In re: EP Energy E&P Company, LP considered three lease maintenance provisions in several oil and gas leases. The federal district court ruled that the leases were maintained in force after cessation of production despite creative (some would say "strained") lease interpretations by a group of lessors. In sum, the court deemed the lessors' positions to be contrary to general principles of Texas oil and gas law and concluded that such provisions are complementary, and are not to be interpreted so as to invalidate each other.
Bankruptcy issues
Facing the pandemic-related collapse of oil prices, lessee EP Energy shut in producing wells on the leases. EP drilled new wells throughout the period and resumed production from each shut-in well within 40 days.
EP filed for Chapter 11 bankruptcy. Seeking a stay from the bankruptcy court in order to pursue a state court lawsuit, the lessors claimed that EP's cessation of production after the primary term resulted in expiration of the leases and reversion of the mineral rights to the lessors. They further argued that EP's operations after termination constituted trespass.
The bankruptcy court addressed administrative claims, bankruptcy jurisdiction, and the abstention doctrine. Those issues can be significant to parties fighting in bankruptcy court but are beyond our modest purposes here.
The district court affirmed Bankruptcy Judge Marvin Isgur's holding that, rather than abstain and allow the lessors to pursue their claims in state court, the court would treat them as administrative expense claims that were ripe for adjudication.
Lease interpretation
A continuous development clause (text at p. 14 of the opinion) allowed EP, after expiration of the primary term, to maintain each lease by commencing drilling of an additional well within 120 days after abandonment of a well or completion of a new well.
A retained acreage clause (Paragraph XI(a), opinion p.15) divided each lease by providing that production from or operations on a production unit would maintain the lease in force after the primary term only as to that portion of the premises within that production unit.
As always, harmonize
The court considered the entire lease so as to give effect to all the provisions so that no one provision would be rendered meaningless.
The court rejected the lessors' asserted that the retained-acreage clause divided the lease at the end of the primary term. That interpretation would read the clause's "whichever occurs later" language out of the lease and render it meaningless. This would result in also reading the continuous development clause itself out of the lease. To the contrary, lease termination will occur only upon the latter of cessation of continuous drilling operations or expiration of the primary term.
The effect of the continuous development clause was that if EP drilled a well within 120 days after expiration of the primary term or 120 days after completion or abandonment of a prior well, EP would continue to maintain the entire lease.
The temporary cessation clause (opinion, p. 17) allowed EP to maintain the lease after cessation of production if operations were conducted or production restored within 120 days. Lessors argued that EP had to drill new wells in order to trigger the clause.
The court rejected that position. Construing that clause as lessors urged would lead to the "odd and perhaps unreasonable result" that EP would be forced to expend additional resources drilling or reworking wells while other wells capable of production were sitting idle. Such a reading would defeat the purpose of the clause and benefit neither party.
EP did not trespass on the leases because it had fulfilled its obligation to either continuously develop the leaseholds by drilling new wells or otherwise maintained the leases by resuming production within 120 days.
Other lease clauses
Leaving no jurisprudential stone unturned, the lessors also urged the court to invoke the shut-in royalty and force majeure clauses (pp.19, 20). Those arguments were also rejected.
Your Christmas interlude
*Sean is a new addition to Gray Reed's benkrupty/restructuring practice.
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