Summary
holding that an offset clause that included a "deemed drainage provision" but also later incorporated the reasonably prudent operator standard required the lessor to prove the triggering well was causing drainage
Summary of this case from Murphy Exploration & Prod. Company—usa, Corp. v. Shirley Adams, Charlene Burgess, Willie Mae Herbst Jasik, William Albert Herbst, Helen Herbst, & R. May Oil & Gas Co.Opinion
No. 04-15-00677-CV
06-28-2017
Helen A. MZYK, Karnes S4 Minerals, L.P., and Karnes S4 Management, L.L.C., Appellants v. MURPHY EXPLORATION & PRODUCTION COMPANY-USA, Appellee
MEMORANDUM OPINION
From the 81st Judicial District Court, Karnes County, Texas
Trial Court No. 14-04-00083-CVK
Honorable Donna S. Rayes, Judge Presiding Opinion by: Luz Elena D. Chapa, Justice Sitting: Sandee Bryan Marion, Chief Justice Rebeca C. Martinez, Justice Luz Elena D. Chapa, Justice AFFIRMED
Helen A. Mzyk, Karnes S4 Minerals, L.P., and Karnes S4 Management, L.L.C. appeal the trial court's take-nothing summary judgment on Mzyk's breach of contract claim against Murphy Exploration & Production Company-USA. Mzyk argues that after producing wells were drilled on an adjacent lot, her mineral lease with Murphy triggered Murphy's obligation to drill an offset well, pay compensatory royalties, or release the lease. We affirm the trial court's judgment.
Appellants refer to themselves collectively as "Mzyk"; appellee refers to itself as "Murphy."
BACKGROUND
On March 2, 2011, Mzyk and Murphy executed a mineral lease regarding approximately 241 acres of land Mzyk owned in Karnes County. The lease had a primary term of three years. Paragraph 6 of the lease required Murphy to drill an offset well or wells as a reasonably prudent operator would under the same or similar circumstances if certain conditions were satisfied. Specifically, Paragraph 6 of the mineral lease provides:
6. Drainage; Offset, Protection. If after the date of this lease any new well or wells is drilled and produces oil or gas in paying quantities on adjacent lands not owned by Lessor, and not pooled with lands covered hereby, which are being explored and developed for oil and gas by a third party or by Lessee under a different lease, and not pooled with lands covered hereby and within four hundred sixty seven feet (467') from said lands, Lessee agrees to drill such offset well or wells on said lands (or attempt to complete for production any existing offset well or wells drilled by Lessee on said lands) as a reasonably prudent operator would drill under the same or similar circumstances ; provided, however, Lessee shall not be required to offset any such gas well on adjacent lands unless the gas therefrom is being marketed. It is provided, however, that, in lieu of drilling an offset to any such oil or gas well, Lessee shall have the option of: (a) paying Lessor, as compensatory royalty, a sum equal to the royalties which would be payable under this lease on the production from such well had same been drilled and produced under this lease, and, as long as Lessee elects to pay such royalty in lieu of drilling an offset well, it will be considered that oil or gas is being produced from said lands as to the number of acres of said lands adjacent to the offset well as would be ascribed to a well on said lands within the meaning of Subparagraph 2(c) hereof; or (b) deliver to Lessee a release of this lease as to the number of acres of said lands adjacent to the offset well as would be ascribed to a well on said lands within the meaning of Subparagraph 2(c) hereof. To be in compliance with the provisions of this Paragraph 6, Lessee shall either commence the drilling of an offset well on said lands within six (6) months from the date of first production from the well on the adjacent land, or within said six (6) month period deliver to Lessee a release of acreage; and Lessee's failure to timely commence such well or deliver a release shall constitute an election by Lessee to pay compensatory royalty in lieu of drilling a well on said lands. Compensatory royalty shall be calculated and paid to Lessor based on production from the well on the adjacent lands commencing with production after 7:00 o'clock A.M. on the first day of the sixth calendar month after first production from such well and continue thereafter until production from such well ceases or an offset well is completed on said lands by Lessee. Should Lessee drill an offset well on said lands pursuant to the provisions of this paragraph,
whether completed as a dry hole or a producer of oil or gas, Lessee's obligations under the provisions of this paragraph shall be deemed fulfilled.(emphasis added).
After the lease was executed, two or three new wells were drilled on an adjacent landowner's property, these wells were located within 467 feet of Mzyk's property and produced in paying quantities, and Mzyk's property was not pooled with the adjacent property. Laterals of the new wells run directionally away from Mzyk's property and, consequently, the wells caused no drainage from the mineral estate of Mzyk's property. During the primary lease term, Murphy determined drilling on Mzyk's property would not be profitable and a reasonably prudent operator would not have drilled or operated any well on Mzyk's property. Because no wells on Mzyk's property were drilled during the primary term of the lease, the lease expired on March 2, 2014.
The following month, Mzyk sued Murphy, alleging Murphy failed to drill an offset well or deliver a release of the acreage. Mzyk claimed Murphy breached the lease, and she sought $11 million in compensatory royalties and her attorney's fees. After generally denying Mzyk's allegations, Murphy filed a traditional motion for partial summary judgment requesting that the trial court construe Paragraph 6 of the lease. Mzyk filed a cross-motion for partial summary judgment and argued Paragraph 6 entitles her to compensatory royalties.
The trial court granted Murphy's motion and construed Paragraph 6 as requiring Murphy to drill an offset well only if "a reasonably prudent operator would drill an offset well, which means that substantial drainage was occurring from the neighboring wellbore(s) in question; and a reasonably prudent operator would have a reasonable expectation of producing gas and condensate in paying quantities from the prospective offset well." The trial court further determined Paragraph 6 required Murphy to pay compensatory royalties only if Murphy had the obligation to drill an offset well and "failed to either drill such offset well or release the Lease within six months of the date Murphy's obligation to drill an offset well accrued." The trial court denied Mzyk's cross-motion for partial summary judgment.
Murphy thereafter filed a traditional and no-evidence motion for summary judgment challenging the breach element of Mzyk's breach of contract claim. Specifically, Murphy argued:
[Mzyk was] required . . . to prove that there was substantial draining from the productive portion of a wellbore within 467 feet of their lease line and that a reasonably prudent operator would have drilled on the lease. . . . Because [Mzyk has] no evidence to support any of these elements, the Court should grant Murphy's motion for no-evidence summary judgment.Murphy also argued its evidence conclusively established no reasonably prudent operator would have drilled an offset well and no drainage was occurring. Murphy further argued "[Mzyk has] no evidence that an offset well drilled on the Lease would have produced in paying quantities, and the summary judgment evidence proves otherwise."
In response, Mzyk argued the lease obligated Murphy to drill an offset well even if there was no drainage and even if such offset well were dry and would not have produced in paying quantities. Mzyk also argued the trial court's construction of the lease was directly contrary to uncontroverted proof concerning the circumstances surrounding the lease. Mzyk filed no evidence with her response showing drainage was occurring, that an offset well drilled on the lease would have produced in paying quantities, or that a reasonably prudent operator would have drilled an offset well under the same or similar circumstances. Mzyk instead argued the lease did not require her to prove any of these facts to raise a fact issue as to a breach. The trial court granted Murphy's motion specifically on the no-evidence grounds and thereafter rendered a final, take-nothing judgment.
STANDARD OF REVIEW
Mzyk argues the trial court erred by granting Murphy's motion for summary judgment and denying her cross-motion for partial summary judgment. "We review a summary judgment de novo." City of San Antonio v. San Antonio Express-News, 47 S.W.3d 556, 561 (Tex. App.—San Antonio 2000, pet. denied). To prevail on a traditional motion for summary judgment, the movant must show "there is no genuine issue as to any material fact and the [movant] is entitled to judgment as a matter of law." TEX. R. CIV. P. 166a(c); accord Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548 (Tex. 1985). "When a party moves for a no-evidence summary judgment, the nonmovant must produce some evidence raising a genuine issue of material fact." Romo v. Tex. Dep't of Transp., 48 S.W.3d 265, 269 (Tex. App.—San Antonio 2001, no pet.) (citing TEX. R. CIV. P. 166a(i)). The nonmovant does not have the burden to marshal its evidence, but it must produce some evidence that raises a fact issue on the challenged element. See id. We take as true all evidence favorable to the nonmovant and "indulge every reasonable inference and resolve any doubts in the nonmovant's favor." Rhône-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 223 (Tex. 1999); City of San Antonio, 47 S.W.3d at 561. When parties file competing motions for summary judgment, and the trial court grants one and denies the other, we review all issues presented and render the judgment the trial court should have rendered. Comm'rs Court v. Agan, 940 S.W.2d 77, 81 (Tex. 1997).
LEASE CONSTRUCTION
Neither party argues Paragraph 6 is ambiguous. "Construing an unambiguous lease is a question of law for the Court. Accordingly, we review lease-construction questions de novo." Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002) (internal citation omitted). When construing an unambiguous lease, "our primary duty is to ascertain the parties' intent as expressed within the lease's four corners." Id. We give the lease's language its plain meaning unless doing so would clearly defeat the parties' intent. Id. "[W]e presume that the parties to a lease intend every clause to have some effect." Id.
In Paragraph 6 of the lease, Murphy agreed "to drill such offset well or wells on said lands . . . as a reasonably prudent operator would drill under the same or similar circumstances." The trial court construed this provision as triggering Murphy's obligation to drill an offset well only if a reasonably prudent operator would do so. Mzyk contends the lease does not contain such a requirement before triggering Murphy's obligation. Under Mzyk's construction, Murphy was obligated to drill an offset well even if doing so would not have prevented any drainage, resulted in production in paying quantities, or benefited either Mzyk or Murphy. According to Mzyk, the phrase "as a reasonably prudent operator would drill" dictates not whether Murphy must drill an offset well, but how Murphy must drill an offset well once the obligation to do so is triggered.
We disagree. Paragraph 6's requirement—"to drill such offset well or wells on said lands . . . as a reasonably prudent operator would drill under the same or similar circumstances"—expressly adopts the reasonably prudent operator standard. See Good v. TXO Prod. Corp., 763 S.W.2d 59, 61 (Tex. App.—Amarillo 1988, writ denied) (reaching the same conclusion about identical language in a similar lease provision). In context of a mineral lease's requirement that a lessor drill an offset well, the reasonably prudent operator standard applies to the lessee's initial determination of whether to drill an offset well at all, not just to how the lessee would drill such an offset well. See, e.g., Menking v. Tar Heel Energy Corp., 621 S.W.2d 447, 448-49 (Tex. Civ. App.—Corpus Christi 1981, no writ); Chapman v. Sohio Petroleum Co., 297 S.W.2d 885, 886-87 (Tex. Civ. App.—El Paso 1956, writ ref'd n.r.e.). Mzyk cites no authority to the contrary. We conclude the reasonably prudent operator standard expressly incorporated by Paragraph 6 obligated Murphy to drill an offset well only if a reasonably prudent operator would have drilled an offset well under the same or similar circumstances. See Good, 763 S.W.2d at 61; Menking, 621 S.W.2d at 449; Chapman, 297 S.W.2d at 886-87.
Mzyk attempts to distinguish Good, Menking, and Chapman by arguing Paragraph 6 is more like a modern lease that presumes drainage is occurring. Mzyk cites authority referring to a lease that purportedly demonstrates this "modern approach," but the lease form does not include a presumption of actual or substantial drainage. The lease form to which Mzyk refers is substantially different from Paragraph 6 and omits the reasonably prudent operator standard. See Jason Newman & Louis E. Layrisson, III, Offset Clauses in A World Without Drainage, 9 TEX. J. OIL GAS & ENERGY L. 1, 17-18 (2014) (citing Tex. Gen. Land Office, July 16, 2013 Oil & Gas Lease Bid Application 5 (2013)). Paragraph 6 also contains no language suggesting the parties agreed to a presumption of actual or substantial drainage. The summary judgment evidence Mzyk cites also does not show the parties intended the omission of the drainage requirement to constitute an agreement to presume any triggering well was causing drainage, and we may not consider matters outside the four corners of the lease to alter the plain meaning of the lease's terms. See Anadarko Petroleum Corp., 94 S.W.3d at 554.
Mzyk argues the drilling of nearby producing wells and the absence of a pooling agreement "triggered" Murphy's obligation under Paragraph 6 to either (1) build an offset well or wells; (2) pay Murphy compensatory royalties; or (3) deliver a release of the lease. Mzyk contends that because Murphy did not build an offset well or deliver a release of the lease, Murphy elected to pay Mzyk compensatory royalties. But the plain language of the terms in the "compensatory royalties" provision—"paying [Mzyk], as compensatory royalty, a sum equal to the royalties which would be payable under this lease on the production from such well had same been drilled and produced under this lease" (emphasis added)—refers back to the "offset well" provision that incorporates the reasonably prudent operator standard. See Good, 763 S.W.2d at 61. Thus, the plain meaning of the compensatory royalties provision supports the trial court's construction: Murphy is obligated to pay compensatory royalties under Paragraph 6 only if Murphy failed to drill an offset well when a reasonably prudent operator would have done so. See Anadarko Petroleum Corp., 94 S.W.3d at 554 (requiring us to construe contractual terms according to their plain meaning).
Mzyk presents several arguments challenging Murphy's other no-evidence grounds. But in its motion for summary judgment, Murphy expressly presented an additional summary judgment ground that Mzyk had no evidence that a reasonably prudent operator would have drilled an offset well under the same or similar circumstances. Because the trial court granted Murphy's no-evidence motion without specifying any summary judgment grounds, we must affirm the trial court's judgment if any of Murphy's no-evidence grounds are meritorious. See Wasson Ints., Ltd. v. City of Jacksonville, 489 S.W.3d 427, 439 n.11 (Tex. 2016). We conclude Mzyk was required to produce some evidence raising a genuine issue of material fact that a reasonably prudent operator would have drilled an offset well under the same or similar circumstances. Mzyk did not argue in the trial court and she does not argue on appeal that she produced any such evidence. Murphy's no-evidence ground regarding the reasonably prudent operator standard is meritorious, and we therefore need not address Mzyk's arguments challenging Murphy's other summary judgment grounds. See id.; see also TEX. R. APP. P. 47.1.
For example, Mzyk contends her undisputed evidence regarding the parties' negotiation of the lease shows the parties did not intend actual or substantial drainage to be a necessary condition for Murphy's obligation to drill an offset well. She also contends Good, Menking, and Chapman are distinguishable because the leases in those cases expressly included a drainage requirement.
CONCLUSION
We affirm the trial court's judgment.
Luz Elena D. Chapa, Justice