Recently, in ConocoPhillips Company v. Vaquillas Unproven Minerals, Ltd., the Fourth Court of Appeals in San Antonio released a memorandum opinion in yet another “retained acreage” case. As the Court noted, “[a] retained acreage clause in an oil and gas lease authorizes the lessee to retain acreage around a producing well in the event of a forfeiture of the lease.” Here, the Court ultimately held that ConocoPhillips must release 15,351 acres to Vaquillas.

The facts of the case are as follows: ConocoPhillips and Vaquillas are parties to two oil and gas leases, one for a 26,622.79-acre tract of land, and the other for a 6,740-acre tract of land. ConocoPhillips ceased drilling in June, 2012. The retained acreage clause in both leases stated that:

[…] Lessee covenants and agrees to execute and deliver to Lessor a written release of any and all portions of this lease which have not been drilled to a density of at least 40 acres for each producing oil well and 640 acres for each producing or shut-in gas well, except that in case any rule adopted by the Railroad Commission of Texas or other regulating authority for any field on this lease provides for a spacing or proration establishing different units of acreage per well, then such established different units shall be held under this lease by such production, in lieu of the 40 and 640-acre units above mentioned […]

ConocoPhillips had previously released all of the acreage except the 640 acres surrounding each gas well. Vaquillas argued that the Texas Railroad Commission had adopted rules that overrode the provision in the lease, and demanded that ConocoPhillips release more acreage. ConocPhillips claimed that The RRC did not adopt a rule that prescribed a certain number of acres per well.

A special spacing rule was adopted, however. The Court noted that although the spacing requirement in the applicable rule did not “expressly set forth a number of acres per well, Rule 38 of the statewide rules contains the standard drilling unit for a gas field ‘wherein only spacing rules, either special, country regular, or statewide, are applicable.’ […] The rule then contains a chart providing that if the spacing rule is 467-1200, like the one here, the acreage requirement is 40 acres per well for both oil and gas wells. […] Therefore, Rule 38 establishes the standard acreage for a well when a field rule only provides for spacing. Because this standard acreage is “different” from the initial acreage set forth in the retained acreage clause, the standard acreage controls the number of acres ConocoPhillips was entitled to retain under the leases.”

Because the acreage provided for under Rule 38 was different from the acreage provided for in the lease, the acreage set forth in Rule 38 prevailed, under the terms of the lease, and it was determined that only the standard 40 acre unit per well was allowed to be retained by ConocoPhillips.