The Oil and Gas Addendum

In Cromwell v. Anadarko E&P Onshore, LLC, 676 S.W. 3d 860 (Tex. App. 2023), the Texas Court of Appeals confirmed the automatic termination of an oil and gas lease, and simultaneously rejected the argument that a forfeiture occurred. The Cromwell decision aligns with the Pennsylvania Superior Court’s recent automatic termination decision in Douglas Equipment, Inc. v. EQT Production Company. The reinforcement of the automatic termination rule in Cromwell and in Douglas Equipment helps to form a beneficial legal framework for oil and gas owners by eliminating ambiguity about the nature and duration of drillers’ rights under oil and gas leases.

The Cromwell case presents an interesting set of facts that, like the Pennsylvania Superior Court’s Douglas Equipment decision, involved a dispute between two drillers. In Cromwell, the oil and gas property was owned by many parties who held fractional, undivided interests. A majority of the oil and gas owners leased their interests in the property to Anadarko. Cromwell at 863. In 2009, two owners of small, fractional interests, “Ferrer” and “Tantalo”, leased their oil and gas in the same property to Cromwell. Id. The Ferrer lease contained a three year primary term and the lease would remain operative beyond the primary term as long as oil and gas were produced in paying quantities. Id. at 863-64. The Tantalo lease contained a five year primary term and remained operative after the primary term as long as oil and gas were produced in paying quantities. Id. at 864.

Since Anadarko had rights to a substantial amount of oil and gas in the property at-issue by virtue of its leases with a majority of the fractional oil and gas owners, Anadarko drilled several wells on the property, even before Cromwell took its leases from Ferrer and Tantalo (the “Cromwell Leases”). In 2009, Anadarko’s 75-26-1 well (the “Subject Well”) began to produce hydrocarbons from the land at-issue. After Cromwell acquired the Cromwell Leases, he asked Anadarko to enter into a joint operating agreement for existing wells and any new wells on the property. Anadarko never responded and the parties never entered into such agreement. Id. at 864. That wound up being a critical detail.

Cromwell never developed any wells, but Anadarko sent invoice summaries to Cromwell that reflected Cromwell’s expenses for operating the Subject Well, as well as an authorization for expenditure related to a compressor for the Subject Well. Id, at 864-65. Anadarko charged Cromwell for Cromwell’s share of costs to operate the Subject Well and Cromwell also contributed capital to the compressor for the Subject Well. Id. Even after the Cromwell Leases’ primary terms ended, Anadarko transmitted notices to Cromwell referring to Cromwell as an “owner” and Anadarko’s records identified one of the Cromwell Leases as being “held by production.” Id. at 865.

In 2017, Anadarko took new leases from Ferrer and Tantalo for the oil and gas interests that they had leased to Cromwell in 2009 (the “Anadarko Leases”). In 2018, Cromwell wrote to Anadarko seeking information about a well on the property where Cromwell believed it held rights under the Cromwell Leases. But, in response, Anadarko stated that the Cromwell Leases had expired and that the Ferrer and Tantalo interests in the land were now subject to the Anadarko Leases. Id. This news surprised Cromwell, who then sued Anadarko. In his suit, Cromwell sought a declaratory judgment, sought a determination about the validity of the Cromwell Leases, damages for payments allegedly due under the Cromwell Leases, and claims that Anadarko breached its duties to Cromwell under a partnership between them. Id.

Even though wells, including the Subject Well, produced oil and gas from the subject property during the Cromwell Leases’ primary terms, the trial court ruled in favor of Anadarko and against Cromwell, and the appellate court affirmed. The operative question was whether Cromwell’s financial contributions to Anadarko’s operations satisfied the Cromwell Leases’ habendum provisions since Cromwell did not drill his own wells. The courts ruled that they did not.

The Texas appellate court framed its inquiry stating that “[b]ecause a mineral lease grants fee simple determinable to the lessee, the lessee's mineral estate may continue indefinitely, so long as he uses the land for its intended purpose. However, the lessee's mineral estate terminates automatically if the event upon which it is limited occurs.” Id. at 867 (internal citation omitted). Anadarko argued that Cromwell never drilled or produced oil and gas, so the Cromwell Leases automatically terminated at the end of their primary terms. Cromwell argued that his financial contributions to Anadarko’s production operations were sufficient to maintain the Cromwell Leases in operation and that “Anadarko's position that his leases automatically terminated is contrary to the rule against surprise forfeitures.” Id. at 870.

The Cromwell court relied on its precedent to resolve the question about whether Cromwell’s participation with the Subject Well was sufficient to maintain the Cromwell Leases in effect. In Cimarex Energy Co. v. Anadarko Petroleum Corp., 574 S.W.3d 73 (Tex. Ct. App. 2019), the Texas Court of Appeals concluded that an oil and gas lease terminated, even though that lessee paid operational costs associated with another driller’s wells, because the lessee in question had not drilled its own wells or contributed capital to the other driller to engage in drilling and production. The Cromwell court found Cimarex to be applicable in this case and rejected Cromwell’s contentions that his “constructive participation” in Antero’s operations was sufficient to maintain the Cromwell Leases beyond their primary terms.

While acknowledging that Cromwell paid costs associated with Antero’s wells while they were in operation, the Cromwell court reasoned that this “reflect[s] his proportionate share of a producing well's operating expenses ordinarily owed by a nonparticipating cotenant.”Id. at 873. The court continued that “[t]hese costs are not indicative of the parties’ intent that Cromwell “shouldered any risk or liabilities inherent in the operation” of the [Subject Well].” Id. The Cromwell court concluded that “[j]ust as we did not convert Cimarex's payments for repair costs and equipment replacements to “constructive production” that would perpetuate its lease, we decline to do the same here.” Id.

The Cromwell court concluded that “[b]ecause Cromwell did not cause production of oil or gas on the leased land, his leases terminated at the end of the primary term.” Id. at 874. Importantly, the Cromwell court continued that “. . . because the habendum clause in the leases is a special limitation, Cromwell's forfeiture argument is inapplicable, as special limitations do not result in forfeitures.” Id.

Although the Cromwell decision is based on Texas law, the reasoning is easily transportable to Pennsylvania and reinforces the logic contained in the Pennsylvania Superior Court’s Douglas Equipment decision. The nature of an oil and gas lease means that it automatically terminates if the provisions of the lease are not satisfied after the primary term ends. Due to the automatic termination of an oil and gas lease, there can be no such thing as the “surprise forfeiture” that was complained-of in the Cromwell case. The parties’ actions suggesting that a lease may be in effect are not relevant to the duration of the lease. What matters is whether the lessee satisfied its obligations in the lease.

Pennsylvania oil and gas owners should be aware of the provisions in their oil and gas leases that identify when the primary term ends and what conduct is necessary to maintain the lease in effect beyond the primary term. If you believe that your oil and gas lease may have terminated, contact Brendan O’Donnell at 412-288-2226 or odonnellba@hh-law.com