Petro Pro, Ltd. v. Upland Resources, Inc.

Facts

The assignments pertain to rights in the wellbore of the King 'F' No. 2 gas well. In September 1992 and 1993, Upland (D) entered into five oil, gas, and mineral leases involving separate tracts of land. In 1993, Medallion acquired the leasehold and spud the King 'F' No. 2 well on one of the leased tracts consisting of 500 acres. The tract covered multiple gas-producing formations, including the Brown Dolomite formation, located at depths of approximately 3,400 to 3,600 feet, and the Cleveland formation, located approximately 6,500 to 6,600 feet beneath the surface. The King 'F' No. 2 well was completed as a gas well in the Cleveland formation and produced gas in paying quantities. Several months after the well was completed, Medallion pooled the 500-acre tract with 204 acres from an adjacent tract to create an irregular shaped, 704-acre gas unit. The leasehold interest in the 704-acre unit was subsequently acquired by KCS Medallion Resources (KCS) and MB Operating Co., Inc. (D). Eventually, the leasehold area situated horizontally outside the 704-acre unit and vertically below 6,800 feet was released. In 1998 KCS and MB (D) decided that the King 'F' No. 2 well was no longer economically viable. KCS and MB (D) sold their interests in the well at an auction of oil and gas properties. The winning bidder, L&R Energy (L&R), received the interests from KCS and MB (D) via two assignments on December 1, 1998. Both assignments conveyed all of Seller's right, title and interest in and to the oil and gas leases described in Exhibit 'A' attached hereto and made a part hereof ('Subject Leases') insofar and only insofar as said leases cover rights in the wellbore of the King 'F' No. 2 Well. Several years later operators in the area began drilling and completing gas wells in the shallower Brown Dolomite formation. In May 2003, Upland (D) entered the pooled gas unit and completed a horizontal gas well in the Brown Dolomite formation. The well traversed within 600 feet of the King 'F' No. 2 well. By June 2004, Upland (D) had completed two more gas wells within the 704-acre pooled gas unit. Both those wells were completed in the Brown Dolomite formation. In April 2004, L&R assigned its interest in the King 'F' No. 2 well to Petro Pro Ltd. (P). Petro (P) sent a letter to Upland (D) and KCS requesting that both parties clarify their respective interests in the pooled gas unit. They claimed that Petro (P) did not acquire any leasehold interest outside the confines of the King 'F' No. 2 wellbore. Petro (P) claimed that Ds were trespassing and had commited conversion. Petro (P) demanded that Ds vacate the leasehold and cease production from their 3 wells. ownership interests acquired by the respective parties by virtue of the assignments and an accounting of all proceeds from the sale of gas produced from Ds' three new wells. The royalty interest owners in the 704-acre pooled gas unit filed a plea of intervention seeking damages for the alleged breach of implied covenants and for tortious interference with existing contracts. Intervenors contended that Ps' lawsuit and wrongful claims of ownership prevented D from fully developing the lease and protecting the lease from drainage from adjacent wells. Ds filed a motion for summary judgment contending that Ps' rights were limited to the right to produce gas from the Cleveland formation only and the right to 'enhance' that production. Ds contend that Ps' rights were restricted to the physical confines of the King 'F' No. 2 without the right to deepen the well to other zones or horizons, or the right to perforate the wellbore casing for the purpose of producing any other zone or horizon lying between the surface and the presently producing section of the Cleveland formation. Intervenors filed a motion for partial summary judgment contending Ps had the right to produce from any formation subject to governmental regulations, which limited the horizontal extent of Ps' rights to forty acres surrounding the King 'F' No. 2 wellbore. Ps filed for summary judgment claiming they were the exclusive owners of any portion of the leasehold estate that could 'reasonably be reached and produced' through the King 'F' No. 2 wellbore. The trial court ruled that the King 'F' No. 2 wellbore assignments were unambiguous and granted Ds' motion for summary judgment. The trial court's judgment does not set forth a declaration of the interest and rights conveyed by the assignments. Ps appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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