Wellbore Assignments in Title Examination Frank Hinton and

Document technical information

Format pdf
Size 51.6 kB
First found Feb 12, 2016

Document content analysis

Category Also themed
Language
English
Type
not defined
Concepts
no text concepts found

Transcript

Wellbore Assignments in Title Examination
Frank Hinton and Timothy C. Dowd
Elias, Books, Brown & Nelson
Two Leadership Square
211 N. Robinson, Suite 1300
Oklahoma City, OK 73102
(405) 232-3722
[email protected]
February 3, 2014
Oklahoma City Association of
Professional Landmen
This paper was originally published by the Rocky Mountain Mineral Law Foundation in the manual of the
Special Institute on Advanced Mineral Title Examination (2014).
Wellbore Assignments in Title Examination
by Frank Hinton and Timothy C. Dowd
I.
Introduction
Wellbore assignments present a unique challenge to the title examiner. As has
been frequently noted, there is a dearth of case law interpreting wellbore assignments,1
although that is beginning to change as the cases presented in this paper demonstrate.
Wellbore assignments are frequently ambiguous. Drafters are often not relying on a
form, not relying on a good form, or not thinking long term and anticipating future
operations. The third situation is frequently the case with older assignments drafted
prior to the frequency of horizontal drilling. This paper will discuss in turn the principals
of contract interpretation necessary to interpret an assignment that is limited to less than
the entire leasehold estate. Then the paper takes a look at the current state of case law
regarding wellbore assignments. Finally, the paper offers tips for drafting an
unambiguous assignment.
II.
Principles of Contract Interpretation
Conveyances of interests in oil and gas leases are subject to the same general
rules of interpretation as contracts.2 The primary goal in construing an assignment or
any conveyance is to determine the intent of the parties as expressed in the
conveyance.3 Often referred to as the “four corners” doctrine, a court will look at the
conveyance in its entirety,4 with effect given to every part of the conveyance.5
Generally, if an instrument is clear and unambiguous on its face, then extrinsic evidence
will not be admitted to determine the intent of the parties.6 Whether a contract or a
conveyance is ambiguous is a question of law, and thus for the court to decide.7
1
Kurt M. Petersen, Wellbores: Shedding Light on a Transactional Black Hole, 48 Rocky Mt. Min. L. Inst.
13-4 (2002); Lawrence P. Terrell, Limited Assignments—Who Gets What?, 35 Rocky Mt. Min. L. Inst. 177 (1989).
2
Miller v. Schwartz, 354 N.W.2d 685, 688 (N.D. 1984); Comet Energy Services, LLC v. Powder River Oil
& Gas Ventures LLC, 185 P.3d 1259, 1261 (Wyo. 2008) (citing Hickman v. Groves, 71 P.3d 256, 258
(Wyo. 2003)).
3
1 Joyce Palomar, Patton and Palomar on Land Titles, § 202 (3d. ed. 2003).
4
Messner v. Moorehead, 787 P.2d. 1270, 1272 (Okla. 1990).
5
1 Joyce Palomar, Patton and Palomar on Land Titles, § 202 (3d. ed. 2003); Petro Pro Ltd. v. Upland
Resources, Inc., 279 S.W.3d 743, 748 (Tex. App. 2007); N.D. Cent. Code § 9-07-06.
6
Petro Pro, Ltd. v. Upland Resources, Inc., 279 S.W.3d 743, 749 (Tex. App. 2007). But see Chisos, Ltd.
v. JKM Energy, L.L.C., 258 P.3d 1107, 1110 (N.M. Ct. App. 2011)(“A court may hear evidence of the
circumstances surrounding the making of the contract in order to determine if it is unclear.”).
7
Miller v. Schwartz, 354 N.W.2d 685, 688 (N.D. 1984); Chisos, Ltd. v. JKM Energy, L.L.C., 258 P.3d
1107, 1110 (N.M. Ct. App. 2011); Plano Petroleum, LLC v. GHK Exploration, L.P., 250 P.3d 328, 330
(Okla. 2011).
2
There are two basic approaches to contract interpretation that have been called
the traditional view and the modern view. In jurisdictions that follow the traditional rule,
contract interpretation is treated as a question of law for the court to decide based on
the four corners of the instrument by applying rules of construction. Only after a court
determines that the intent of the parties cannot be determined from the document itself
(i.e. that it is ambiguous) will a court allow extrinsic evidence to determine the intent of
the parties.8
According to the modern view, as contract interpretation seeks to determine what
the parties actually intended, the fact that the parties dispute intent makes the
conveyance ambiguous.9 A conveyance is ambiguous if it is “reasonably and fairly
susceptible of different constructions”10 or contains “an intrinsic uncertainty.”11
In specifically eschewing the four corners rule, New Mexico allows extrinsic
evidence in order to determine whether a conveyance is ambiguous, even though it
treats the question of whether a contract is ambiguous as a question of law.12 It is also a
rule of construction that a conveyance will be construed most strongly against the
grantor.13
In theory, a title examiner would apply the same rules of contract interpretation
that a court would, especially in a situation where there is no extrinsic evidence of intent
of the parties. In practice, a title attorney would consider outside factors in construing an
instrument regardless of whether the instrument seems unambiguous. Frequently, two
parties will argue that an instrument unambiguously supports each party’s claim, only to
have a court decide that the instrument is ambiguous.14 Thus, it is difficult for a title
examiner to determine what a court would decide is ambiguous. Further, a title
examiner may be advised that a client claims a certain interest as a result of a
conveyance. Whether or not the conveyance is ambiguous, the title examiner will likely
credit his or her client with the interest claimed, subject to a title requirement to obtain
some sort of stipulation or other curative. Thus, the cautious approach for a title
examiner is to err on the side of finding ambiguity, consider all available evidence as to
the intent of the parties, and draft an appropriate requirement.
Given that construing wellbore assignments is so heavily fact-based, and that
courts have interpreted cases in some surprising ways, it is instructive to look at some
cases in further detail.
8
Randall H. Warner, All Mixed Up About Contract: When is Contract Interpretation a Legal Question and
When is it a Fact Question?, 5 Va. L. & Bus. Rev. 81, 85-86 (2010).
9
Id.
10
Chisos, Ltd. v. JKM Energy, L.L.C., 258 P.3d 1107, 1110 (N.M. Ct. App. 2011) (quoting Mark V, Inc. v.
Mellekas, 845 P.2d 1232, 1235 (N.M. 1993)).
11
Messner v. Moorehead, 787 P.2d. 1270, 1273 (Okla. 1990).
12
C. R. Anthony Co. v. Loretto Mall Partners, 817 P.2d 238, 242-43 (N.M. 1991).
13
Key Production Company, Inc. v. Quality Operating, Inc., 2013 WL 1286672 (Tex. App. 2013) (mem.)
(citing Commerce Trust C. v. Lyon, 284 S.W.2d 920, 921 (Tex. Civ. App.-Fort Worth 1955)).
14
See, e.g. Plano Petroleum, LLC v. GHK Exploration, L.P., 250 P.3d 328, 330 (Okla. 2011).
3
III. Case Law
A. Petro Pro, Ltd. v. Upland Resources, Inc.15
Petro Pro, Ltd. v. Upland Resources, Inc. is probably the seminal case construing a
wellbore-only assignment. The King “F” No. 2 Well was completed on a tract that was
later pooled to create a 704-acre gas unit, producing from the Cleveland Formation
between 6,500 and 6,600 feet, but also including the Brown Dolomite Formation
between 3,400 and 3,600 feet. KCS Medallion Resources (“KCS”) and MB Operating
Co., Inc. (“MB”) were the owners of this unit. In November 1998, KCS and MB conveyed
to L & R Energy (“L & R”):
All of Seller’s right, title and interest in and to the oil and gas leases
described in Exhibit “A” attached hereto and made a part hereof (“Subject
Leases”) insofar and only insofar as said leases cover rights in the
wellbore of the King “F” No. 2 Well.16
Beginning in May 2003, Upland Resources (“Upland”), pursuant to a farmout
agreement with KCS, drilled three wells in the Brown Dolomite Formation: the
Skeeterbee No. 1 and Skeeterbee No. 2 Wells, both horizontal wells, and the
Skeeterbee No. 3, a vertical well.
In April 2004, L & R assigned its interest in the King “F” No. 2 Well to Petro Pro,
Ltd. (“Petro Pro”). Upon inquiry, Petro Pro determined that KCS and Upland were
treating the interest of Petro Pro as a wellbore-only interest in the King “F” No. 2 Well.
In September 2004, Petro Pro filed suit seeking to quiet title to the entire 704acre pooled unit, from the surface to a depth of 6,800 feet. Several royalty owners
intervened, seeking damages for alleged breach of implied covenants and for tortious
interference with existing contracts. The royalty owners argued that Petro Pro’s lawsuit
and claims of ownership prevented Upland from fully developing the lease from
drainage from adjacent wells.
In cross motions for summary judgment, Upland contended that Petro Pro’s
interest was limited to production and enhancement of production from the Cleveland
Formation from the confines of the King “F” No. 2 Well. The royalty owners contended
that Petro Pro had the right to produce from any formation, subject to governmental
regulations limiting Petro Pro’s horizontal rights to forty acres surrounding the King “F”
No. 2 wellbore. Petro Pro contended they were the exclusive owners of any portion of
the leasehold estate that could reasonably be reached and produced through the King
“F” No. 2 wellbore. At trial, the court found the assignment unambiguous and granted
Upland’s motion for summary judgment.
15
16
279 S.W.3d 743 (Tex. App. 2007)
Id. at 746.
4
The court of appeals found that the judgment entered by the trial court failed to
resolve the rights conveyed by the assignment. The court of appeals construed the
limitation to “rights in the wellbore” as limiting the assignment to production from the
wellbore of the King “F” No. 2 Well at the depth it existed at the time of the conveyance.
This meant that Petro Pro’s rights included the right to produce from shallower
formations, including the Brown Dolomite, but not the right to extend the wellbore
vertically or horizontally, and not the right to share in production from any other well that
may be drilled on the lease.
Important points in this case are that the court relies on Texas’ ownership-inplace theory to support its finding that the assignment was unambiguously limited to the
gas that may be produced from the wellbore of the King “F” No. 2 Well. Thus, the court
effectively gave some guidance on how to interpret an assignment limited to a wellbore
absent greater definition. The only geographical area conveyed and owned by Petro Pro
was that required to operate and produce the King “F” No. 2 Well, and the depths
conveyed to Petro Pro are the depths (both horizontally and vertically) penetrated by the
existing wellbore. Further, Petro Pro had the right to use the wellbore to produce from
any uphole formations.
B. Key Production Company, Inc. v. Quality Operating, Inc.17
Key Production Company, Inc. v. Quality Operating, Inc. follows Petro Pro in
finding that the language “insofar and only insofar as” described is a limitation on the
grant but neither reserves nor conveys any interest.
In Key Production Company, Inc. v. Quality Operating, Inc. the Texas Court of
Appeals construed a purchase and sale agreement, an assignment, and an amendment
of the assignment, a joint operating agreement, and a declaration of unit in order to
determine the intent of the parties. Exxon was an owner of an interest in the Pearline
Perkins, et al., Smackover Gas Unit, when it conveyed the same to Gasoven, Key’s
predecessor in title. The Assignment describes three leases comprising 359.5 acres,
and specifically reserves the “deep rights,” being depths below 11,680. An amendment
was subsequently executed in which Exxon further reserved the Henry Williams, et al.,
Pettit Gas Unit, which was located at a depth between 6,898 feet and 6,900 feet.
Exxon subsequently created the Henry Williams Cotton Valley Gas Unit, which
covered depths between 10,142 feet and 10,340 feet, and was covered by the same
leases as the Pearline Perkins, et al., Smackover Gas Unit. Around the same time, the
Pearline Perkins well stopped producing and was reworked to produce from the Cotton
Valley Gas Unit and, upon completion, was renamed the Henry Williams No. 2 Well.
Exxon conveyed its interest to Quality Operating, and Gasoven conveyed its interest to
Key, and a dispute arose as to ownership of the gas being produced from the Henry
Williams No. 2 Well. Key claimed all interest in all three leases, except for those
specifically reserved in the assignment and amendment (depths below 11,680, and the
Pettit Gas Unit from a depth between 6,898 feet and 6,900 feet). The trial court found
17
2013 WL 1286672 (Tex. App.) (mem.).
5
the assignment was ambiguous, and that Key’s predecessor had only acquired the
leases in the Pearline Perkins, et al., Smackover Gas Unit and only in the Smackover
formation from a depth of 10,980 feet to 11,680 feet. The grant in the assignment
included:
All leases or wellbores or contract rights INSOFAR AND ONLY INSOFAR
AS set out in Exhibit A being attached to this Assignment and Bill of Sale
and made a part hereof for all purposes, INSOFAR AND ONLY INSOFAR
AS these leases or wellbores or contract rights are contained in the units
described and set out in the particular Exhibit A, and INSOFAR AND
ONLY INSOFAR AS these leases or wellbores or contract rights are
subject to the contracts described in Paragraph 2 below or in the particular
Exhibit. Assignor excepts from this Assignment and reserves unto itself all
other right, title, and interest, including but not limited to any reservation by
Assignor of any kind of interest (such as overriding royalty, depths,
formations, contractual rights, etc.) from any conveyance or agreement,
whether recorded or not, executed or effective prior to the execution of this
Assignment, as specified herein.18
The Exhibit “A” contained a page titled “Pearline Perkins, et al., Smackover Gas
Unit” that described the three leases being conveyed. Important to the court’s analysis
was the fact that the Pearline Perkins, et al., Smackover Gas Unit had been created by
a Designation of Unit that had been filed of record in the deed records of Freestone
County. The Designation of Unit described the Smackover Gas Unit as including the
Smackover formation at a subsurface depth of between 10,980 feet and 11,680 feet.
The assignment referred to the recorded Designation of Unit.
Key argued that, reading the assignment as a whole, interpreting the assignment
as conveying only rights in the Smackover formation would negate specific reservations
to the deep rights in the assignment and the Pettit formation in the amendment.19 Key
further argued that the description of the unit and the limitation to the leases “contained
in the unit” was intended to be a limitation of the geographic surface area and not a
limitation of the depth.
The court sided with Quality, finding that the limitation “INSOFAR AND ONLY
INSOFAR AS these leases or wellbores or contract rights are contained in the units
described,”20 taken together with the definition of the Pearline Perkins, et al., Smackover
Gas Unit as found in the recorded designation of unit, unambiguously limited the
assignment to the Smackover formation.
It should be noted that the court of appeals held the assignment unambiguous.
Thus, the court was not looking at extrinsic evidence of intent when it factored in the
unrecorded agreements referred to in the assignment, including the amendment, the
18
Id. at 3.
Id. at 4.
20
Id. at 3.
19
6
joint operating agreement, the purchase and sale agreement, and the recorded
designation of unit.
C. Comet Energy Services, LLC v. Powder River Oil & Gas Ventures, LLC
Comet Energy Services, LLC v. Powder River Oil & Gas Ventures, LLC is a case
that came before the Wyoming Supreme Court twice. In Comet I,21 the Supreme Court
of Wyoming was asked to interpret an assignment of a federal oil and gas lease.
Powder River claimed the entire 760-acre federal lease based on a 1998 assignment of:
1. The oil and gas well(s) described on Exhibit “A” attached hereto (“Wells”),
together with all equipment and machinery associated therewith;
2. The leasehold estate created by the lease(s) upon which the Wells are located
and/or pooled/unitized therewith (“Leases”) and all licenses, permits and other
agreements directly associated with the Wells and/or Leases;
The Exhibit “A” described, in table form, the State and County, Location (4-53N75W), Well/Unit Name (the Federal 44-4) and the Field. The Exhibit “A” header stated:
This Exhibit “A” contains the description of the wells/units with such
description intended to incorporate all of Seller’s/Assignor’s interest in
such wells/units and is not intended to be limited to Assignor’s/Seller’s
interest in the geographic boundaries of the specific spaced/drillsite unit
description therein.22
The trial court had found that the assignment unambiguously granted Powder
River the entire 760-acre lease upon which the well sat. On appeal, the parties main
issue was the meaning of the term “leasehold estate”, with Powder River arguing that
leasehold estate referred to the entire lease, and Comet arguing that absent a legal
description of the underlying lease, “leasehold estate” referred to the 40-acre unit on
which the Federal 44-4 well was situated. The Wyoming Supreme Court found that it
was impossible to determine the intent of the parties from the four corners of the
assignment, specifically with regard to the term “leasehold estate,” which the court
found to be ambiguous, and remanded the case to the trial court.23
On remand, the trial court admitted testimony from the land manager at
Forcenergy (Powder River’s Assignor) stating that it was Forcenergy’s intent at the time
of the conveyance to convey all interest in the lease associated with the Federal 44-4
Well. The land manager further testified that the lease itself had not been described
because Forcenergy obtained the interest through a series of mergers, did not have
records of the lease itself, and spending the money to do the title work would not add
any value for Forcenergy at the time of the sale. The trial court again found in favor of
21
22
185 P.3d 1259 (Wyo. 2008).
Id. at 1263.
7
Powder River, and Comet appealed, arguing that the testimony of the land manager
was inadmissible evidence of the subjective intent of the parties.
In Comet II,24 the Wyoming Supreme Court states that a party’s subjective intent
is not relevant or admissible and that Wyoming uses an objective approach to contract
interpretation. Upon determining that a contract or a term or terms of a contract are
ambiguous, Wyoming allows objective evidence of the circumstances surrounding the
formation of the contract, but does not allow evidence of the subjective intent of the
parties.25 The objective approach allows extrinsic evidence of the relationship of the
parties, subject matter of the contract, and the parties’ purpose in making the contract.26
The Supreme Court affirmed the trial court, holding that the testimony of the land
manager “explaining Forcenergy’s reason for offering the twenty-six assignments at the
1998 auction, the process by which the assignments were drafted and why the property
descriptions were limited to well descriptions, rather than well and lease descriptions,
was the sort of evidence this Court contemplated when we remanded the case for
resolution of the term ‘leasehold estate.’”27
Comet II does not exactly address a wellbore-only assignment, as it is at least
clear that the assignment intended to convey the entire unit on which the well was
producing (40 acres). However, Comet is a cautionary tale to title examiners that even
where language appears inclusive, a court might find an ambiguity where the
assignment describes only the well and not the lease, or describes less than the entire
tract covered by the lease.
If there is anything to be gathered from the cases discussed thus far, it is that
courts appear to be willing to aggressively interpret limitations on grants. While paying
lip service to the rule of construction that a deed is to be most strongly construed
against the grantor, it appears that courts are frequently willing to find in favor of
grantors by interpreting limitations broadly and language of grant narrowly. Perhaps
there is an unspoken policy at work here. It is often an assignee of the remaining
interest that claims that a prior assignment was wellbore-only, or limited to specific
depths, or limited to particular geographic tract that is less than the entire lease. It is
these subsequent assignees who are attempting to develop new depths or new
acreage, and frequently the assignees of the limited interests who are simply producing
existing wells. This sort of policy would tend to encourage development by those who
take a risk on new depths, or new horizontal drilling.
D. Cox v. Kaiser-Francis Oil Co.28
This case involves a mineral deed, not an assignment, and illustrates that courts
may be less strict in enforcing limitations when a mineral interest or an unsophisticated
24
239 P.3d 382 (Wyo. 2010).
Id. at 387 (citing Omohundro v. Sullivan, 202 P.3d 1077, 1084 (Wyo. 2009)).
26
Id. (citing Ecosystem Res., L.C. v. Broadbent Land & Res., L.L.C., 158 P.3d 685, 688 (Wyo. 2007)).
27
Id. at 390.
28
152 P.3d 274 (Okla. Civ. App. 2006).
25
8
party is involved. Plaintiff Ivy Lively Newton Cox was the owner of a mineral interest on
which two wells were producing: the S.P. Helm No. 1-12 Well and the Stevens No. 1-12
Well. Cox conveyed to Kaiser-Francis:
all of Grantor's interest in and to all of the oil royalty, gas royalty, and
royalty in casinghead gas, and distillate gasoline, and royalty in other
associated minerals in and under, and that may be produced and mined
from the following described lands situated in the County of Canadian,
State of Oklahoma, to wit: South one-half (S1/2) Section 12, Township 14
North, Range 10 West....
Said lands or portions thereof, being now under oil and gas lease dated
October 14, 1966, from Samuel P. Helm and Fannie A. Helm, husband
and wife, Lessors, to L.J. Johnston, Lessee, ... it is understood and agreed
that this sale is made subject to the terms of said leases, but covers and
includes all the [royalty] due and to be paid under the terms of said lease
to Grantor, less and except the Grantor's interest in the wellbore rights and
production from the S.P. Helm # 1 well located in the center of the
Southwest quarter of Section 12–T14–R10W, Canadian County,
Oklahoma.29
Cox believed she had conveyed only her royalty interest in the Stevens No. 1-12
Well, and produced evidence that she did not know she had conveyed more until the
S.P. Helm No. 2 Well, a replacement well for the S.P. Helm No. 1 Well, was drilled.
Kaiser-Francis claimed the royalty from the S.P. Helm No. 2 Well, and Cox sued
seeking reformation of the deed, quiet title, and accounting.
The trial court granted summary judgment in favor of Kaiser-Francis. At issue on
appeal was (1) whether the five-year statute of limitations ran from the execution of the
deed or upon discovery that the language of the deed did not reflect the intent of the
parties, and (2) whether the deed was ambiguous. The court first tackled the
reformation question, and found that the legal effect of the deed was only questioned or
disputed upon Kaiser claiming the royalty from the S.P. Helm No. 2 Well.30 Second, the
court held that the reservation of “wellbore rights and production from the S.P. Helm # 1
well” was ambiguous. Since “wellbore rights” are owned by the lessee while a lease is in
force, Cox owned no “wellbore rights” that could be conveyed. Further, the S.P. Helm
No. 1 Well was a unit well and not merely drilled on the underlying lease. As such, the
court determined that the reservation of Grantor’s interest in production from the S.P.
Helm No. 1 Well could be interpreted as a reservation of royalty from the unit, in which
case Cox would be entitled to royalty from the replacement well. Because the court
determined that the trial court erred in finding that the statute of limitations had run, and
because the court found the assignment ambiguous, the case was remanded on both
the reformation and quiet title issues.
29
30
Id. at 276.
Id. at 278.
9
E. Plano Petroleum, LLC v. GHK Exploration, L.P.31
Plano claimed the 320-acre Newell lease as a result of an assignment of:
All right, title and interest in and to that certain wellbore, all leasehold,
limited in depth from the surface of the earth to the base of the Tonkawa
Formation, and all surface and subsurface equipment and materials
thereon and therein, more particularly described as the Claude E. Newell
# 1 well. Said leases and well located in the northwest quarter of Section
23-17N-25W, Roger Mills County, Oklahoma, which wellbore, leases and
associated equipment and materials so specified are hereinafter referred
to as “SAID WELL.”32
GHK, the successor to the Assignor in that assignment, claimed all right in the Newell
Lease except for production of the Claude E. Newell No. 1 Well. Plano filed suit seeking
to quiet title to the entire 320-acre lease. The trial court found that the assignment
unambiguously conveyed the entire 320-acre lease to Plano’s predecessor. The
Oklahoma Supreme Court found that there was a patent ambiguity in the use of the
phrase “all leasehold” without a legal description of the lease itself. The court found five
possible interpretations of the assignment, including:
(1) the instrument was a wellbore only assignment of the Newell # 1 well,
as GHK argued, and the “all leasehold” language refers to leasehold rights
insofar as the Newell # 1 well and production therefrom is concerned; (2) it
assigned the entire 320 acre Newell Lease, as Plano argued and the
lower courts held; (3) it assigned a leasehold of 80 acres in the quarter
section which contains the Newell # 1 well; (4) it assigned a leasehold of
80 acres in the quarter section which contains the Newell # 1 well limited
in depth to the base of the Tonkawa Formation; or (5) it assigned the
entire Newell Lease limited in depth to the base of the Tonkawa
Formation.33
The case was remanded for the trial court to consideration of extrinsic evidence of the
intent of the parties.
F. Chisos, Ltd. v. JKM Energy, L.L.C.34
Chisos is a dispute between an Assignor (Chisos) and an Assignee (JKM), with Chisos
claiming it intended to assign a wellbore-only interest in the Stetson Well, and JKM
claiming it intended to purchase the entire leasehold interest of Chisos in the west half
of Section 2, which unbeknownst to JKM, included a second well, the HL2. Upon
learning that the HL2 well had stopped producing, Chisos sent a crew out to frac the
31
250 P.3d 328 (Okla. 2011).
Id. at 330.
33
Id. at 331.
34
258 P.3d 1107 (N.M. Ct. App. 2011).
32
10
well, and was informed by JKM’s president that they were trespassing. Chisos filed suit,
and the trial court found in favor of JKM.
Although New Mexico courts follow the rule that “[t]he existence of ambiguity is an issue
of law that we review de novo,”35 it also allows extrinsic evidence of the circumstances
surrounding the contract formation in order to determine if the deed is ambiguous.36 The
court quotes, “[w]ithout a full examination of the circumstances surrounding the making
of the agreement, ambiguity or lack thereof cannot properly be discerned.”37
Interestingly, the court of appeals barely mentioned the language of the assignment and
focused heavily on the circumstances surrounding the assignment. In determining that
the assignment was ambiguous, the court relied heavily on the testimony of expert
witnesses finding the assignment ambiguous.
Upon determining that a contract is ambiguous, New Mexico applies the
Restatement (Second) of Contracts § 201 (1981):
Where the parties have attached different meanings to a promise or
agreement or a term thereof, it is interpreted in accordance with the
meaning attached by one of them if at the time the agreement was made
(a) that party did not know of any different meaning attached by the
other, and the other knew the meaning attached by the first party;
or
(b) that party had no reason to know of any different meaning
attached by the other, and the other had reason to know the
meaning attached by the first party.38
In Chisos, the court found that Chisos, who claimed the assignment was a
wellbore only assignment, knew or had reason to know that the JKM did not know or
have reason to know that Chisos intended the assignment to be wellbore-only.
The application of the Restatement to wellbore assignments is one approach that
may not bring certainty to litigants, but could lead to resolution of more of these cases at
the trial level. It is unlikely that ambiguous wellbore assignments will stop being litigated
anytime soon. The Restatement approach punishes the side that attempts to take
advantage of ambiguity at the drafting stage, thus encouraging better drafting to start
with. North Dakota has a similar statutory rule: If the terms of a promise in any respect
are ambiguous or uncertain, it must be interpreted in the sense in which the promisor
believed at the time of making it that the promisee understood it.39
35
Id. at 1110 (quoting Mark V, Inc. v. Mellekas, 845 P.2d 1232, 1235 (N.M. 1993)).
Id. at 1110 (quoting C.R. Anthony Co. v. Loretto Mall Partners, 817 P.2d 238, 242-43 (N.M. 1991)).
37
Id. (quoting Mark V, Inc. v. Mellekas, 845 P.2d 1232, 1235 (1993)).
38
Id. at 1111.
39
N.D. Cent. Code § 9-07-14.
36
11
IV. Drafting considerations
As there are no widely used or standardized forms for wellbore assignments, as
a general approach, the drafter should expressly address as many points of potential
conflict as possible. As limitations in an assignment are considered neither grants nor
reservations,40 it is in the interest of the parties to expressly convey or reserve any
interest owned by the assignor in order to avoid ambiguity.41
A. Legal description
Careful attention should be given to the difference in the description of the
location of the well and the description of the premises conveyed. A true wellbore-only
assignment should clearly state that the legal description is included for location
purposes only, and that it is the intent of the assignor to reserve all interest in the
lease(s) covering any lands described. It is not advised that a drafter omit a legal
description entirely. In a state that employs tract indices, absence of a legal description
does not provide notice to third parties of the interest of the assignee, as the
assignment will not appear in the chain of title.42
B. Description of the Leases
A wellbore-only assignment may purport to convey the leases or leasehold
interest insofar and only insofar as it relates to the borehole and production from the
borehole. In the alternative, a wellbore-only assignment may not describe or purport to
convey any interest whatsoever in the leases or leasehold interest.43 For title purposes,
if the grant is effectively limited to production from specific tracts, depths, and
boreholes, including a description of the underlying leases should not affect the interest
conveyed. If the assignment is to be the narrowest of wellbore assignments, the
assignment should clearly recite that any leases described are for information purposes
only, and that assignor reserves all interest in the leases except as required to operate
and produce from the wellbore assigned. Further, the object of the granting language
should be the wellbore described, and not the leases or leasehold described.
The terms “leasehold estate” and “leasehold” with no accompanying legal
description have been held to render an assignment ambiguous.44 The North Dakota
Supreme Court has held that a conveyance of “working interest,” when combined with a
description of the underlying lease, unambiguously conveys the underlying leases, and
that working interest is generally synonymous with the term “leasehold interest.”45
40
Petro Pro, Ltd. v. Upland Resources, Inc., 279 S.W.3d 743 (Tex. App. 2007).
Kurt M. Petersen, Wellbores: Shedding Light on a Transactional Black Hole, 48 Rocky Mt. Min. L. Inst.
13-30 (2002).
42
Plano Petroleum, LLC v. GHK Exploration, L.P., 250 P.3d 328, 331-32 (Okla. 2011).
43
Lawrence P. Terrell, Limited Assignments—Who Gets What?, 35 Rocky Mt. Min. L. Inst. 17-6 (1989).
44
Comet Energy Services, LLC v. Powder River Oil & Gas Ventures, LLC, 185 P.3d 1259, 1264 (Wyo.
2008); Plano Petroleum, LLC v. GHK Exploration, L.P., 250 P.3d 328, 331 (Okla. 2011).
45
Miller v. Schwartz, 354 N.W.2d 685, 689 (N.D. 1984).
41
12
C. Rights in a drilling and spacing unit or in a voluntary unit.
The Assignment should clearly state the interest of the assignor and assignee in
any pooled unit or drilling or spacing unit. In the narrowest wellbore-only assignment,
the assignor should reserve the right to drill new wells or replacement wells on the same
lease tract or unit. Alternatively, the assignment should specifically grant these rights to
the assignee if it is the intent to convey the entire lease or the entire drilling and spacing
unit. The Assignment should clearly set forth the rights of the parties if new drilling and
spacing units are formed, or if existing spacing units are respaced, despaced, or
increased density wells are authorized.46 In Texas, the assignment should include
acreage necessary to ensure compliance with applicable Railroad Commission Rules.47
There is evidence that the term “wellbore rights” in Oklahoma is considered ambiguous
if the well is drilled on a drilling and spacing unit.48
D. Depths
In the context of horizontal wells in particular, it is important to distinguish
between measured depth and vertical depth. Measured depth can be determined from
the length of the drillpipe and includes the entire length of the lateral, while vertical
depth is the perpendicular depth from the surface to a certain point beneath the surface.
If the wellbore is intended to include only certain formations, it is a good idea to identify
those formations with reference to both footage and formation in the actual logs of the
wellbore assigned or a control well (i.e. limited to the stratigraphic equivalent of the
top/bottom of a specific formation as found in a specific well).49 While Texas has found
that a wellbore-only assignment unambiguously conveys the rights to uphole formations
but not the right to extend the lateral vertically or horizontally, other states may find a
wellbore-only assignment ambiguous as to these rights.50 As such, the assignment
should specifically address whether the assignee has the right to recomplete the well in
a different formation (uphole or downhole), as well as whether the Assignee has the
right to sidetrack, extend the lateral vertically, or extend the lateral horizontally.
E. Tangible Personal Property
As an assignment of a wellbore would typically involve personal property,
including fixtures and equipment, such fixtures and equipment should be described with
as much specificity as possible. If there is more than one well within the area of the well
being conveyed, the fixtures and equipment should be described with enough specificity
to determine which equipment is being reserved, and which is being conveyed.51
46
Lawrence P. Terrell, Limited Assignments—Who Gets What?, 35 Rocky Mt. Min. L. Inst. 17-7 (1989).
George A. Snell and Ana Maria Marsland-Griffith, Legal Descriptions—A Little Background and a Few
New Issues, State Bar of Texas, Oil, Gas and Energy Resource Law Section, Section Report, 28 (2011).
48
Cox v. Kaiser-Francis Oil Co.,152 P.3d 274 (Okla. Civ. App. 2006).
49
Lawrence P. Terrell, Limited Assignments—Who Gets What?, 35 Rocky Mt. Min. L. Inst. 17-10 (1989).
50
Petro Pro, Ltd. v. Upland Resources, Inc., 279 S.W.3d 743 (Tex. App. 2007).
51
Kurt M. Petersen, Wellbores: Shedding Light on a Transactional Black Hole, 48 Rocky Mt. Min. L. Inst.
13-28 (2002).
47
13
F. Intangible personal property and references to other contracts
It should be noted that a court will construe an assignment along with other
contracts or unrecorded agreements to which the assignment refers or is explicitly made
subject. Thus, the drafter should harmonize any potential inconsistencies between the
assignment and contracts related to the assignment. For example, if a wellbore
assignment is pursuant to and subject to a purchase and sale agreement, the drafter
should make every attempt to harmonize the two and specify which agreement controls
in the event of a conflict of any of the terms. As noted above in the discussion of Key
Production Company, Inc. v. Quality Operating, Inc., the court used a definition of the
Smackover Unit found in a recorded designation of unit. As the Assignment referenced
the designation of unit, the court was free to interpret the assignment in the light of the
designation of unit without finding the assignment ambiguous and admitting extrinsic
evidence.52 The drafter should be aware of any terms in the assignment which may be
defined by reference to another agreement and, if necessary, expressly disclaim the
use of terms from an outside agreement to define terms in the assignment.
As a practical matter, even if the assignment does not refer to or is not expressly
subject to outside agreements, the parties should anticipate the possibility that a court
would hold the assignment ambiguous, in which case the court would consider the
circumstances surrounding the negotiation and drafting of the assignment. 53
G. Warranties
As the Uniform Commercial Code implies certain warranties with regard to the
personal property conveyed, special care should be taken to expressly disclaim any
express warranties and any implied warranties of merchantability or fitness for a
particular purpose. Further, the assignment should address whether and to what extent
the assignor warrants title to the real property. Either the assignor should expressly
warrant title to the property, warrant title to the property by or through the assignor but
not otherwise (a “special warranty”), or expressly disclaim any warranty of title.54
V.
Conclusion
In interpreting wellbore assignments, the title attorney should keep one
overarching concern in mind: the assignment is more likely than not ambiguous. Any
ambiguous assignment will likely require curative. The drafting considerations set forth
in this paper are a guide not just for drafting assignments, but also for drafting the title
requirements that will inevitably make their way into a title opinion where there are
wellbore assignments in the chain of title. A title attorney, unlike a judge, should begin
by considering the totality of the circumstances in construing any wellbore assignment.
52
2013 WL 1286672 (Tex. App.-Waco 2013).
Kurt M. Petersen, Wellbores: Shedding Light on a Transactional Black Hole, 48 Rocky Mt. Min. L. Inst.
13-25 (2002).
54
Kurt M. Petersen, Wellbores: Shedding Light on a Transactional Black Hole, 48 Rocky Mt. Min. L. Inst.
13-31 (2002).
53
14
×

Report this document