Upon expiration of the Primary Term of this Assignment... this Assignment and all rights created hereunder shall terminate as to all lands and depths covered hereby. Said lease shall revert to Assignor, save and except that portion of said lease included within the proration or pooled unit of each well drilled under this Assignment and producing or capable of producing oil and/or gas in paying quantities. The term “proration unit,” as used herein, shall mean the area within the surface boundaries of the proration unit then established or prescribed by field rules or special order of the appropriate regulatory authority for the reservoir in which each well is completed. In the absence of such field rules or special order, each proration unit shall be deemed to be 320 acres of land in the form of a square as near as practicable surroundings [sic] a well completed as a gas well producing or capable of production in paying quantities . . .
Six wells were drilled within the primary term, with two in each section. Five of those wells were drilled in a field that provided for maximum proration units of 320 acres, and anything smaller would have been considered a fractional proration unit. The sixth well was drilled in a field that had no field rules or special orders. There were no pooled unit designations filed of record. In the Statement of Productivity of Acreage Assigned to Proration Units (Form P-15 filings), Chesapeake did not designate the full 320 acres as proration units for the wells, which would have totaled 1,920 acres for all six wells. Instead, it designated fractional proration units as to each well, which totaled 802 acres for all six wells. Because of the filings Chesapeake made, XOG argued that Chesapeake was only entitled to hold 802 acres under the leases. XOG, wanting acreage to revert to them, argued that the “retained-acreage clause was tied to the regulatory framework of the Texas Railroad Commission.” In other words, Chesapeake was only able to claim proration units that were the size they claimed with the Texas Railroad Commission on Form P-15. Therefore, according to XOG, Chesapeake retained only a total of the 802 acres that were filed as the proration units for the six wells. Chesapeake claimed the intent of the parties was “to retain the amount of acreage prescribed by the applicable field rules or, in the absence of any field rules, 320 acres per well.” Therefore, they should be entitled to retain all of the acreage under lease. The Court agreed that the “parties intended that the acreage excepted from reversion would be that acreage described by the ‘proration... unit of each well.’” They then turned to “the question of what the parties intended when they used that particular phrase.” In order to answer that question, the Court looked to the Texas Administration Code, and noted that “[g]enerally, absent an express contractual agreement providing otherwise, a proration unit is defined as ‘the acreage assigned to a well for the purpose of assigning allowables and allocating allowable production to the well’ for regulatory purposes.” Here, the parties “specifically agreed to define a proration unit to mean the area within the boundaries of a proration unit ‘established or prescribed by field rules’ or, in the absence of such field rules, 320 acres.” Therefore, “[t]o give effect to XOG's argument would mean that [the Court] would have to read into the agreement of the parties the intent to “include within” the retained acreage that acreage “designated in the Form P-15 filing as to each well.” The Court could not do this. They found that “[t]he plain language of the agreement defines a “proration unit” (and concomitantly the retained acreage) as the area prescribed by the applicable field rules, or in the absence of field rules, 320 acres—nothing more, nothing less.” The lesson for operators here is that it is the agreement (e.g. the Lease or Assignment) is what rules with respect to the acreage retained after the expiration of the primary term. What is listed as the acreage in the proration unit on the Form P-15 filed with the Texas Railroad Commission will not operate to limit or expand a Lessee’s retained acreage, unless the agreement specifically limits or expands the proration units to the acreage listed on the Form P-15. For those of us who referred to the Texas Railroad Commission’s listing of proration unit size as the acreage held by a producing well under a lease, rather than review the lease language or check the County records for a Designation of Pooled Unit, this is quite eye opening. If XOG appeals again, the Texas Supreme Court may weigh in, but until then, we must look to the courthouse records, and not what is filed with the Railroad Commission, to verify proration unit sizes.