(i) the June 3, 1993 agreement referred to by the parties as the Royalty Agreement, concerning ownership of royalties under the October 5, 1956 oil and gas lease recorded in Volume 5, Page 151 of the Oil and Gas Records of La Salle County, Texas, is unambiguous; (ii) the Royalty Agreement requires that the royalties from the Springer Ranch No. 2 well be divided between Defendant Rosalie Sullivan and Plaintiff Springer Ranch Ltd. based on the productive portions of the well situated on their properties; (iii) Defendant Rosalie Sullivan is entitled to receive royalty of .08500689 of production from the well and Plaintiff Springer Ranch, Ltd. is entitled to receive royalty of .03999311 of production from the well; (iv) royalties from any future horizontal wells that are subject to the Royalty Agreement and that are situated on more than one tract of land and owned by any of the parties to this suit or their heirs, successors, and assigns will be allocated in proportion to the producing portions of the well situated on each of the respective tracts.
Springer Ranch appeals from this judgment.
Standard of Review
âWe review the trial courtâs summary judgment de novo.â Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). âWhen reviewing a summary judgment, we take as true all evidence favorable to the nonmovant, and we indulge every reasonable inference and resolve any doubts in the nonmovantâs favor.â Id. âWhen both parties move for partial summary judgment on the same issues and the trial court grants one motion and denies the other, as here, the reviewing court considers the summary judgment evidence presented by both sides, determines all questions presented, and if the reviewing court determines that the trial court erred, renders the judgment the trial court should have rendered.â Id.
Contract Interpretation
âIf the written instrument is so worded that it can be given a certain or definite legal meaning or interpretation, then it is not ambiguous and the court will construe the contract as a matter of law.â Coker v. Coker, 650 S.W.2d 391, 394 (Tex. 1983). In construing an unambiguous contract, our primary concern is to ascertain the true intentions of the parties as expressed in the agreement. Valence Operating, 164 S.W.3d at 662. The partiesâ intentions should be understood in light of the facts and circumstances surrounding the contractâs execution so long as those circumstances inform, rather than vary from or contradict, the contractâs text. Houston Exploration Co. v. Wellington Underwriting Agencies, Ltd., 352 S.W.3d 462, 469 & n.25 (Tex. 2011) (citing Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981)). It is the partiesâ objective intent, as expressed in the document, not their subjective intent, which may not have been expressed, that controls our construction of the contract. Matagorda Hosp. Dist. v. Burwell, 189 S.W.3d 738, 740 (Tex. 2006) (per curiam). To ascertain the partiesâ objective intent, we âshould examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless.â Valence Operating, 164 S.W.3d at 662. We give the contractâs terms their plain, ordinary, and generally accepted meanings unless the contract itself shows them to be used in a technical or different sense. Id.
We also âconstrue contracts âfrom a utilitarian standpoint bearing in mind the particular business activity sought to be servedâ and âwill avoid when possible and proper a construction which is unreasonable, inequitable, and oppressive.ââ Frost Natâl Bank v. L&F Distribs., Ltd., 165 S.W.3d 310, 312 (Tex. 2005) (quoting Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530 (Tex. 1987)). However, ââparties make their own contracts, and it is not within the province of this court to vary their terms in order to protect them from the consequences of their own oversights and failures . . . .ââ Provident Fire Ins. Co. v. Ashy, 162 S.W.2d 684, 687 (Tex. 1942) (quoting Dorroh-Kelly Mercantile Co. v. Orient Ins. Co., 135 S.W. 1165, 1167 (Tex. 1911)); see also Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640, 646 (Tex. 1996) (âWe have long held that courts will not rewrite agreements to insert provisions parties could have included or to imply restraints for which they have not bargained.â). Therefore, â[t]he intent of a contract is not changed simply because the circumstances do not precisely match the scenarios anticipated by the contract.â SAS Inst., Inc. v. Breitenfeld, 167 S.W.3d 840, 841 (Tex. 2005).
Discussion
The Surrounding Circumstances
The impetus for the 1993 contract was the division of the original Burkholder propertyâ and thus the benefits of the outstanding mineral lease over the propertyâat Joseph Burkholderâs death. During the time between the leaseâs execution in 1956 and Josephâs death, the original lessee-operator carved out portions of its mineral interest under the Burkholder lease and assigned those interests to other operators, who in turn subdivided and assigned their interests to other operators. When the partiesâ remainder interests became present interests in 1990, it became apparent that the property boundary lines of their interests, as established by Aliceâs will, did not match with and were crossed by the boundary lines separating the operators who held portions of the lesseeâs interest under the Burkholder lease.
Once the mismatch became apparent, one of the operators stopped paying royalties and would not resume royalty payments until the parties executed division orders.[1] The parties did execute division orders. However, one of the parties questioned the division orders after discovering that a well situated on an adjoining partyâs property was located within a âproduction unit, â almost half of which included acreage from his property.[2] The operator again suspended royalty payments until the 1993 agreement was reached.
In 1993, each of the three sets of parties had two vertical wells on their âsurface estates, â whose â production unitsâ included acreage from an adjoining partyâs property. Therefore, the parties agreed each party would receive all the royalties from the wells âsituated onâ their âsurface estateâ and would forego any claims to the royalties from wells on the adjoining partiesâ surface estates. Bearing in mind the surrounding circumstances, we turn to the contractâs text. âall royalties payable under the above described Oil and Gas Lease from any well or wells on said 8, 545.02 acre tract, shall be paid to the owner of the surface estate on which such well or wells are situated . . . .â
⢠âwellâ
Because the contract allocates the royalties payable from wells based on where the wells are situated, we begin by construing the term âwell.â The Matthews parties argue that âwellâ should be understood as âthe entire underground orifice from which oil and gas are produced.â Springer Ranch does not discuss or advocate for a particular definition of âwell, â but its construction requires â wellâ to be only the topmost portion of the hole on the surface where hydrocarbons exit the earth or the structure overlying the well.[3]
Legal and lay authorities agree that â[a] well is a shaft or hole bored or sunk in the earth through which the presence of minerals may be detected and their production obtained.â Kothmann v. Boley, 308 S.W.2d 1, 3 (Tex. 1957); accord Blackâs Law Dictionary 1732 (9th ed. 2009) (defining âwellâ as âa hole or shaft sunk into the earth to obtain a fluid, such as water, oil, or natural gasâ); Shorter Oxford English Dictionary 3604, at 5, 5 spec. (b) (6th ed. 2007) (defining âwellâ as âany shaft or pit sunk or dug into the ground . . . a shaft sunk in the ground to reach and tap a supply of oil, brine, gas, etc.â); Merriam-Websterâs Collegiate Dictionary 1342, at 2b (10th ed. 1999) (defining âwellâ as âa shaft or hole sunk to obtain oil, brine, or gasâ); Websterâs Third New International Dictionary 2594, at 4c (2002) (defining âwellâ as âa shaft or pit dug or bored in the earth . . . a shaft or hole sunk to obtain oil, brine, or gasâ). The Matthewsâ summary judgment evidence also included the affidavit of a petroleum engineer, who stated â[w]hile the surface location of the wellhead is on Springer Ranch property, the well is situated on both Ms. Sullivanâs and Springer Ranch property.â
The Matthewsâ expertâs affidavit suggests, and we agree, that Springer Ranchâs construction requires âwellâ to be conflated with the term âwellhead, â which is the top of the hole from which hydrocarbons exit, or the visible structure over the well. See Shorter Oxford English Dictionary 3606, at 2 b (defining âwellheadâ as â[a] structure erected over an oil well or gas wellâ); Merriam-Websterâs Collegiate Dictionary 1342, at 3 (defining âwellheadâ as
âthe top of or a structure built over a wellâ); Websterâs Third New International Dictionary 2595, at 3 a, b (defining âwellheadâ as âthe top of a well . . . a structure built over the top of a well.â). In its brief, Springer Ranch states â[t]here is no other surface location for the well other than the wellhead located on Springer Ranchâs property.â However, Springer Ranch does not cite any support for their necessarily limited definition of âwellâ or its conflation of âwellâ and âwellhead.â Although we are aware âwellâ may be colloquially used in this way, we decline to construe the word in a way that contravenes its technical, legal, and dictionary definitions.
⢠âonâ
Springer Ranch contends that, because the contract describes a well âonâ a surface estate, it must mean only that part of the well that is visible on the surface of its property. It is true that âonâ is often used to mean in contact with the top surface of a thing. Shorter Oxford English Dictionary 2000, at 1, 2; Merriam-Websterâs Collegiate Dictionary 811, at 1 a, b; Websterâs Third New International Dictionary 1574, at 1 a, c. But âonâ is a versatile preposition and also denotes other spatial relations, including within the limits or bounds of something. Shorter Oxford English Dictionary 2000, at 5; Merriam-Websterâs Collegiate Dictionary 811, at 2 c; Websterâs Third New International Dictionary 1574, at 1 c. For instance, oil is said to be âonâ oneâs property. See, e.g., Fleming v. Ashcroft, 175 S.W.2d 401, 404 (Tex. 1943) (â[O]n account of discovery of oil on the tract . . . .â). âOnâ is sometimes used in this sense with âwell.â See, e.g., BP Am. Prod. Co. v. Marshall, 342 S.W.3d 59, 63 (Tex. 2011) (referring to âgood-faith efforts to develop a well on the Marshall lease . . . .â). Both parties argue that their definition of âonâ is the only one consistent with the other uses of âonâ in the contractâs operative language: âfrom any well or wells on said 8, 545.02 acre tractâ and âwithout reference to any production unit on which such well or wells are located.â Because âonâ is so versatile, that argument is not persuasive for either partyâs construction.
⢠âsurface estateâ
We next examine the meaning of the term âsurface estate.â The âsurface estate, â strictly construed, is not â landâ or any other kind of physical or corporeal structure on which a well may be situated. Instead, it is a âlegal unit of ownership in the physical land.â Averyt v. Grande, Inc., 717 S.W.2d 891, 894 (Tex. 1986) (ââLandâ is the physical earth in its natural state, while an estate in land is a legal unit of ownership in the physical land.â). But it is fair, when construing a writing, to equate the âsurface estateâ with the physical or corporeal structures of the earth over which the surface estate owner has dominion, or owns. See, e.g, Dunn-McCampbell Royalty Interest, Inc. v. Natâl Park Serv., 630 F.3d 431, 442 (5th Cir. 2011) (citing Averyt, 717 S.W.2d at 894). In this case, such a construction is necessary if the 1993 contract is to be given meaning under either partyâs construction. Separate surface and mineral estates do not come into existence until there is a grant of the minerals in a deed or lease, or a reservation in a conveyance. See Moser v. U.S. Steel Corp., 676 S.W.2d 99, 101 (Tex. 1984). Therefore, in order to give meaning to the phrase âsurface estate on which such well or wells are situated, â we construe the term â surface estateâ to mean the portions of the earth, over which the surface estate owner holds dominion after a severance of the mineral estate. See Dunn-McCampbell, 630 F.3d at 442; Averyt, 717 S.W.2d at 894; Moser, 676 S.W.2d at 101; Blackâs Law Dictionary 1580 (defining âsurface interestâ as âevery right in real property other than the mineral interestâ).
To understand what mineral and surface estate owners actually own, we must discuss the relationship between hydrocarbons and the earth surrounding them.[4] See generally 2 Ernest E. Smith & Jacqueline Lang Weaver, Texas Law of Oil and Gas § 8.2[A]â[C], at 8-16.8 â 8-22 (LexisNexis Matthew Bender, 2nd ed. 2013); 1 W. L. Summers, The Law of Oil and Gas § 4, at 4â17 (West 1954). Hydrocarbons reside within porous formations or reservoirs of rock under immense pressure from the overlaying earth. 2 Smith & Weaver, Texas Law of Oil and Gas § 8.2[A], at 8-16.8; 1 Summers, The Law of Oil and Gas § 4, at 10. When the porous reservoir is pierced by a well, the pressure of the impermeable earth above the reservoir and internal forces from within the reservoir, such as water trapped with the hydrocarbons, push the hydrocarbons out of the formation and into the well. 2 Smith & Weaver, Texas Law of Oil and Gas § 8.2[A]â [C], at 8-16.8 â 8-22; 1 Summers, The Law of Oil and Gas § 4, at 15.
With that understanding in mind, we note ownership of the hydrocarbons does not give the mineral owner ownership of the earth surrounding those substances. Emeny v. United States, 412 F.2d 1319, 1323 (Ct. Cl. 1969) (per curiam). In Emeny, the defendant mineral lessee was obtaining production from a gas formation. 412 F.2d at 1321. The defendant injected helium gas into the reservoir, which it had brought in from outside sources, and also injected helium gas from other producers who paid the defendant to store it in the reservoir. Id. at 1321â23. The injection of helium gas was unnecessary to the production of the hydrocarbon gas.[5] Id. at 1324. The court held that the right to use a gas reservoir for the storage of helium-gas mixtures and pure helium gas produced elsewhere was vested in the surface estate owners and not in the defendant mineral owner. Id. at 1320. The court explained â[t]he surface of the leased lands and everything in such lands, except the oil and gas deposits covered by the leases, were still the property of the respective landowners.â Id. at 1323. âThis included the geological structures beneath the surface, including any such structure that might be suitable for the underground storage of âforeignâ or âextraneousâ gas produced elsewhere.â Id. That holding has been cited with approval by the Texas Supreme Court. Humble Oil & Refining Co. v. West, 508 S.W.2d 812, 815 (Tex. 1974).
Emenyâs holding also accords with the nature of the mineral estate. See Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1, 15 (Tex. 2008); Dunn-McCampbell Royalty Interest, Inc. v. Natâl Park Serv., 630 F.3d 431, 441â42 (5th Cir. 2011). As the Texas Supreme Court has explained:
While a mineral rights owner has a real interest in oil and gas in place, this right does not extend to specific oil and gas beneath the property; ownership must be considered in connection with the law of capture, which is recognized as a property right as well. The minerals owner is entitled, not to the molecules actually residing below the surface, but to a fair chance to recover the oil and gas in or under his land, or their equivalents in kind.
Coastal Oil, 268 S.W.3d at 15 (internal quotation marks and citations omitted). Relying on Coastal Oil, the Fifth Circuit has determined that âTexas law establishes that the holder of a mineral estate has the right to exploit minerals, but does not own the subsurface mass.â Dunn-McCampbell, 630 F.3d at 442; see also id. at 441 (â[T]he conveyance of mineral rights ownership does not convey the entirety of the subsurface.â).
Springer Ranch argues that relying on cases dealing with the disputes between the rights or boundaries of the surface and mineral estate owners (e.g., Emeny and Dunn-McCampbell) is improper because â[n]one of these cases concern the partiesâ identification, among competing âmineral estateâ owners, for the purpose of the payment of royalties for the actual production of oil and gas from the subsurface.â We fail to see why the meaning of âsurface estateâ should vary from one context to another. Springer Ranch also argues that treating the well as situated on the surface estate conflates surface estate and mineral estate. We note that the physical structures and subsurface substances that the surface estate and mineral estate owners possess are inherently intertwined, at least with respect to hydrocarbons. See Smith & Weaver, Texas Law of Oil and Gas § 8.2[A]â[C], at 8-16.8 â 8-22; 1 Summers, The Law of Oil and Gas § 4, at 4â17. Some conflation is unavoidable. However, if there are no minerals beneath the surface, the mineral estate owner owns the legal fiction of an estate that is nothing. Dunn-McCampbell, 630 F.3d at 441.
In light of the contractâs language, physical facts of the mineral and surface estates, and the applicable case law, we conclude that the SR2 wellââthe shaft or hole bored or sunk in the earth through which the presence of minerals may be detected and their production obtainedââis situated âonâ more than one âsurface estate, â consistent with the Matthewsâ construction. Royalties from the well therefore should be allocated between Springer Ranch and Sullivan. âwithout reference to any production unit on which such well or wells are locatedâ
The contract explicitly bars the payment of royalties on the basis that the SR2 wellâs âproduction unitâ includes acreage from both Springer Ranchâs and Sullivanâs properties. Springer Ranch complains that the trial court violated this provision by allocating royalties âbased on the productive portions of the well situated on [the parties'] properties, â arguing that the 1993 contract bars any division or allocation of the royalties between adjacent parties of the subdivided Burkholder tract. We disagree.
As noted above, the parties have offered competing interpretations of âproduction unit, â which is not a term that carries any standardized oil and gas meaning. Without choosing to apply one definition over the other, we note that this provision is at the heart of the 1993 contract in light of the surrounding circumstances. The contract was made because one of the parties questioned whether he should receive royalties from a well that, although it was on an adjacent partyâs property, was located in a production unit which included much of its acreage from his property.[6]
The contractâs recitals and the surrounding circumstances confirm that this dispute and the desire to promptly resume royalty payments was the impetus for the 1993 contract. The objective meaning of this provision was to remove a wellâs location in a production unit that included acreage from adjoining parties as a basis for one party demanding a portion of the royalties from the well. Therefore, the parties agreed to allocate royalties on the basis of a wellâs situation on a partyâs property and not on the basis of a wellâs location in a production unit comprised of adjoining partiesâ acreage.
We find it unnecessary to discuss the virtues of the partiesâ competing definitions of the term âproduction unitâ because it is clear that the courtâs judgment does not allocate royalties based on the fact that the SR2 wellâs âproduction unitâ includes acreage from both Springer Ranchâs and Sullivanâs properties.[7] That would have been prohibited under the 1993 contract. But the allocation of royalties on the basis that a well is situated on two surface estates does not contravene this provision and does carry out the intent of the earlier provision.
The Division and Allocation Formula
Springer Ranch argues that if a well may be situated on more than one surface estate, the allocation of royalties based only on the âproductive portionsâ of the SR2 well is incorrect, and that royalties should be allocated on the basis of the entire length of the well âonâ the partiesâ property and not just the productive portions. We disagree, and conclude the trial courtâs allocation was a necessary consequence of the contractâs language and was supported by the evidence before it.
The contract allocates âall royalties payable under the above described Oil and Gas Lease from any well or wells . . . .â A royalty is a fraction of the SR2 wellâs production, free of the costs of production, paid to the mineral lessor. See Heritage Res., 939 S.W.2d at 121â22. Production from a well, whether horizontal or vertical, is not obtained from the entire length of the well, but from the part of the well that pierces and drains the reservoir in which the hydrocarbons reside. See 2 Smith & Weaver, Texas Law of Oil and Gas § 8.2[A]â[C], at 8-16.8 â 8-22; 1 Summers, The Law of Oil and Gas § 4, at 15. A vertical well may produce hydrocarbons from different formations within its vertical line. See 16 Tex. Admin. Code § 3.10 (2013) (Tex. R.R. Commân, Restriction of Production of Oil and Gas from Different Strata). A horizontal well only produces hydrocarbons from the part of the well that lies within the hydrocarbon-bearing reservoir, or âcorrelative interval.â See 16 Tex. Admin. Code § 3.86(a)(1) (2013) (Tex. R.R. Commân, Horizontal Drainhole Wells). Along the horizontal displacement are takepoints through which hydrocarbons flow into the well. See Browning Oil Co. v. Luecke, 38 S.W.3d 625, 634â35 (Tex. App.âAustin 2000, pet. denied). A royalty, as a fraction of production, is only obtainable from the part of the SR2 well actually within the correlative interval. Despite Springer Ranchâs argument that the calculation should be based on the whole length of the well, it is not the whole length of the well from which production is obtained. See id.
The Matthewsâ expert measured the total distance between the SR2 wellâs first and last takepoints within the correlative interval, the distance between its first takepoint and the property line between Sullivan and Springer Ranchâs properties, and the distance between the property line and the wellâs last takepoint. The expert multiplied the one-eighth royalty provided under the 1956 lease by the ratio of the total distance between the first and last takepoints to allocate the royalties. He calculated: â[i]f the royalty were divided based on the length of open drainhole situated on each respective tract, Ms. Sullivanâs net revenue interest in the well based on the one-eighth lease royalty would be 0.08500689 (2, 615.9/3, 846.6 x 1/8) and Springer Ranchâs share would be 0.03999311 (1, 230.7/3, 846.6x 1/8).â Springer Ranch did not dispute the expertâs measurements or calculations, nor did it offer evidence of any other basis for determining how much production was obtained from the parts of the well on the partiesâ respective surface estates. Therefore, there is summary judgment evidence supporting the trial courtâs judgment allocating âall royaltiesâ payable from the SR2 well based on the âproductive portions of the well situated on [Springer Ranch's and Sullivan's] properties.â[8]
Our Construction
Having reviewed the contractâs terms, we agree with the Matthewsâ construction as it is the only plausible construction. Their construction of the word âwellâ to mean the entire length of the underground hole or shaft, comports with the legal, technical, and dictionary meaning of the term. See Valence Operating, 164 S.W.3d at 662 (We give the contractâs terms âtheir plain, ordinary, and generally accepted meanings unless the contract itself shows them to be used in a technical or different sense.â). We see no basis in light of the surrounding circumstance or the text of the contract to limit the term or conflate it with âwellhead.â The SR2 well is situated on two âsurface estates.â See Emeny, 412 F.2d at 1323; Dunn-McCampbell, 630 F.3d 431, 441â42 (citing Coastal Oil, 268 S.W.3d at 15). Therefore, the royalties must be allocated on the basis that the productive portions of the SR2 well are situated on both Springer Ranchâs and Sullivanâs properties. But no royalties may be allocated on the basis that the production unit within which the SR2 well is located includes acreage from both Springer Ranchâs and Sullivanâs properties.
Springer Ranch argues the partiesâ past practice and history support its construction and point to evidence showing the royalties from previous wells located in production units with acreage from adjacent parties were allocated only to one party. See Trinity Universal Ins. Co. v. Ponsford Bros., 423 S.W.2d 571, 575 (Tex. 1968). We disagree. Springer Ranchâs argument presupposes that its construction was the correct one, but both Springer Ranchâs and the Matthewsâ constructions were consistent with the past twenty years of vertical well drilling. In addition, we have explained that the Matthewsâ construction does not allocate royalties on the basis of combined production unit acreage.
Springer Ranch also argues that the Matthewsâ construction improperly incorporates horizontal well concepts that were not contemplated at the time the parties entered into the 1993 contract and that the failure of the parties to anticipate a change in technology does not justify rewriting the contract in favor of the Matthews. See Marcus Cable Assocs. v. Krohn, 90 S.W.3d 697, 703â06 (Tex. 2002) (holding contractual easement for âelectric transmission or distribution line or systemâ could not be construed in light of technological advances to permit installation of cable television lines). We have not altered the meanings of âwell, â â on, â â surface estate, â â production unit, â or â royaltiesâ to accommodate a change in technology. Cf. id. The intent of the parties was to allocate royalties from âwellsâ without respect to âproduction units, â regardless of whether the parties contemplated the differences between vertical and horizontal wells. Cf. Browning Oil, 38 S.W.3d at 640 (â The intent of the parties was to authorize pooling, but to prevent the dilution of the Lueckesâ royalties, whether the royalties represented production from vertical wells or horizontal wells.â). We have integrated horizontal-well concepts into our construction of the word âroyaltiesâ because, unlike a vertical well, the SR2 well crosses the surface estate of more than one party and obtains royalties from takepoints along its entire length within the correlative interval. Cf. id. at 642â46 (holding jury charge on damages was erroneous because the remedy for breach of anti-dilution provisions must be based on the facts of horizontal-well drilling). We find Springer Ranchâs complaint unpersuasive.
Another rule of contract construction supports our holding. The Texas Supreme Court has stated that a court should construe contracts ââfrom a utilitarian standpoint bearing in mind the particular business activity sought to be servedââ and ââavoid when possible and proper a construction which is unreasonable, inequitable, and oppressive.ââ Frost Nat. Bank, 165 S.W.3d at 312 (quoting Reilly, 727 S.W.2d at 530). In Frost, the Court held the court of appealsâs construction of an equipment-lease agreement with a purchase option provision violated those precepts. Id. at 311. The lessee had attempted to exercise the purchase option and buy the equipment a little over a year into the five-year lease term, but the lessor refused, contending that the contract only allowed the lessee to purchase the equipment when the lease term ended. Id. The court of appeals construed the lease to allow the lessee to exercise its purchase right when it terminated the lease little more than a year after it began. Id. at 312.
The Court reversed and held the court of appeals committed two errors by construing the lease to permit the lessee to exercise the purchase option when it terminated the lease early. Id. At 312â13. First, the court of appeals committed error by interchanging the words terminate and expire, which were two distinct ways the lease could have ended. Id. at 313. The Court also held that
In addition, L & Fâs and the court of appealsâ construction is unreasonable, inequitable, and oppressive. Such a construction allows the lessee to terminate the lease and purchase the vehicles for the same price (twenty percent of the original invoice price) at any point during the five-year lease term with the requisite notice. At the lesseeâs discretion, then, the lessor would essentially have to forgo almost the entire rental value of the equipment and sell it almost new for twenty percent of its value, the same price it would receive for selling the equipment at the end of the lease term after collecting rent on it for sixty months. Bearing in mind that our primary goal is to ascertain the intent of the parties when they entered into the agreement, we find such a construction unreasonable. Because there is only one reasonable interpretation of the lease, we construe it as a matter of law.
Id. (internal quotation marks and citations omitted); see also Fortis Benefits v. Cantu, 234 S.W.3d 642, 650 n.54 (Tex. 2007) (declining to construe insurance policy in a way that allowed for subrogation of claims unrelated to the policy); Reilly, 727 S.W.2d at 530 (refusing to construe partnership agreement as a matter of law in a way that was âpotentially oppressive towards the limited partners . . . [and would] give the managing general partner the authority to drastically dilute the limited partnersâ [interests] so as to work a practical forfeiture.â); Shadow Dance Ranch Pâship, Ltd., v. Weiner, No. 04-03-00926-CV, 2005 WL 3295664, at *4 (Tex. App.âSan Antonio Dec. 7, 2005, no pet.) (mem. op.) (holding that appellantâs construction of partnership agreement âtaken to its logical conclusion, would allow [appellant] to ignore dissolution notices indefinitely and continue to demand capital until [appellee's] ownership interest is eliminated . . . thus produc[ing] an unjust, unreasonable, and oppressive result.â) (internal quotation marks and alterations omitted).
We find the same criticisms applicable to Springer Ranchâs proposed construction. When the 1993 contract was formed, each of the three sets of parties had two vertical wells on their respective tracts that included acreage from an adjacent partyâs property in their production units. The operator of some of those wells insisted that the parties agree on how the royalties from those wells would be allocated. To resume royalty payments, the parties agreed they would forego claims based on combined acreage within a production unit and would assign all royalties to the owner of the surface estate on which a well was situated. The intent of the parties to the 1993 contract was to bar claims for royalties based on âproduction units, â not to allow one party to directly produce hydrocarbons from within the bounds of anotherâs property. Cf. Browning Oil, 38 S.W.3d at 645 (âThe intent of the parties as evidenced by the language of these leases was to award the Lueckes royalties for one-eighth of the oil and gas produced from their land, not to provide a punitive remedy for a breach of the pooling provisions.â).
Sullivan is entitled to one-eighth of the minerals within the bounds of her property under the lease. See Japhet v. McRae, 276 S.W. 669, 670â71 (Tex. Commân App. 1925, judgmât adopted) (holding that if a property is subject to a mineral lease and is later subdivided, the owners of the subdivided tracts are only entitled to royalties obtained from wells on their tract and are not entitled to the royalties from adjoining tracts simply because they were part of the original property); Garza v. De Montalvo, 217 S.W.2d 988, 993 (Tex. 1949) (affirming Japhetâs non-apportionment rule was still Texas law); see Coastal Oil, 268 S.W.3d at 15 (âThe minerals owner is entitled . . . to âa fair chance to recover the oil and gas in or under his land, or their equivalents in kind.ââ). Over two-thirds of the SR2 wellâs horizontal length lies underneath Sullivanâs property with the remaining one-third under Springer Ranchâs property, and it is beyond cavil that the SR2 well produces hydrocarbons directly from within the bounds of Sullivanâs property. Cf. Coastal Oil, 268 S.W.3d at 14 (âThe gas produced through a deviated well does not migrate to the wellbore from anotherâs property; it is already on anotherâs property.â). Springer Ranchâs construction would have us hold that the parties intended that a party would have the right to produce and deplete the minerals directly from within another partyâs property. If we were to adopt its construction and take it to its logical conclusion, Springer Ranch would receive all of the SR2 wellâs royalties because the wellhead was on its property, even if the well obtained all of its production directly from underneath Sullivanâs tract. This is not a utilitarian construction in light of the business activity the contract pertains to and is unreasonable, inequitable, and oppressive. See Frost Nat. Bank, 165 S.W.3d at 312; Fortis Benefits, 234 S.W.3d at 650 n.54; Reilly, 727 S.W.2d at 530; Shadow Dance Ranch, 2005 WL 3295664, at *4; cf. Browning Oil, 38 S.W.3d at 647 (âThe Lueckes are entitled to the royalties for which they contracted, no more and no less.â).
Conclusion
We construe the 1993 contract as requiring royalties to be allocated on the basis of the âproductive portionsâ of the SR2 well underlying Springer Ranchâs and Sullivanâs properties. The uncontroverted and only evidence before us shows the productive portion of the SR2 well under Springer Ranchâs property is the length of the well between the first takepoint and the property line. The productive portion under Sullivanâs property is the length of the well between the property line and the last takepoint. The portion of the royalties to which Springer Ranch and Sullivan are entitled is determined by the ratio of the productive portions of the SR2 well on their respective properties to the entire length of the well, multiplied by the one-eighth lease royalty. The same proration of royalties shall apply to future horizontal wells on the partiesâ properties. We affirm the judgment of the trial court.
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