Applying its own precedent, the El Paso Court of Appeals has ruled that a co-tenant in a producing oil and gas lease cannot extend the primary term of its lease on the basis of the other co-tenant’s production rather than its own.
David W. Cromwell v. Anadarko E&P Onshore, LLC (No. 08-22-00129-CV; delivered August 4, 2023) stemmed from two oil and gas leases executed by Cromwell in Loving County in 2009. Cromwell’s leases contained a standard habendum clause specifying a primary term of three years in one lease and five years on the other and a secondary term extending the lease “as long hereafter as oil, gas, or other minerals are produced from [the] land[.]” At the time Cromwell executed the leases, Anadarko already had joint operating agreements with other working interest owners under which Anadarko was named as operator and, in fact, had already drilled three vertical wells that reached payout in 2009. Although Cromwell submitted his leases to Anadarko and repeatedly requested a similar joint operating agreement, Anadarko did not respond. Anadarko did, however, begin sending Cromwell joint interest billings. Cromwell accordingly paid his share of operating expenses and collected revenue checks. In 2011, Anadarko sent Cromwell an authorization for expenditure on a new compressor, which Cromwell signed.
This state of affairs existed until January 2017, when Anadarko, believing that Cromwell’s leases had expired, took the same two leases. Cromwell filed suit, asserting declaratory judgment, trespass-to-try title, and contract damages. He further alleged the existence of a partnership under which Anadarko breached its fiduciary duties and committed fraud. Anadarko moved for summary judgment, which the trial court granted. Cromwell appealed.
In an opinion by Justice Rodriguez, joined by Chief Justice Palafox and Justice Soto, the court of appeals affirmed. The court’s analysis turned on whether the primary term of the lease expired, as Anadarko argued, because Cromwell had never caused production from the leases, either by drilling himself or by entering into a joint operating agreement with someone who did. Here the facts were substantially the as those of Cimarex Energy Co. v. Anadarko Petro. Corp., 574 S.W.3d 73 (Tex. App.—El Paso 2019, pet. denied). In Cimarex, the court construed the plain, unambiguous language of a “typical” habendum clause to require the lessee to itself cause or contribute to production during the primary term (or pay delay rentals to perpetuate the lease). In other words, a lessee may not rely on another lessee’s production to satisfy the production requirement, as Cimarex (and Cromwell in this case) argued. The court reasoned that since the stated purpose of an oil and gas lease is for the drilling and producing of minerals, the lessee is expected to “do something to bring about that exploration and production . . . ,” whether by drilling, assigning the lease to someone else for drilling, pooling with others, or executing a joint operating agreement with an operator. Consequently, the court held that “the lease required Cimarex to ‘take some action to cause production’ to keep its lease alive; it could not rely on a cotenant’s production absent cash consideration paid to lessors.”
Cromwell contended that he “constructively” caused production by paying his share of expenses, including the cost of a new compressor, as well by sharing in costs related to risk and liabilities of production, such as reimbursing Anadarko for spill containment. He also pointed to numerous communications and check notations referencing an “operating agreement” or referring to him as a “working interest owner.” He further asserted that this mass of documentary representations created a partnership between him and Anadarko under the Business Organizations Code, which triggered fiduciary duties that Anadarko violated by leasing over him. None of this, the court pointed out, changed the fact that Cromwell’s lease required him to “cause or contribute” to production, which, among other things, means sharing in the risks of drilling or exploration, “including the risk that a well might be unprofitable.” Regardless of how communications with between Cromwell and Anadarko may have characterized their relationship, they remained co-tenants with no joint operating agreement or other partnership (there was also a statute of frauds issue that defeated Cromwell’s JOA argument as well).
