LAW
  vided lessee resumes operations for drilling a well                   A. LEASE CONSTRUCTION
  within sixty (60) days from such cessation, and this           [1][2][3][4][5][6] Construing an unambiguous
  lease shall remain in force during the prosecution of     lease is a question of law for the Court. Luckel v.
  such operations and if production results therefrom,      White, 819 S.W.2d 459, 461 (Tex.1991). Accordingly,
  then as long as production continues.                     we review lease-construction questions de novo. See
                                                            El Paso Natural Gas Co. v. Minco Oil & Gas, Inc., 8
    Anadarko's predecessors began producing gas in          S.W.3d 309, 312 (Tex.1999). In construing an unam-




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                                                                                                            Page 8

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

biguous lease, our primary duty is to ascertain the         that lasts “as long as oil or gas is produced” automat-
parties' intent as expressed within the lease's four        ically terminates if actual production permanently
corners. Luckel, 819 S.W.2d at 461; see also                ceases during the secondary term. See Amoco Prod.
Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368,            Co. v. Braslau, 561 S.W.2d 805, 808 (Tex.1978).
372–73 (Tex.2001). We give the lease's language its
plain, grammatical meaning unless doing so would                 [12][13] Although the habendum clause generally
clearly defeat the parties' intentions. Fox v. Thoreson,    controls the mineral estate's duration, other clauses
398 S.W.2d 88, 92 (Tex.1966). We examine the entire         may extend the habendum clause's term. Southland
lease and attempt to harmonize all its parts, even if       Royalty, 496 S.W.2d at 552. When a lease terminates
different parts appear contradictory or inconsistent.       “is always a question of resolving the intention of the
Luckel, 819 S.W.2d at 462. That is because we pre-          parties from the entire instrument.” Southland Royal-
sume that the parties to a lease intend every clause to     ty, 496 S.W.2d at 552.
have some effect. Heritage Res., Inc. v. NationsBank,
939 S.W.2d 118, 121 (Tex.1996). However, we will
                                                                               III. ANALYSIS
not hold the lease's language to impose a special lim-
                                                                        A. LEASE CONSTRUCTION
itation on the grant unless the language is so clear,
                                                                 [14] Here, we decide whether the lease terminated
precise, and unequivocal that we can reasonably give
                                                            when actual production ceased *555 longer than sixty
it no other meaning. Fox, 398 S.W.2d at 92.
                                                            days. Both parties' arguments about what triggers the
                                                            lease's termination rely upon the lease's habendum and
     B. OIL AND GAS LEASE PROVISIONS                        cessation-of-production clauses.
     [7][8][9] A Texas mineral lease grants a fee sim-
ple determinable to the lessee. See Texas Co. v. Davis,
                                                                 Anadarko contends that the habendum clause's
113 Tex. 321, 254 S.W. 304, 309 (1923). Conse-
                                                            plain language allows production or the capability of
quently, the lessee's mineral estate may continue in-
                                                            production to sustain the lease. Thus, Anadarko ar-
definitely, as long as the lessee uses the land for its
                                                            gues, the court of appeals incorrectly concluded that
intended purpose. Davis, 254 S.W. at 306. However, a
                                                            the habendum clause requires actual production.
mineral estate will automatically terminate if the event
                                                            Anadarko urges us to give the clause's “can be pro-
upon which it is limited occurs. Gulf Oil Corp. v. Reid,
                                                            duced” language its full effect. See Fox, 398 S.W.2d at
161 Tex. 51, 337 S.W.2d 267, 269 (1960).
                                                            92.    According to Anadarko, the cessa-
                                                            tion-of-production clause does not contradict the
     [10][11] A lease's habendum clause defines the         habendum clause's plain meaning, because the cessa-
mineral estate's duration. Gulf Oil Corp. v. Southland      tion-of-production clause is a savings provision that
Royalty Co., 496 S.W.2d 547, 552 (Tex.1973). For            only applies if the habendum clause's special limita-
instance, a typical habendum clause states that the         tion occurs and threatens to terminate the lease. In
lease lasts for a relatively short fixed term of years      other words, the cessation-of-production clause only
(primary term) and then “as long thereafter as oil, gas     applies if the well holding the lease becomes incapable
or other mineral is produced” (secondary term). See,        of production. Because the well holding the lease has
e.g., Reid, 337 S.W.2d at 269 n. 1; see also 1 SMITH        always been capable of production, Anadarko asks us
& WEAVER, TEXAS LAW OF OIL & GAS § 4.3                      to reverse the partial summary judgment that the lease
(1996). In Texas, such a habendum clause requires           terminated due to one or more cessations of produc-
actual production in paying quantities. Reid, 337           tion.
S.W.2d at 269–70; Garcia v. King, 139 Tex. 578, 164
S.W.2d 509, 512 (1942). Thus, a typical Texas lease




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                                                                                                               Page 9

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

     In response, Thompson asserts that both the             372–73; Luckel, 819 S.W.2d at 461. The habendum
lease's terms and existing Texas law support the court       clause's plain language shows that the parties intended
of appeals' conclusion that actual production is re-         that a well actually produce gas, or be capable of
quired to sustain the lease after the primary term. See      producing gas, to sustain the lease. See Fox, 398
60 S.W.3d at 140. According to Thompson, the ces-            S.W.2d at 92. This construction does not conflict with
sation-of-production clause applies whenever actual          our rule that Texas leases generally require actual
production ceases rather than when actual production         production. See Reid, 337 S.W.2d at 269–70; Garcia,
and capability of production cease. Moreover,                164 S.W.2d at 512. That is because the cases in which
Thompson argues, allowing the capability of produc-          *556 we recognized the general rule involved leases
tion to sustain the lease indefinitely would render the      with typical habendum clauses that sustained the lease
cessation-of-production clause meaningless.                  as long as oil or gas “is produced.” See Reid, 337
                                                             S.W.2d at 269 n. 1; Garcia, 164 S.W.2d at 512. Thus,
     Here, the habendum clause expressly states that         these cases do not control how to construe a habendum
the lease lasts as long as gas “is or can be produced.”      clause that lasts as long as gas “is or can be produced.”
For several reasons, the court of appeals rejected
Anadarko's argument that capability of production                 Additionally, the court of appeals reasoned that
sustained the lease and, instead, concluded that the         allowing the ability to produce gas to prolong the lease
habendum clause requires actual production. 60               would “effectively erase” the cessation-of-production
S.W.3d at 140. First, citing Garcia v. King, the court       clause from the lease. 60 S.W.3d at 139. But the court
of appeals reasoned that the habendum clause must            of appeals' analysis incorrectly assumes that the ces-
require actual production to further the lease's objec-      sation-of-production clause is triggered any time ac-
tive—to reap economic gain. 60 S.W.3d at 140. Sec-           tual production stops. Read as a whole, the cessa-
ond, the court of appeals construed the habendum             tion-of-production clause combines a sixty-day time
clause in light of the lease's continuous operations         limit with a resumption of operations provision. Thus,
clause, which sustains the lease so long as drilling         the clause indicates the parties' intent that the cessa-
operations continue “and if production results there-        tion-of-production clause apply only when the cir-
from, then as long as production continues.” See 60          cumstances require the lessee “to resume operations
S.W.3d at 140. The court of appeals determined that          for drilling a well.” In other words, the cessa-
the continuous operations clause shows that the parties      tion-of-production clause only applies if a well hold-
intended that “the continuation of actual production         ing the lease ceases to be capable of producing gas.
was and is necessary to prolong the life of the lessee's     Indeed, in analyzing a similar cessation-of-production
interest.” 60 S.W.3d at 140. And third, the court of         clause, one commentator has observed:
appeals relied on decisions from other jurisdictions
that have interpreted similar habendum clauses. 60             The fact that the event which is designed to prevent
S.W.3d at 140 (citing Greer v. Salmon, 82 N.M. 245,            termination is the commencement of drilling or
479 P.2d 294 (1970); Fisher v. Grace Petroleum                 reworking operations gives some indication of the
Corp., 830 P.2d 1380 (Okla.Ct.App.1991)).                      purpose of the clause and the intention of the par-
                                                               ties. It indicates that the parties are concerned with a
      We disagree with the court of appeals' lease con-        situation where cessation of production is of the
struction. Here, neither party contends that the lease is      type that is remedied by drilling or reworking op-
ambiguous. Consequently, in construing the lease, we           erations. Thus, the parties must have intended that
first consider the parties' intentions as expressed in the     the clause would become operative if a dry well is
lease's four corners. See Yzaguirre, 53 S.W.3d at              drilled or if a producing well ceases to be capable of




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                                                                                                              Page 10

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

  producing in paying quantities. A literal application     299. Thus, the New Mexico Court relied on provisions
  of the clause to every temporary cessation of pro-        within the lease's four corners to ascertain the
  duction could lead to absurd and unintended results.      habendum clause's meaning.

   2 KUNTZ, A TREATISE ON THE LAW OF OIL                         Furthermore, the court of appeals erroneously re-
& GAS 416–17.                                               lied upon an Oklahoma court of appeals opinion to
                                                            support its view that the Anadarko habendum clause
     Construing the cessation-of-production clause to       requires actual production. See Fisher, 830 P.2d at
apply when a well holding the lease ceases to be ca-        1387–88. In relying on Fisher, the court of appeals
pable of production—and not simply when actual              overlooked the fact that the Oklahoma Supreme Court
production ceases—accords with the cessa-                   rejected the Fisher court's approach. See Pack v. Santa
tion-of-production clause's plain language. Moreover,       Fe Minerals, 869 P.2d 323, 327 (Okla.1994).
this construction avoids imposing an unnecessary
limitation on the grant. See Fox, 398 S.W.2d at 92.              In Pack, the Oklahoma Supreme Court consid-
The court of appeals' construction of the cessa-            ered whether a lease held by a gas well capable of
tion-of-production clause would require Anadarko to         production but shut-in for more than sixty days ex-
resume drilling operations within sixty days of any         pired under the cessation-of-production clause. Pack,
cessation in actual production even if the existing well    869 P.2d at 325. In construing both clauses, the Ok-
remained capable of production. Such a construction         lahoma Supreme Court concluded that the cessa-
disregards the habendum clause's “can be produced”          tion-of-production clause operates as a savings clause
language, whereas our construction gives every clause       and only applies when production—as defined in the
some effect. See Heritage Res., 939 S.W.2d at 121.          habendum clause—ceases. Pack, 869 P.2d at 328.
Accordingly, the court of appeals incorrectly relied        “Any other conclusion would render the habendum
upon the cessation-of-production clause to hold that        clause useless after the primary term expires, a con-
the habendum clause requires actual production to           clusion clearly not intended by the parties to the
sustain the lease.                                          lease.” Pack, 869 P.2d at 328. Thus, the Oklahoma
                                                            Supreme Court's analysis supports our viewpoint
     The court of appeals also misplaced its reliance       rather than Thompson's.
on cases from other states. See 60 S.W.3d at 140. First,
in looking to other states to determine how to interpret         Finally, we reject Thompson's contention that
the lease here, the court of appeals disregarded our        allowing the capability of production to sustain the
well-established rules about how to interpret oil and       lease would allow the lessees to sustain the lease in-
gas leases. See Heritage Res., 939 S.W.2d at 121;           definitely—without actual production. Rather, the
Luckel, 819 S.W.2d at 461–62; Fox, 398 S.W.2d at 92.        implied duty to manage and administer the lease as a
Second, the cases the court of appeals cites actually       reasonably prudent operator, which encompasses the
support our views about this lease. In Greer, the New       implied duty to market the gas reasonably, would limit
Mexico Supreme Court construed a habendum clause            the lessees' ability to sustain the lease based on a well's
like the one in this case in conjunction with two sav-      capability of production. See Yzaguirre, 53 S.W.3d at
ings clauses: a cessation-of-production clause and a        373.
shut-in royalty clause. Greer, 479 P.2d at 296. The
New Mexico Court held that a gas well capable of                For these reasons, we hold that a well actually
production would only hold the lease if the lessee paid     producing or capable of producing gas sustains this
*557 an annual shut-in royalty. Greer, 479 P.2d at




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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

particular lease under the habendum clause. We also         maintained a lease even though actual production had
hold that the cessation-of-production clause only ap-       ceased. Hydrocarbon, 861 S.W.2d at 433–34. In this
plies if the lease would otherwise terminate under the      context, the Hydrocarbon court stated:
habendum clause. Consequently, the court of appeals
erred in holding that, under this lease, “can be pro-         We believe that the phrase “capable of production in
duced” means “actual production.”                             paying quantities” means a well that will produce in
                                                              paying quantities if the well is turned “on,” and it
        B. CAPABILITY OF PRODUCTION                           begins flowing, without additional equipment or
      Because we conclude that actual production was          repair. Conversely, a well would not be capable of
not necessary to sustain the lease, we next consider          producing in paying quantities if the well switch
whether the 1981 and 1985 cessations terminated the           were turned “on,” and the well did not flow, because
lease. This depends upon whether the well holding the         of mechanical problems or because the well needs
leased premises was capable of production during the          rods, tubing, or pumping equipment.
two periods when actual production ceased longer
than sixty days. According to Anadarko's brief, “[t]he            Hydrocarbon, 861 S.W.2d at 433–34.
evidence is undisputed here that the well was capable
of production during the two periods when no pro-
                                                                 [16] We approve the Hydrocarbon definition,
duction was shown,” because the evidence shows that
                                                            because it is consistent with existing cases that discuss
the well was shut-in for pipeline repairs. In response,
                                                            the difference between actual production and capabil-
Thompson contends that the well was not capable of
                                                            ity of production. See Peveto, 645 S.W.2d at 771 (a
production, because the well would not have produced
                                                            well is capable of production if it is shut-in because
if it had been “turned on.” See Hydrocarbon Mgt., Inc.
                                                            there is no available pipeline); Stanolind Oil & Gas
v. Tracker Exploration, Inc., 861 S.W.2d 427, 433–34
                                                            Co. v. Barnhill, 107 S.W.2d 746, 749
(Tex.App.-Amarillo 1993, no writ).
                                                            (Tex.Civ.App.-Amarillo 1937, writ ref'd) (a well is
                                                            capable of production if it is shut-in because there is
     [15] We have determined that “the completion of        no available market); see also Davis, 254 S.W. at 309
a gas well capable of producing in paying quantities        (a well is incapable of production if the lessee removes
but shut-in due to lack of pipe line facilities or for      the equipment and abandons all efforts to produce);
other reasons is not considered production” and             Pack, 869 P.2d at 327 (a well is incapable of produc-
therefore does not sustain a mineral interest that lasts    tion if the underlying mineral reserves are depleted).
as long as oil or gas “is produced.” Peveto v. Starkey,     Accordingly, we hold that a well is capable of pro-
645 S.W.2d 770, 771 (Tex.1982) (quoting Midwest             duction if it is capable of producing in paying quanti-
Oil Corp. v. Lude, 376 S.W.2d 18, 20                        ties without additional equipment or repairs.
(Tex.Civ.App.-Corpus Christi 1964, writ ref'd n.r.e.));
see also *558Giles v. McKanna, 200 S.W.2d 709, 712
                                                                              IV. CONCLUSION
(Tex.Civ.App.-Austin 1947, writ ref. n.r.e.) (noting
                                                                 Here, the lease's habendum clause expressly
the “marked difference between the capacity to pro-
                                                            states that the lease lasts as long as gas “is or can be
duce in paying quantities and actual production in
                                                            produced.” Based on the habendum clause's plain
paying quantities”). However, we have not defined
                                                            meaning, we hold that a well actually producing gas or
what “capable of production” means.
                                                            capable of producing gas sustains this particular lease.
                                                            To be “capable of producing gas,” we conclude that a
     One court of appeals considered this issue in de-      well must be capable of producing gas in paying
ciding whether a lessee's paying shut-in royalties




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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

quantities without additional equipment or repairs.         be facilities located near enough to the well that it
Accordingly, we reverse the court of appeals' judg-         would be economically feasible to establish a con-
ment and remand to the trial court for further pro-         nection so that production could be marketed at a
ceedings consistent with this opinion. See                  profit. As we explained in Clifton v. Koontz, 160 Tex.
TEX.R.APP. P. 60.2(d). Because we resolve this case         82, 325 S.W.2d 684, 691 (Tex.1959), all the relevant
based on the lease-construction issue, we do not reach      circumstances must be considered in determining
Anadarko's affirmative defenses.                            whether there are “paying quantities”:
                                                                 In the case of a marginal well, such as we have
Justice O'NEILL did not participate in this opinion.           here, the standard by which paying quantities is
         ON MOTION FOR REHEARING                               determined is whether or not under all the relevant
PER CURIAM.                                                    circumstances a reasonably prudent operator would,
     We deny the motion for rehearing but write to             for the purpose of making a profit and not merely
clarify our decision.FN1                                       for speculation, continue to operate a well in the
                                                               manner in which the well in question was operated.
         FN1. JUSTICE BAKER, author of the
         Court's original opinion, resigned effective             ....
         August 31, 2002, and therefore did not par-
         ticipate on rehearing.                                  The term “paying quantities” involves not only
                                                              the amount of production, but also the ability to
     [17][18][19][20][21][22] In defining “capable of         market the product (gas) at a profit. Whether there is
production” in our original opinion, we approved this         a reasonable basis for the expectation of profitable
definition from Hydrocarbon Management, Inc. v.               returns from the well is the test. If the quantity be
Tracker Exploration, Inc., 861 S.W.2d 427, 433–34             sufficient to warrant the use of the gas in the market,
(Tex.App.-Amarillo 1993, no pet.):                            and the income therefrom is in excess of the actual
                                                              marketing cost, and operating costs, the production
                                                              satisfies the term “in paying quantities”. In the
  We believe that the phrase “capable of production in
                                                              Hanks case, [24 S.W.2d 5, 6 (Tex. Comm'n
  paying quantities” means a well that will produce in
                                                              App.1930, judgm't adopted)], the trial court found
  paying quantities if the well is turned “on,” and it
                                                              that the well completed by Hanks did not produce in
  begins flowing, without additional equipment*559
                                                              paying quantities within the contemplation of the
  or repair. Conversely, a well would not be capable
                                                              terms of the lease, and this Court upheld such
  of producing in paying quantities if the well switch
                                                              finding, holding that there was no evidence showing
  were turned “on,” and the well did not flow, because
                                                              that there were any facilities for marketing the gas
  of mechanical problems or because the well needs
                                                              or any near-by localities or industries which might
  rods, tubing, or pumping equipment.
                                                              have furnished a profitable market therefor. The
                                                              Court went further and pointed out the complete
     94 S.W.3d 550, 557. In so doing, we did not
                                                              failure of the evidence to show what the gas could
overrule or otherwise call into question our prior de-
                                                              have been sold for at any probable market, and that
cisions regarding the proper interpretation of “pro-
                                                              there was no evidence “tending to show that the well
duction in paying quantities.” Specifically, we did not
                                                              was situated in such proximity to any prospective
overrule or modify the longstanding requirement that
                                                              market which would justify the construction of a
for a well to produce in paying quantities, or to be
                                                              pipe line for marketing same.”
capable of producing in paying quantities, there must




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94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

      Id. at 691 (quoting Hanks v. Magnolia Petroleum       (holding that a lease did not terminate when an im-
Co., 24 S.W.2d 5, 6 (Tex. Comm'n App.1930, judgm't          plied covenant was breached but that there would be
adopted)) (citations omitted); see also Stanolind Oil &     liability for damages sustained); Tex. Co. v. Davis,
Gas Co. v. Barnhill, 107 S.W.2d 746, 749                    113 Tex. 321, 254 S.W. 304, 308 (Tex.1923) (reiter-
(Tex.Civ.App.-Amarillo 1937, writ ref'd). In the case       ating that the implied covenant to explore and produce
before us today, the well was connected to pipeline         is not a condition subsequent that would give rise to
facilities, and there was no question that it was capable   the lease's termination if breached). The rationale for
of producing in paying quantities even though there         these holdings is to promote greater certainty about the
were periods during which there was no production.          continued existence of a lease:
  In our original opinion in this case, we also said,          [I]f reasonable diligence in performing every one of
                                                               the lessee's exploring, developing, producing, and
  we reject Thompson's contention that allowing the            marketing operations was the test, neither lessor nor
  capability of production to sustain the lease would          lessee could at any time have clearly or certainly
  allow the lessees to sustain the lease indefinite-           known whether the estate granted was alive or
  ly—without actual production. Rather, the implied            ended. Such a test must inevitably diminish—if not
  duty to manage and administer the lease as a rea-            destroy—the value of the rights of all parties de-
  sonably prudent operator, which encompasses the              rived from a mineral lease.
  implied duty to market the gas reasonably, would
  limit the lessees'*560 ability to sustain the lease             W.T. Waggoner Estate, 19 S.W.2d at 30–31.
  based on a well's capability of production.
                                                                 We meant in our original decision that, as a prac-
     94 S.W.3d at 557–58. But we did not intend to          tical matter, a lessee will not sustain a lease based on a
imply that the remedy for breach of an implied cove-        well's capability of production without actual produc-
nant to market production would be forfeiture or ter-       tion of the well because the payment of damages for
mination of a lease because we have consistently held       the failure to reasonably market the gas would be a
that breach of an implied covenant in an oil and gas        strong incentive to connect the well to facilities that
lease “does not automatically terminate the estate, but     would permit actual production. And, in an extraor-
instead subjects the breaching party to liability for       dinary case, when damages would not furnish an ad-
monetary damages, or in extraordinary circumstances,        equate remedy, a court could conditionally order ter-
the remedy of a conditional decree of cancellation.”        mination if a connection and actual production were
Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79           not commenced within a reasonable time. See id. at
(Tex.1989); see also Rogers v. Ricane Enters., Inc.,        32.
884 S.W.2d 763, 767–68 (Tex.1994); Stanolind, 107
S.W.2d at 748 (holding that “the failure of the lessee           [23] Finally, the motion for rehearing contends
further to develop the property is, under the holdings      that several decisions of this Court and other courts
of the courts, a breach of an implied covenant, the         compel a different result in this case. We disagree. The
usual remedy for which is an action in damages”);           cases on which Thompson and the other Respondents
W.T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509,       rely are distinguishable because they involved dif-
19 S.W.2d 27, 32 (Tex.1929) (refusing “to treat as a        ferent lease provisions, different facts, or both. The
limitation or as a condition subsequent the implied         leases at issue in many of the cases said that the lease
covenant for reasonable development of premises             would remain in effect as long as oil or gas “is pro-
leased for the mining of oil and gas”); Mon–Tex Corp.       duced.” See Haby v. Stanolind Oil & Gas Co., 228
v. Poteet, 118 Tex. 546, 19 S.W.2d 32, 34 (Tex.1929)        F.2d 298, 301 (5th Cir.1955); Samano v. Sun Oil Co.,




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                                                                                                       Page 14

94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup. Ct. J. 1039
(Cite as: 94 S.W.3d 550)

621 S.W.2d 580, 581 (Tex.1981); Francis v. Pritchett,
278 S.W.2d 288, 289 (Tex.Civ.App.-El Paso 1955,             Justice O'NEILL, Justice SMITH and Justice
writ ref'd); Sunray DX Oil Co. v. Texaco, Inc., 417         WAINWRIGHT did not participate in the decision on
S.W.2d 424, 426–27 (Tex.Civ.App.-El Paso 1967,              rehearing.
writ ref'd n.r.e.); Woodson Oil Co. v. Pruett, 281
S.W.2d 159, 162 (Tex.Civ.App.-San Antonio 1955,
                                                            Tex.,2002.
writ ref'd n.r.e.); Hall v. McWilliams, 404 S.W.2d 606,
                                                            Anadarko Petroleum Corp. v. Thompson
607 (Tex.Civ.App.-Austin 1966, writ ref'd n.r.e.);
                                                            94 S.W.3d 550, 161 Oil & Gas Rep. 550, 45 Tex. Sup.
Wainwright v. Wainwright, 359 S.W.2d 628, 629
                                                            Ct. J. 1039
(Tex.Civ.App.-Fort Worth 1962, writ ref'd n.r.e.). But
in this case, the lease said “is *561 or can be pro-
                                                            END OF DOCUMENT
duced.” As we explained in our original opinion, “can
be produced” does not mean actual production.


     Only two decisions relied on by Thompson and
the other Respondents involved leases that contained a
“can be produced” provision. Davis, 254 S.W. at 305;
Hanks, 24 S.W.2d at 7, affirming Hanks v. Magnolia
Petroleum      Co.,      14     S.W.2d      348,     349
(Tex.Civ.App.-Eastland 1929). But the facts were
very different from the facts in the case before us
today. In Davis, the lessee abandoned all operations on
the lease after the wells it had drilled ceased to pro-
duce, and there was no production for about fourteen
years. 254 S.W. at 305. There was also evidence that
the lessee had expressly released the lease. Id. This
Court held the lease had terminated. Id. at 309. In
Hanks, the lessee drilled a successful well and then
capped it. 24 S.W.2d at 5. The court held that there
was no evidence that the well could produce in paying
quantities because “[t]he record is wholly devoid of
evidence showing that there were any facilities for
marketing the gas or any nearby localities or industries
which might have furnished a profitable market
therefor,” and “[n]o attempt was made to show what
the gas could have been sold for at any probable
market, nor was there any evidence tending to show
that the well was situated in such proximity to any
prospective market which would justify the construc-
tion of a pipe line for marketing same.” Id. at 6. As
noted above, that is not the situation in this case.


    Accordingly, we deny the motion for rehearing.




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                                                                                                               Page 1

445 S.W.3d 878
(Cite as: 445 S.W.3d 878)

                                                                    30XVI(F) Trial De Novo
                                                                      30k892 Trial De Novo
                                                                          30k893 Cases Triable in Appellate
              Court of Appeals of Texas,
                                                            Court
                        El Paso.
                                                                              30k893(1) k. In general. Most Cited
 CHESAPEAKE EXPLORATION, L.L.C., Chesa-
                                                            Cases
peake Operating, Inc., Anadarko Petroleum Corpora-
          tion, and Swepi, L.P., Appellants,
                           v.                                  The standard of review for construction of an
ENERGEN RESOURCES CORPORATION, Kaiser                       unambiguous oil and gas lease is de novo.
Francis Oil Company, Pride Energy Company, Crown
Oil Partners, IV, L.P., Crump Energy Partners, L.L.C.,      [2] Mines and Minerals 260            73
Dalton H. Cobb, Jr., Michael B. Cobb, Bill Hightower,
   and Hightower Exploration, L.L.C., Appellees.            260 Mines and Minerals
                                                                260II Title, Conveyances, and Contracts
                No. 08–13–00266–CV.                                260II(C) Leases, Licenses, and Contracts
                     Oct. 1, 2014.                                     260II(C)3 Construction and Operation of
                                                            Oil and Gas Leases
Background: Plaintiff oil companies brought action                         260k73 k. In general; general rules of
against defendant oil companies after each side re-         construction. Most Cited Cases
quested that the other cease operations in 560–acre
portion of section that had been pooled with an                  The primary duty of the court in interpreting an
80–acre portion of another section. The District Court,     oil and gas lease is to ascertain the parties' intent as
Ward County, Bob Parks, J., entered summary judg-           expressed within the four corners of the lease.
ment in favor of plaintiffs. Defendants appealed.
                                                            [3] Mines and Minerals 260            73
Holding: The Court of Appeals, Yvonne T. Rodri-
guez, J., held that retained acreage clauses confirmed      260 Mines and Minerals
that production anywhere on certain section, or land            260II Title, Conveyances, and Contracts
pooled with it, was sufficient to maintain the leases as           260II(C) Leases, Licenses, and Contracts
to the entirety of the section.                                        260II(C)3 Construction and Operation of
                                                            Oil and Gas Leases
    Affirmed.                                                              260k73 k. In general; general rules of
                                                            construction. Most Cited Cases
                   West Headnotes
                                                                 In seeking to ascertain the parties' intent, the court
[1] Appeal and Error 30         893(1)                      must attempt to harmonize all parts of the oil and gas
                                                            lease, even if different parts of the lease appear con-
30 Appeal and Error                                         tradictory or inconsistent.
   30XVI Review




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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)

[4] Mines and Minerals 260            73                      part of the pooled acreage would be treated as if such
                                                              drilling operations were upon or such production was
260 Mines and Minerals                                        from the land described in the lease whether the well
    260II Title, Conveyances, and Contracts                   or wells be located on the land covered by this lease or
       260II(C) Leases, Licenses, and Contracts               not, ensured that production anywhere on a pooled
           260II(C)3 Construction and Operation of            unit maintained the lease in effect as to all lands cov-
Oil and Gas Leases                                            ered by the lease, both within and outside the unit,
               260k73 k. In general; general rules of         unless the lease expressly provided otherwise, and the
construction. Most Cited Cases                                plain, grammatical language of the retained acreage
                                                              clause did not expressly provide for rolling termina-
                                                              tion of proration units as they ceased to exist.
     Construing the oil and gas lease to give effect to
all of its provisions honors the parties' intent that every
clause has some effect and in some measure evidences          [6] Mines and Minerals 260          78.1(7)
their agreement; accordingly, the court should not
strike down any part of the lease, unless there is an         260 Mines and Minerals
irreconcilable conflict wherein one part of the lease             260II Title, Conveyances, and Contracts
destroys in effect another part thereof.                              260II(C) Leases, Licenses, and Contracts
                                                                         260II(C)3 Construction and Operation of
[5] Mines and Minerals 260            78.1(7)                 Oil and Gas Leases
                                                                            260k78 Testing or Working
                                                                                260k78.1 Construction, Breach, and
260 Mines and Minerals
                                                              Penalties
    260II Title, Conveyances, and Contracts
                                                                                   260k78.1(7) k. Place or portion
        260II(C) Leases, Licenses, and Contracts
                                                              developed; pooled or unitized tracts. Most Cited Cases
           260II(C)3 Construction and Operation of
Oil and Gas Leases
              260k78 Testing or Working                            A habendum clause referring to “said land” ex-
                  260k78.1 Construction, Breach, and          tends the lease as to all the leased property while
Penalties                                                     production of oil or gas occurs anywhere on the
                     260k78.1(7) k. Place or portion          property during the second term; thus, in the absence
developed; pooled or unitized tracts. Most Cited Cases        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
     Retained acreage clauses in oil and gas lease did
                                                              thereby.
not provide for rolling termination of non-producing
proration units, and instead, the leases confirmed that
production anywhere on certain section, or land               [7] Mines and Minerals 260          73
pooled with it, was sufficient to maintain the leases as
to the entirety of the section, where the habendum            260 Mines and Minerals
clauses in both leases provided for continuation be-              260II Title, Conveyances, and Contracts
yond the primary term as long as oil, gas, or other                  260II(C) Leases, Licenses, and Contracts
mineral was produced from said land or land with                         260II(C)3 Construction and Operation of
which said land was pooled, and pooling clause, which         Oil and Gas Leases
stated that drilling operations and production on any                        260k73 k. In general; general rules of




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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)

construction. Most Cited Cases                                   This case involves the construction of two oil and
                                                            gas leases executed in 1976 (hereinafter, “the 1976
     When an oil and gas lease terminates is always a       leases”) and their effect on a 640–acre section of land
question of resolving the intention of the parties from     covered by the leases—Section 25. Section 25 was
the entire instrument; however, Court of Appeals will       pooled with an adjacent section of land not covered by
not hold the lease's language to impose a special lim-      the 1976 leases—Section 18–to form two pooled gas
itation on the grant unless the language is so clear,       units. One of the pooled units continues to produce to
precise, and unequivocal that Court can reasonably          this day, but the other ceased producing completely in
give it no other meaning.                                   1988 when its well was plugged and abandoned. That
                                                            particular well was completed in March 1979, and its
                                                            operator designated all of Section 25 as the well's
[8] Mines and Minerals 260          78.1(7)
                                                            proration unit in paperwork filed with the Texas
                                                            Railroad Commission (hereinafter, “RRC”). Ap-
260 Mines and Minerals                                      proximately two months thereafter, continuous de-
    260II Title, Conveyances, and Contracts                 velopment ended on the leased premises. The leases
        260II(C) Leases, Licenses, and Contracts            provide that when continuous development ends, the
           260II(C)3 Construction and Operation of          lease terminates as to all acreage except for:
Oil and Gas Leases
              260k78 Testing or Working
                                                              [E]ach proration unit established under ... [the] rules
                  260k78.1 Construction, Breach, and
                                                              and regulations [of the RRC ...] upon which there
Penalties
                                                              exists (either on the above described land or on
                     260k78.1(7) k. Place or portion
                                                              lands pooled or unitized therewith) a well capable of
developed; pooled or unitized tracts. Most Cited Cases
                                                              producing oil and/or gas in commercial quantities
                                                              ....
     The primary legal consequence of pooling is that
production and operations anywhere on the pooled
                                                                 The issue is whether, under the above-quoted
unit are treated as if they have taken place on each
                                                            “retained acreage” clause, the 1976 leases remain in
tract within the unit; additionally, production from the
                                                            effect as to all of Section 25, as urged by Plain-
pooled gas unit provides the lessors with an economic
                                                            tiffs–Appellees FN1 *880 (hereinafter “Energen”), or
benefit in the form of royalty income.
                                                            only as to an 80–acre portion of Section 25, as urged
                                                            by Defendants–Appellants FN2 (hereinafter, “Chesa-
*879 Shannon H. Ratliff, Lisa A. Paulson, Ratliff Law       peake”). On cross-motions for summary judgment, the
Firm, PLLC, Austin, William E. Berry, Jr., Cotton,          trial court ruled in favor of Energen and against
Bledsoe, Tighe & Dawson, P.C., for Appellees.               Chesapeake. We affirm.

Jane M.N. Webre, Scott, Douglass & McConnico,                        FN1. Appellees are Energen Resources
LLP, Austin, for Appellants.                                         Corporation, Kaiser Francis Oil Company,
                                                                     Pride Energy Company, Crown Oil Partners,
Before McCLURE, C.J., RIVERA (Not Participat-                        IV, L.P., Crump Energy Partners, L.L.C.,
ing), and RODRIGUEZ, JJ.                                             Dalton H. Cobb, Jr., Michael B. Cobb, Bill
                                                                     Hightower, and Hightower Exploration,
               OPINION                                               L.L.C. We refer to Appellees collectively as
YVONNE T. RODRIGUEZ, Justice.                                        Energen, for we see nothing that requires us




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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)

         to distinguish among them.                          from Section 18. As mentioned earlier, the designated
                                                             proration unit for the Cadenhead No. 2 Well included
         FN2. Appellants are Chesapeake Explora-             all of Section 25. Each lease also contains a provision
         tion, L.L.C., Chesapeake Operating, Inc.,           requiring termination if the leased premises are not
         Anadarko Petroleum Corp., and SWEPI, L.P.           continuously developed as set forth in the leases'
         We refer to Appellants collectively as              “continuous development” clauses. Those clauses
         Chesapeake because, again, we see nothing           provide in relevant part:
         that requires us to distinguish among them.
                                                               [12]D. Lessee shall continuously develop the above
     FACTUAL AND PROCEDURAL BACK-                              described land by commencing operations for the
                     GROUND                                    drilling of a well on or before the expiration of the
     The 1976 leases cover acreage located in Ward             primary term of this lease and thereafter shall allow
County, Texas, including the aforementioned Section            not more than sixty (60) days to elapse between the
25 of Block 1, W & NW Ry. Co. Survey. Each lease               completion or abandonment of one well and the
contains a “pooling” clause, which states in pertinent         commencement of the next until the above de-
part:                                                          scribed land is drilled to the density necessary to
                                                               obtain the maximum allowable per well under the
                                                               rules and regulations of the Railroad Commission of
  5. Lessee is hereby granted the right to pool or
                                                               Texas (or other governmental authority having ju-
  unitize this lease, the land covered by it or any part
                                                               risdiction), or this lease shall terminate as to all of
  thereof with any other land, lease, leases, mineral
                                                               the above described land ....
  estates or parts thereof for the production of oil, gas,
  or any other minerals. ... Drilling operations and
  production on any part of the pooled acreage shall             As indicated earlier, after the Cadenhead No. 2
  be treated as if such drilling operations were upon or     Well was completed in March 1979, no additional
  such production was from the land described in this        wells were drilled on the leased premises. The Ca-
  lease whether the well or wells be located on the          denhead No. 2 well was subsequently plugged back
  land covered by this lease or not. The entire acreage      and recompleted in a shallower field in 1984. Four
  pooled into a unit shall be treated for all purposes ...   years later, it was abandoned.
  as if it were included in this lease.
                                                                  Through subsequent transactions not relevant to
     Pursuant to this provision, an 80–acre portion of       this appeal, Energen and Chesapeake acquired their
Section 25 was pooled with a 560–acre portion of             respective interests in Section 25. In 2011, Energen
Section 18 to form a 640–acre pooled gas unit named          drilled a well on the 560–acre portion of Section 25
the Cadenhead No. 1 Pooled Gas Unit. This pooled             that had been pooled with the 80–acre *881 portion of
unit's well, the Cadenhead No. 1 Well, was drilled and       Section 18 and obtained a permit to drill another well.
completed on the 560–acre portion of Section 18 in           Chesapeake too obtained a permit to drill a well on the
1978, and it has continually produced gas in com-            560–acre portion of Section 25. Each party requested
mercial quantities since then. The next year, the Ca-        that the other cease operations. Neither did, and the
denhead No. 2 Well was completed on Section 25.              present action ensued.
This well was included in a 640–acre pooled gas unit
named the Cadenhead No. 2 Pooled Gas Unit, which                 In the trial court, both parties agreed with the
consisted of 560 acres from Section 25 and 80 acres          principle that production anywhere on the pooled




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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)

premises is sufficient to maintain the entire lease un-     “to maintain the lease[s] in effect throughout the
less the lease provides otherwise. They disagreed,          secondary term—not just at the moment that contin-
however, on whether the retained acreage clause in          uous development ends.” In so arguing, Chesapeake
each lease provided otherwise. Chesapeake argued the        takes the position that the proration unit designated for
retained acreage clause provided otherwise because it       the Cadenhead No. 2 Well was retained only while the
applied “equally to ‘all’ of the lands under lease, even    well was producing, and when it ceased to produce in
if pooling has occurred and even as to pooled lands.”       1988, the proration unit reverted to the lessors and was
According to Chesapeake, the clause expressly pro-          no longer subject to the 1976 leases. We disagree.
vides for continuous and automatic termination, i.e.,
“rolling” termination, of proration units as they cease                       Standard of Review
to produce. Thus, when the proration unit for the Ca-            [1] The trial court's summary judgment concerns
denhead No. 2 Well ceased to exist in 1988, the 1976        the construction of an unambiguous oil and gas
leases terminated as to the 560–acre portion of Section     lease.FN3 The standard of review is therefore de novo.
25 on which that well had been drilled, irrespective of     See Tex. Mun. Power Agency v. Pub. Util. Comm'n of
continued production from the Cadenhead No. 1               Tex., 253 S.W.3d 184, 192 (Tex.2007) (reviewing
Pooled Gas Unit.                                            grant of summary judgment de novo ); Anadarko
                                                            Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554
     Energen urged a different construction. Accord-        (Tex.2002) (reviewing lease-construction questions
ing to Energen, the retained acreage clause did not         de novo ).
provide for “rolling” termination because the clause
operated once and only once—when continuous de-                      FN3. The parties agree the lease is not am-
velopment ceased. Under Energen's interpretation, all                biguous, and we do not hold otherwise. The
acreage included in a designated proration unit was                  parties also agree the resolution of this appeal
retained if a well capable of producing in commercial                hinges on the law, not on disputed facts.
quantities existed on the leased premises or on acreage
pooled with the leased premises when continuous
                                                                                  Applicable Law
development ended. Thus, “[b]ecause the Cadenhead
                                                                 [2][3][4] The primary duty of the court in inter-
No. 2 Well was then capable of producing in com-
                                                            preting an oil and gas lease is to *882 ascertain the
mercial quantities, the lease was preserved as to its
                                                            parties' intent as expressed within the four corners of
designated proration unit, all of Section 25, a portion
                                                            the lease. Luckel v. White, 819 S.W.2d 459, 461
of which had previously been pooled with Section
                                                            (Tex.1991). In seeking to ascertain the parties' intent,
18.”
                                                            the court must attempt to harmonize all parts of the
                                                            lease, even if different parts of the lease appear con-
    In essence, both parties agreed the retained            tradictory or inconsistent. Id. at 461–62. Construing
acreage applied, but disagreed on its scope and tem-        the lease to give effect to all of its provisions honors
poral application.                                          the parties' intent that every clause has some effect and
                                                            in some measure evidences their agreement. Luckel,
   THE RETAINED ACREAGE CLAUSE DOE                          819 S.W.2d at 462. Accordingly, the court should not
 NOT PROVIDE FOR “ROLLING” TERMINA-                         strike down any part of the lease, unless there is an
                        TION                                irreconcilable conflict wherein one part of the lease
     In one issue, Chesapeake argues the trial court        destroys in effect another part thereof. Id.
erred in concluding the 1976 leases did not require
“rolling” termination of non-producing proration units




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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)

                       Discussion                            pooled gas units serve to maintain the 1976 leases as
     [5] When read in harmony with other portions of         to the entirety of Section 25. However, they agree the
the leases, the retained acreage clauses do not provide      answer to their dispute lies in the proper interpretation
for “rolling” termination of non-producing proration         of the retained acreage clauses, which control the
units as argued by Chesapeake. Instead, the language         termination of the leases after cessation of continuous
of the 1976 leases confirms that production anywhere         development. “Retained acreage clauses were origi-
on Section 25, or land pooled with it, is sufficient to      nally drafted to prevent the lessee from losing those
maintain the leases as to the entirety of Section 25.        portions of a lease that had productive wells located
                                                             thereon if the rest of the lease terminated ... [but] ...
     [6] The habendum clauses in both leases provide         [t]he term has expanded its meaning to include clauses
for continuation beyond the primary term “as long ...        that require the release of all acreage that, at the end of
as oil, gas, or other mineral is produced from said land     the primary term, is not within a drilling, spacing, or
or land with which said land is pooled.” Under Texas         proration unit.” Bruce M. Kramer, Oil and Gas Leases
law, a habendum clause referring to “said land” ex-          and Pooling: A Look Back and A Peek Ahead, 45
tends the lease as to all the leased property while          TEX. TECH L.REV. 877, 881 n. 28 (2013).
production of oil or gas occurs anywhere on the
property during the second term. Ridge Oil Co., Inc. v.           [7] Here, the leases' retained acreage clauses, in
Guinn Invs., Inc., 148 S.W.3d 143, 149 (Tex.2004).           conjunction with the continuous development clauses,
Thus, “in the absence of anything in the lease to in-        provide that the lessee's failure to continuously de-
dicate a contrary intent, production on one tract will       velop the *883 leased premises terminates the leases
operate to perpetuate the lease as to all tracts described   as to all unproductive acreage except for:
therein and covered thereby.” Mathews v. Sun Oil Co.,
425 S.W.2d 330, 333 (Tex.1968).                                [E]ach proration unit established under ... [the] rules
                                                               and regulations [of the RRC ...] upon which there
     Concordant with this general principle, the lease's       exists (either on the above described land or on
pooling clauses provide that: “Drilling operations and         lands pooled or unitized therewith) a well capable of
production on any part of the pooled acreage shall be          producing oil and/or gas in commercial quantities
treated as if such drilling operations were upon or such       ....
production was from the land described in this lease
whether the well or wells be located on the land cov-             When a lease terminates “is always a question of
ered by this lease or not.” Accorded its plain, gram-        resolving the intention of the parties from the entire
matical meaning, this clause ensures that production         instrument.” Thompson, 94 S.W.3d at 554. “However,
anywhere on a pooled unit maintains the lease in effect      we will not hold the lease's language to impose a
as to all lands covered by the lease, both within and        special limitation on the grant unless the language is
outside the unit, unless the lease expressly provides        so clear, precise, and unequivocal that we can rea-
otherwise. Key Operating & Equip., Inc. v. Hegar,            sonably give it no other meaning.” Thompson, 94
435 S.W.3d 794, 798 (Tex.2014); Scott v. Pure Oil            S.W.3d at 554.
Co., 194 F.2d 393, 395 (5th Cir.1952); Texaco, Inc. v.
Lettermann,         343       S.W.2d       726,      733
                                                                  The plain, grammatical language of the retained
(Tex.Civ.App.-Amarillo 1961, writ ref'd n.r.e.).
                                                             acreage clause does not expressly provide for rolling
                                                             termination of proration units as they cease to exist.
    As indicated earlier, Chesapeake and Energen             Instead, the plain, grammatical language shows that
disagree on whether operations conducted within the




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445 S.W.3d 878
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the parties intended the leases to continue as to each
designated proration unit if the unit had a well capable         But this construction is belied by the plain, ex-
of producing gas in commercial quantities when con-         press language of the retained acreage clauses. The
tinuous development ceased. That the parties chose to       language in these clauses makes clear that: (1) prora-
maintain the lease as to each proration unit when           tion units, as recognized by the state agency having
continuous drilling stopped based on the ability of that    regulatory jurisdiction over oil and gas development,
unit's well to produce gas, rather than actual produc-      are the portions of the leased premises maintained
tion, indicates they did not intend the retained acreage    after continuous development ceases; and (2) each
clause to be triggered any time actual production           proration unit is maintained, not by the existence on
stops. To conclude otherwise would promote uncer-           the unit of a producing well, but by the existence on
tainty about the continued existence of a lease.            the unit of a well capable of producing in paying
Moreover, adopting the construction urged by Ches-          quantities. The use of the specific regulatory term in
apeake imposes an unnecessary limitation on the kind        the retained acreage clause merely serves to identify
and character of the estate the parties chose to convey,    with reasonable certainty the *884 property that re-
i.e., an expansive one maintained by production from        mains under lease when continuous development
any part of pooled lands unless limited by language so      ceases. In other words, the term “RRC-designated
clear, precise, and unequivocal that no other conclu-       proration unit” functions as a mere descriptor in the
sion could be reached. That type of language is absent      clause, not as a normative one in the sense that it
from the retained acreage clauses.                          prescribes what ought to be the outcome based on the
                                                            application of RRC regulations. If the parties to the
     Chesapeake contends that the retained acreage          1976 leases had wished to provide for continual re-
clauses must be read to modify the habendum clauses         linquishment of non-producing proration units, so that
to require “rolling” termination of non-producing           a proration unit would no longer be subject to the lease
proration units, as designated by the Texas Railroad        once production had ceased on that particular unit,
Commission, such that production from a pooled unit         they could have done so by including such language.
will not maintain the leases as to proration units that     But they did not, and it is not within our purview to
ceased to exist. It makes two arguments in support of       rewrite the leases and alter the parties' contract. See
this construction, one of which finds no support in the     Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154,
leases, and the other of which finds no support in          162 (Tex.2003) (“But we may neither rewrite the
Texas case law.                                             parties' contract nor add to its language.”).

     Chesapeake first argues that “[t]he parties' use of         [8] Chesapeake also argues that the parties to the
a specific regulatory term—[RRC-designated] prora-          1976 leases could not have intended for production on
tion unit—to define the extent to which the 1976            a single unit to maintain the entire lease indefinitely
leases would be maintained after continuous devel-          after continuous development ceased. Although this
opment” signals their intent “that the leases would         argument has some equitable appeal, it is refuted by
only be maintained as to lands within proration units       language of the lease, as demonstrated above. More-
for so long as such proration units existed.” Chesa-        over, maintaining the leases during the secondary term
peake thus asserts that because “[p]roration units are      to acreage outside of producing proration units but
designed on a well-by-well basis and only exist for so      within a pooled unit would not be novel. “The primary
long as the well for which the proration unit is desig-     legal consequence of pooling is that ‘production and
nated produces [,]” the proration unit for the Caden-       operations anywhere on the pooled unit are treated as
head Well No. 2 ceased to exist when it was plugged.        if they have taken place on each tract within the unit.’




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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)

” Hegar, 435 S.W.3d at 798. Additionally, production          acreage clause, operated independently upon each
from the pooled gas unit provides the lessors with an         tract and that production on one 160–acre tract would
economic benefit in the form of royalty income.               not maintain the lease as to *885 another 160–acre
Granted, the lessors could have achieved an additional        tract on which production had ceased. 522 S.W.2d at
economic benefit by expressly stating that production         707–08. The retained acreage clause there provided
on each proration unit is required to maintain the            that upon the lessee's failure to comply with the con-
leases as to each of those units during the secondary         tinuous drilling program, the lease terminated as to the
term. However, they failed to do so. Absent proof of          entire premises except as to “the gas and gas rights ...
fraud or mutual mistake, neither of which was pled by         in 160 acres ... around each well theretofore completed
the parties, we are not at liberty to rewrite the eco-        as a gas well, down to and including the sand from
nomic bargain struck by the parties to the 1976 leases.       which such well produced gas.” Id. at 705. When
See Eagle Life Ins. Co. v. G.I.C. Ins. Co., 697 S.W.2d        continuous drilling ceased in 1954, four wells were
648, 651 (Tex.App.-San Antonio 1985, writ ref'd               producing oil. Id. at 705. The two oil wells at issue
n.r.e.) (“Courts are not at liberty to rewrite the contract   ceased producing in 1968. Id. Relying on the
between the parties without pleading and proof of             habendum clause, the appellants argued that continued
fraud or mutual mistake.”). Accordingly, we decline           production from an oil well was sufficient to maintain
Chesapeake's invitation to construe the retained              the lease as to the oil wells even though those wells
acreage clauses—decades after the fact—as expressly           were not located on the same 160–acre tract of land on
stating “that the leases would only be maintained as to       which the producing well was located. Id. at 705–06.
lands within proration units for so long as such prora-       The court disagreed, concluding that, “[i]n light of the
tion units existed” in the absence of clear, precise, and     provisions of this lease discussed above, it is evident
unequivocal language to that effect. See Lettermann,          that the well must be producing oil, or gas, at the date
343 S.W.2d at 732 (“[I]n the absence of clear language        that lessee ceases permanent drilling operations re-
to the contrary, pooling clauses should not be con-           quired in paragraph 6, as amended, and the mineral
strued in a narrow or limited sense.”).                       (oil or gas) produced as of that date determines the
                                                              acreage and mineral rights therein which said well will
     Chesapeake next argues that “Texas case law di-          hold under the lease.” Id. at 708 [Emphasis added].
rectly on point confirms that the 1976 leases termi-
nated as to the disputed acreage.” In support of this              Nafco is distinguishable in that there is no indi-
argument, Chesapeake relies chiefly on Nafco Oil &            cation the lease in that case contained a pooling
Gas, Inc. v. Tartan Res. Corp., 522 S.W.2d 703                clause. Nafco is also distinguishable because the re-
(Tex.Civ.App.-Corpus Christi 1975, writ ref'd n.r.e).         tained acreage clause there expressly required actual
According to Chesapeake, Nafco stands for the prop-           production on each 160–acre tract when continuous
osition that “even where a retained acreage provision         development ceased. But significantly, the Nafco
is silent as to whether a lease terminates as to a re-        court did not construe the retained acreage clause there
tained tract once the retained tract's well stops pro-        to mean it operated continuously over the life of the
ducing later in the life of the lease, the fee simple         lease. Rather, as the italicized language quoted above
determinable nature of an oil and gas leases requires         demonstrates, the Nafco court construed that clause to
courts to imply such an intent ....” But Chesapeake's         mean it operate once and only once—“at the date that
reliance on Nafco is misplaced. Although Nafco is             lessee ceases permanent drilling operations ....” That
distinguishable, the court's opinion in that case actu-       interpretation comports with ours.
ally supports our conclusion. In Nafco, the court held
that the habendum clause, as modified by the retained             Like Nafco, the court's opinion in Humphrey v.




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445 S.W.3d 878
(Cite as: 445 S.W.3d 878)

Seale, 716 S.W.2d 620 (Tex.App.-Corpus Christi               Seale court construed that clause to mean it operates
1986, no writ), supports our conclusion. In Seale, the       once and only once—when the initial release of
court held that, in the absence of language in the re-       acreage occurred after continuous drilling ceased.
tained acreage clause calling for a continual relin-
quishment on non-producing lease acreage, the gen-                Chesapeake argues Seale does not support our
eral rule provides that production anywhere on the           conclusion because termination of the lease under the
leased premises maintains the lease. 716 S.W.2d at           retained acreage clause there “was not automatic but
622. The retained acreage clause there provided that         rather required an affirmative action by the lessee,”
upon the lessee's failure to comply with the continuous      and thus, it was not surprising that “the [c]ourt de-
drilling program, the lease terminated as to the entire      clined to imply a continuing release obligation that
premises except as to “forty (40) acres designated as a      would effectuate ‘rolling’ lease termination.” But that
well block around such producing well, and said well         was not the reason why the Seale court declined to
block designation shall be filed of record immediately       construe the retained acreage clause in that case to
after said block has been designated by Lessee ....” Id.     mean it operated continuously over the life of the
at 621. When appellant acquired his interest in the          lease. Rather, the court declined to construe the clause
leased premises in April 1982, two of the wells in           in that manner because the clause did not provide for
dispute were no longer producing, but the other dis-         rolling termination in clear, precise, and unequivocal
puted well continued to produce until appellant ceased       language. As the court was quick to note, “[i]f the
operations on it when he filed suit. Id. The appellees       parties to the lease had wished to provide for a con-
took “the position that 40 acres was retained around         tinual relinquishment of nonproducing acreage, so that
the well only while a well produced, and upon the            a 40–acre tract would no longer be subject to the lease
cessation of production of a particular well, the 40         once production had ceased on that particular 40–acre
acres surrounding that well reverted to the landowner        tract, it would have been simple to include such lan-
and was no longer subject to the ... [l]ease.” Seale, 716    guage.” Seale, 716 S.W.2d at 622.
S.W.2d at 621 The court disagreed, concluding:
                                                                  For the foregoing reasons, Chesapeake has not
  [The retained acreage clause] does not require the         shown the trial court erred in concluding that the 1976
  lessee to relinquish additional acreage from the           leases failed to provide for rolling termination of
  lease after the initial release is accomplished            non-producing proration units.
  ‘within 180 days of the first oil well.’ As all three of
  the 40–acre tracts are under the same lease and lease
                                                                                CONCLUSION
  terms, production on one will keep the lease in ef-
                                                                  The trial court's order granting Energen's motion
  fect for all.
                                                             for summary judgment is affirmed.

     Seale, 716 S.W.2d at 622 [Emphasis added].
                                                             Tex.App.–El Paso,2014.
                                                             Chesapeake Exploration, L.L.C. v. Energen Resources
     *886 The retained acreage clause in Seale, like         Corp.
the one in Nafco, is not identical to the ones here.         445 S.W.3d 878
However, that difference is immaterial because the
Seale court, like the Nafco court, did not construe the
                                                             END OF DOCUMENT
retained acreage clause there to mean it operated con-
tinuously over the life of the lease. Rather, as the
italicized language quoted above demonstrates, the




                            © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
                                                                                                            Page 1

Not Reported in S.W.3d, 2006 WL 1748584 (Tex.App.-San Antonio)
(Cite as: 2006 WL 1748584 (Tex.App.-San Antonio))

                                                           sors-in-interest of Maria Eva U. Ramirez and El
Only the Westlaw citation is currently available.          Refugio, Ltd. (collectively “Ramirez”) for a primary
                                                           term of five years. After the expiration of the primary
                                                           term, the acreage the lessee is entitled to hold is gov-
SEE TX R RAP RULE 47.2 FOR DESIGNATION
                                                           erned by paragraph 18 of the lease, which provides in
AND SIGNING OF OPINIONS.
                                                           part as follows:

MEMORANDUM OPINION
                                                                At the end of five years after the expiration of the
                                                             primary term hereof, Lessee covenants and agrees to
            Court of Appeals of Texas,
                                                             execute and deliver to Lessor a written release of
                  San Antonio.
                                                             any and all portions of this lease which have not
CONOCOPHILLIPS COMPANY and Kaiser-Francis
                                                             been drilled to a density of at least forty (40) acres
            Oil Company, Appellants
                                                             for each producing oil well and three hundred and
                        v.
                                                             twenty (320) acres for each producing or shut-in gas
 Maria Eva U. RAMIREZ and El Refugio, Ltd., Ap-
                                                             well from depths above 5,000 feet from the surface
                     pellees.
                                                             of the ground and 640 acres for each producing or
                                                             shut-in gas well from depths below 5,000 feet from
                No. 04-05-00488-CV.                          the surface of the ground except that in case any rule
                   June 28, 2006.                            adopted by the Railroad Commission of Texas or
                                                             other regulating authority for any field on this lease
From the 49th Judicial District Court, Webb County,          provides for a spacing or proration establishing
Texas, Trial Court No. 2005-CVQ-000823-D1; Ma-               different units of acreage per well, then such estab-
nuel R. Flores, Judge Presiding.                             lished different units shall be held under this lease
Michael V. Powell, Chrysta L. Castaneda, Locke               by such production, in lieu of the units above men-
Liddell & Sapp L.L.P., Dallas, Adolfo Campero, Jr.,          tioned....
Campero & Becerra, P.C., Laredo, for Appellant.
                                                                In short, paragraph 18 provides that, at the end of
Ricardo E. Morales, Person, Whitworth, Borchers &          five years after the expiration of the primary term, the
Morales, L.L.P., Laredo, for Appellee.                     lessee is entitled to hold 640 acres for each gas well
                                                           drilled below 5,000 feet unless the Railroad Commis-
Sitting: SARAH B. DUNCAN, Justice KAREN                    sion has “adopted” a rule “for” the field in which the
ANGELINI, Justice SANDEE BRYAN MARION,                     gas well is drilled; if the Railroad Commission has
Justice.                                                   “adopted” a rule “for” a field, the lessee is entitled to
                                                           the acreage specified in that rule.
            MEMORANDUM OPINION
Opinion by SARAH B. DUNCAN, Justice.                           The parties agree the lease's primary term expired
     *1 On February 10, 1975, the predeces-                on February 10, 1980; and, five years later, on Feb-
sor-in-interest of ConocoPhillips and Kaiser-Francis       ruary 10, 1985, two wells were producing gas from a
Oil Company (collectively “Conoco”) leased 1053            depth greater than 5,000 feet: the Serafin No. 1 gas
acres in Zapata County from the predeces-                  well and the Serafin No. 4 gas well. The parties further




                           © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
                                                                                                            Page 2

Not Reported in S.W.3d, 2006 WL 1748584 (Tex.App.-San Antonio)
(Cite as: 2006 WL 1748584 (Tex.App.-San Antonio))

agree that the Railroad Commission “adopted” a rule
“for” the field in which the Serafin No. 4 gas well was                No well shall be drilled on less, but may be
drilled; and that field rule entitles Conoco to 176 acres              drilled on more, acreage than that hereafter
surrounding the Serafin No. 4 gas well. But the parties                prescribed as the proper amount for all oil
disagree on whether the Railroad Commission                            and gas fields wherein only spacing rules,
“adopted” a rule “for” the field in which the Serafin                  either special or statewide, are applicable
No. 1 gas well was drilled. Ramirez argues the Rail-                   ... 467-1200 [feet] ... 40 [acres].
road Commission “adopted” two rules-statewide
Rules 37 FN1 and 38 FN2-“for” this field and, under
                                                                       16 TEX. ADMIN. CODE § 3.38(b)(1),
these rules, the lessee is entitled to only forty acres
                                                                       adopted effective Jan. 1, 1976 (repealed
around the well. Conoco argues statewide rules are not
                                                                       and replaced 1989) (current version at 16
“adopted” “for” a field and therefore do not trigger the
                                                                       TEX. ADMIN. CODE § 3.38(b)(1)
“except clause” in paragraph 18; accordingly, Conoco
                                                                       (Tex.R.R. Comm'n, Well Densities)
argues, it is entitled to 640 acres around the well. The
                                                                       (hereinafter cited as Former Rule
trial court rendered judgment in Ramirez's favor, rul-
                                                                       38(b)(1)).
ing that Conoco is entitled to only forty acres around
the Serafin No. 1 gas well in accordance with the
                                                                 *2 “To regulate oil and gas production, the Rail-
statewide rules. Conoco appealed. Because we agree
                                                            road Commission of Texas has adopted general rules
with Conoco that statewide rules are not “adopted”
                                                            applicable throughout the State....” R. R. Comm'n of
“for” a field, we reverse the trial court's judgment and
                                                            Tex. v. WBD Oil & Gas Co., 104 S.W.3d 69, 70
render judgment in Conoco's favor.
                                                            (Tex.2003). However, “because these general rules
                                                            cannot adequately address the widely varying condi-
         FN1. Rule 37, the Statewide Spacing Rule,
                                                            tions found in the thousands of oil and gas reservoirs
         provides in relevant part:
                                                            in Texas, the Commission may issue orders with de-
                                                            tailed regulations for a specific field, which the
           The distances mentioned in subsection (a)        Commission calls field rules.” Id. Because the general
           [-1200 feet between wells and 467 feet           rules apply statewide, they must be promulgated in
           between any well and a property line-] are       accordance with the rulemaking provisions of the
           minimum distances to provide standard            Texas Administrative Procedure Act; field rules, on
           development on a pattern of one well to          the other hand, apply to a specific field and a specific
           each 40 acres in areas where proration           group of operators and must therefore be adopted
           units have not been established.                 under the adjudication provisions of the TAPA. See id.
                                                            at 71. These differences make clear that a statewide
           16 TEX. ADMIN. CODE § 3.37(b) (2006)             rule is not a field rule. FN3 Accordingly, we hold that,
           (Tex.R.R. Comm'n, Statewide Spacing              because statewide Rule 37(b) and Former Rule
           Rule). Because this part of statewide Rule       38(b)(1) were not “adopted” “for” the field in which
           37 remains unchanged since 1985, we cite         the Serafin gas well No. 1 was drilled, they are not
           to the current rule.                             field rules and therefore do not trigger the “except”
                                                            clause in paragraph 18.
         FN2. In 1985, Texas Railroad Commission
         Rule 38, Well Densities, provided in relevant               FN3. See, e.g., Browning Oil Co. v. Luecke,
         part:                                                       38 S.W.3d 625, 633 n. 5 (Tex.App.-Austin




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                                                                                                             Page 3

Not Reported in S.W.3d, 2006 WL 1748584 (Tex.App.-San Antonio)
(Cite as: 2006 WL 1748584 (Tex.App.-San Antonio))

         2000, pet. denied) (“Field rules are special       following a formal adjudicative proceeding-a type of
         rules that modify the Railroad Commission's        proceeding that indisputably did not occur before
         [statewide regulations affecting] well spac-       statewide Rule 37(b) and Former Rule 38(b)(1) were
         ing, density, prorationing, and casing re-         applied to the field in which the Serafin No. 1 gas well
         quirements for designated fields to deal with      was drilled. In short, although these statewide rules
         differences in reservoir conditions.”); Sea-       apply to the field in which the Serafin No. 1 gas well
         gull Energy E & P, Inc. v. R.R. Comm'n of          was completed, these rules were not “adopted” “for”
         Tex.,     99     S.W.3d      232,       235-36     the field. Accordingly, the “except” clause in para-
         (Tex.App.-Austin 2003, pet. granted) (dis-         graph 18 does not apply as a matter of law; and parol
         tinguishing statewide and field rules).            evidence from Ramirez's expert is irrelevant.


     Ramirez makes three arguments to the contrary.                  FN4. See Nat'l Union Fire Ins. Co. v. CBI
First, she argues paragraph 18 is ambiguous and points               Indus., Inc., 907 S.W.2d 517, 521 (Tex.1995)
to the testimony of her expert that it was the Railroad              (per curiam).
Commission's policy for a proration analyst to “adopt”
statewide rules “for a particular field when the field is         *3 Ramirez next argues that paragraph 18 is in-
discovered and application is made to the [Commis-          consistent with and trumped by the statewide rules.
sion] by the operator.” However, parol evidence is not      However, the statewide rules merely establish mini-
admissible to vary the terms of an unambiguous con-         mum spacing and density requirements. See 16 TEX.
tract FN4; and a contract is ambiguous only if it is        ADMIN. CODE § 3.37(b) (“The distances mentioned
susceptible to more than one reasonable interpretation.     in subsection (a) [-1200 feet between wells and 467
See Universal C.I.T. Credit Corp. v. Daniel, 150 Tex.       feet between any well and a property line-] are min-
513, 243 S.W.2d 154, 157 (1951). In light of the            imum distances to provide standard development on a
longstanding distinction in Texas jurisprudence be-         pattern of one well to each 40 acres in areas where
tween statewide and field rules, we hold paragraph 18       proration units have not been established.”); Former
is unambiguous: it clearly provides that, if the Rail-      Rule 3.38(b)(1) (“No well shall be drilled on less, but
road Commission does not “adopt” a rule “for” a field,      may be drilled on more, acreage than that hereafter
the lessee is entitled to 640 acres around a gas well       prescribed as the proper amount for all oil and gas
drilled below 5,000 feet; if the Railroad Commission        fields wherein only spacing rules, either special or
does “adopt” a rule “for” a field, the lessee is entitled   statewide, are applicable ... 467-1200 [feet] ... 40
to the acreage specified in that rule. Ramirez's ambi-      [acres]”). Paragraph 18, on the other hand, establishes
guity argument, as well as her interpretation of para-      the acreage the lessee is entitled to hold five years
graph 18 and her expert's testimony, also erroneously       after the expiration of the primary term. Indeed, if we
equates the quite different concepts of “adoption” and      were to construe statewide Rule 37(b) and Former
“application.” To “adopt” means “to accept formally         Rule 38(b)(1) as determining the amount of acreage
and put into effect,” while to “apply” means “to put        the lessee is entitled to hold five years after the expi-
into operation or effect.” WEBSTER'S NINTH NEW              ration of the primary term, it would render the part of
COLLEGIATE DICTIONARY 58, 97 (1984). Under                  paragraph 18 that applies in the absence of a field rule
Texas law, an operator's application for a permit does      meaningless. The statewide rules would always con-
not cause the Railroad Commission to “adopt”                trol.
statewide rules; rather, the Commission promulgates
statewide rules through a formal rule-making proce-
                                                                Ramirez also argues the drafters intended para-
dure. The Commission “adopts” specific field rules
                                                            graph 18 to protect against the remote contingency




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                                                                                               Page 4

Not Reported in S.W.3d, 2006 WL 1748584 (Tex.App.-San Antonio)
(Cite as: 2006 WL 1748584 (Tex.App.-San Antonio))

“that spacing or proration rules by a governing body         Tex.App.-San Antonio,2006.
may not exist at the time Paragraph 18 is triggered,” so     ConocoPhillips Co. v. Ramirez
that a lessee could hold the entire acreage with just one    Not Reported in S.W.3d, 2006 WL 1748584
well. However, this construction of paragraph 18             (Tex.App.-San Antonio)
ignores its plain language and structure: the first pro-
viso states the general rule (in the absence of a field      END OF DOCUMENT
rule, the lessee will hold 640 acres around a gas well
drilled deeper than 5,000 feet), while the second pro-
viso states the exception (if a field rule is adopted, the
lessee will hold the acreage specified in the field rule).
Under Ramirez's construction, the structure of para-
graph 18 is turned on its head: the first clause would
never apply, while the second “except” clause would
state both the general rule (fields governed by the
statewide rules) and the exception (fields governed by
field rules). This construction would be not only
nonsensical but contrary to general rules of construc-
tion. Cf. Knight v. Chicago Corp., 144 Tex. 98, 188
S.W.2d 564, 566-67 (1945) (“Immediately following
the above clause and in the same sentence is a proviso
introduced by the words ‘provided, however,’ which
are followed by the restrictive provisions. That pro-
viso must be construed as a limitation or restraint upon
the authority defined in the clause immediately pro-
ceeding it.... The parties undertook only to restrict the
powers defined and not to enlarge thereon. To hold
otherwise would be to make a restriction upon a power
cover a broader field than the power itself.”).


     In sum, although statewide Rule 37(b) and For-
mer Rule 38(b)(1) apply to the field in which the
Serafin No. 1 gas well was drilled, they were not
“adopted” “for” this field. Accordingly, pursuant to
the plain language of paragraph 18, Conoco is entitled
to hold 640 acres surrounding the Serafin No. 1 gas
well. The trial court therefore erred in ruling to the
contrary. Therefore, we reverse the trial court's
judgment to the extent it declares that, as of February
10, 1985, Conoco held forty acres located around the
Serafin No. 1 gas well and render judgment that, as of
February 10, 1985, Conoco held 640 acres located
around the Serafin No. 1 gas well.




                             © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
