It is hereby specifically agreed and stipulated that in the event a well is completed as a producer of oil and/or gas on land adjacent and contiguous to the leased premises, and within 467 feet of the premises covered by this lease, that Lessee herein is hereby obligated to, within 120 days after the completion date of the well or wells on the adjacent acreage, as follows: (1) to commence drilling operations on the leased acreage and thereafter continue the drilling of such off-set well or wells with due diligence to a depth adequate to test the same formation from which the well or wells are producing from on the adjacent acreage; or (2) pay the Lessor royalties as provided for in this lease as if an equivalent amount of production of oil and/or gas were being obtained from the off-set location on these leased premises as that which is being produced from the adjacent well or wells; or (3) release an amount of acreage sufficient to constitute a spacing unit equivalent in size to the spacing unit that would be allocated under this lease to such well or wells on the adjacent lands, as to the zones or strata producing in such adjacent well.
Of course, a horizontal well (the Lucas “A” #1H) was drilled by a third party, parallel to the Adams’ tract, within 467 feet of the lease line. In order to comply with the offset well requirement, Murphy drilled the Herbst Unit “B” #1H well. The Herbst well ran “parallel to the Lucas well and bottom[ed] in the same formation—but the two wells [were] separated laterally by approximately 2,100 feet.” Adams claimed this was not an offset well, while Murphy said it was under the terms of the lease. At the trial court, both parties moved for summary judgment, arguing that the trial court could determine whether “the Herbst well was an offset well under the lease.” Adams “argued Murphy breached the lease because the offset well clause expressly required Murphy to drill an offset well—a well that actually prevents drainage. [They] asserted that ‘[u]nder the plain, ordinary meaning of the [offset clause],’ any offset well must be drilled ‘as close as reasonably possible to the [Lucas well] so that it can truly ‘offset’ or ‘counterbalance’ the [Lucas] well.’ They also asserted that under the commonly understood meaning of offset well, the Herbst well did not meet the offset clause requirements.” Murphy claimed that the lease “did not require an offset well to be drilled at a particular location or within any specific distance from a triggering well.” The trial court sided with Murphy, holding that the well satisfied the offset well provision in the lease. Adams appealed. On appeal, the Court acknowledged that they “must give meaning and effect to all the lease’s words, including the offset clause’s express requirement that a well drilled to satisfy its provisions must be an offset well.” They further noted that “[i]f the term offset well has a commonly understood meaning in the oil and gas industry, [they would] apply its commonly understood meaning.” The Court looked to the definition of off-set well in a treatise, which provided that it is “[a] well drilled on one tract of land to prevent the drainage of oil or gas to an adjoining tract of land, on which a well is being drilled or is already in production.” The Court also looked to precedent, and found that the “Texas Supreme Court has recognized the concept that an offset well is one used ‘to offset drainage from [the owner’s] property.’” They further looked to the evidence, and determined that Murphy failed to prove that the Herbst well, drilled so far away from the Lucas well, protected the Adams’ from drainage by the Lucas well. Therefore, the Appellate Court reversed the trial court’s holding, and remanded the case for further proceedings. I will be interested to see whether Murphy appeals this decision to the Texas Supreme Court, and whether said Court will accept the petition for review. In the meantime, operators must continue to be diligent in following the terms of the lease, but be warned! Commonly understood meanings of words (such as “off-set well”) could add an additional burden to ensure actions taken truly do comply with lease terms.