Summary
Sundown Energy LP, et al. v. HJSA No. 3, LP arises from a dispute regarding the definition of “drilling operations” sufficient to maintain non-producing portions of an oil and gas lease. The parties’ lease contained a “continuous drilling program” provision, which required “drilling operations” to maintain the non-producing lease tracts. “Drilling operations” was not a defined term in that provision, but was defined elsewhere in the lease. HJSA filed suit against Sundown, arguing that pursuant to the continuous drilling program, Sundown was required to spud-in new wells prior to the expiration of certain time periods, and that Sundown had failed to do so. Sundown counterclaimed, asserting that its interests in non-producing tracts were maintained so long as it engaged in “drilling operations,” defined to include additional operational activities – not merely spudding-in new wells.
The trial court granted partial summary judgment for Sundown, finding that the contractual definition of “drilling operations” applied throughout the lease, and as a result, Sundown maintained its lease on the non-producing tracts by engaging in operational activities despite not having spudded-in a new well. A divided court of appeals partially reversed the decision of the trial court, concluding that the provision at issue “assigns a more specific definition of ‘drilling operations’ that controls over the general definition” provided elsewhere in the lease. The dissent observed that the parties had agreed on the definition of “drilling operations,” and determined that this definition applied “whenever” the term was used in the contract.
A unanimous Supreme Court affirmed the trial court’s grant of partial summary judgment, holding that the definition of “drilling operations” contained in the contract applied to the continuous drilling program provision. The Court reasoned that the contract specified this definition applied “whenever” the term “drilling operations” was used in the lease. Further, the clause at issue clearly used the term “spud[ding]-in” to discuss the first continuous development well and the term “drilling operations” thereafter, demonstrating the parties’ intent for the two terms to have different meanings.
Contractual definition controls
After the lease’s primary term expired, Sundown was required to “reassign to Lessor . . . all of Lessee’s operating rights in [each individual tract] of the lease not then held by production” unless Sundown was engaged in a “continuous drilling program.” Paragraph 7(b) of the lease set forth the requirements for a “continuous drilling program,” which included the following: “The first such continuous development well shall be spudded-in on or before the sixth anniversary of the Effective Date, with no more than 120 days to elapse between completion or abandonment of operations on one well and commencement of drilling operations on the next ensuing well” (emphasis in opinion). Paragraph 18 of the lease defined “drilling operations” as “actual operations for drilling, testing, completing and equipping a well (spud in with equipment capable of drilling to Lessee’s object depth); reworking operations, including fracturing and acidizing; and reconditioning, deepening, plugging back, cleaning out, repairing or testing of a well.”
Although Sundown satisfied the requirements for timely spudding-in the “first such continuous development well,” HJSA argued that the lease expired as to the non-producing tracts because Sundown had not spudded-in a new well every 120 days as purportedly required under the continuous drilling program. According to HJSA, the paragraph 18 definition of “drilling operations” did not apply to paragraph 7(b)’s continuous drilling program, which required the drilling of new wells to hold non-producing lease tracts.
The Court determined that paragraph 18 expressly stated its definition of “drilling operations” and that this definition applied “whenever” the term was used in the lease. Accordingly, this definition applied to the “drilling operations” in paragraph 7(b). The Court rejected HJSA’s argument that paragraph 7(b)’s language required the inference of a different, more specific meaning that took precedence over the paragraph 18 definition, reasoning that this argument lacked a “textual basis for ignoring the definition the parties prescribed.”
The Court also observed that this construction was required based on long-standing contractual principles requiring courts to avoid construing contracts in a way that renders contractual language meaningless. The Court noted that the language in paragraph 7(b) distinguished between “spud[ding]-in” the first continuous development well and commencing “drilling operations” afterwards, demonstrating the parties’ intention for the terms to be afforded different meanings.
As the parties agreed that Sundown had timely engaged in the activities encompassed by “drilling operations” other than spudding-in wells, the Court concluded that Sundown maintained its lease on the non-producing tracts, reversed the court of appeals' judgment, and remanded to the trial court for further proceedings.
Key takeaways
- Terms and phrases in oil and gas leases will be interpreted pursuant to long-standing principles of general contract interpretation.
- The definitions provided in an oil and gas lease will control the meaning of terms and phrases within the lease.
- Absent lease language to the contrary, courts are likely to apply definitions outside of continuous drilling program provisions to define terms within the provisions.
Client Alert 2021-104
