Texas Court of Appeals Rules on Production Sharing Agreement

Earlier this year, the Corpus Christi Court of Appeals was called on to interpret the rights provided by a production sharing agreement. A production sharing agreement is an agreement between an oil company-lessee and the lessor mineral owners setting out how a horizontal well’s production will be allocated to the various mineral owners. In Hamilton v. Conoco Phillips, the Plaintiff and Defendant had signed a production sharing agreement.

The production sharing agreement contained the following language:

5. Surface Use, To the extent Owner may own any interest in the surface estate within the Lease, Owner giants Burlington easements (including subsurface easements) and rights-of-way (including all reasonable ingress and egress rights) on, in, and under the Leases associated with any Sharing Well, including easements and rights-of-way for:

a. drillings deepening, reworking, replacing, recompleting, maintaining, or conducting operations in the search or production of oil or gas associated with any and all Sharing Wells;

b. laying, maintaining, and replacing pipelines and roads;

c. gathering, storing, transporting, and treating hydrocarbons; and

d. constructing and maintaining production facilities and infrastructure associated with or convenient for the operation of any Sharing Well, SUBJECT HOWEVER TO THE FOLLOWING LIMITATIONS, TERMS AND PROVISIONS;

i. All above ground surface use and surface operations described herein shall be conducted in accordance with and governed and limited by the existing terms and provisions of the Lease described in Exhibit A dealing with surface use and payment for the use and damages set forth therein.

The Plaintiff asserted that because of paragraph i, the Court had to look to the lease between Plaintiff and Defendant, and the lease prohibited horizontal wells without a new and independent agreement between the parties. The Court disagreed and said this was a circular argument and would render the rest of Paragraph 5 meaningless. The Court held that by signing the production sharing agreement, the Plaintiff had clearly consented to a horizontal well.

Production sharing agreements are becoming more common as the drilling of horizontal wells becomes more common. A production sharing agreement is a complex document and should be reviewed by an oil and gas attorney before you sign it, especially to ensure that the agreement’s allocation of production to the various mineral owners is fair.