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Texas Supreme Court Rules for Baker Botts Client in Horizontal Drilling Lease Interpretation

HOUSTON, June 5, 2018 – Baker Botts L.L.P., a leading international law firm, received a significant win on Friday, June 1, 2018, when the Texas Supreme Court ruled 5-4 in favor of firm client Murphy Exploration & Production—USA in an ongoing case over the proper interpretation of an offset well clause in the context of horizontal drilling.  

The Court’s 5-4 opinion turned on a key distinction between horizontal drilling in tight shale formations where there is little to no drainage, and vertical drilling in more traditional reservoirs where migrating hydrocarbons lead to drainage.

“We are very pleased with the outcome for our client and that the Texas Supreme Court agreed with Murphy’s interpretation and application of the lease provision,” said Jason Newman, lead Baker Botts partner for the case. “The Court’s opinion is a notable victory as the Court recognized important differences in horizontal drilling in deciding that Murphy drilled in the appropriate location on the lease.”

Baker Botts has been representing the client in the ongoing litigation challenging the plain language of the initial lease provision as it pertains to an alleged distance requirement of the offset well from the triggering well.  

“The Texas Supreme Court compared Murphy’s interpretation with that of the lower court and the opposing party, and determined that Murphy’s interpretation of the lease clause was the only reasonable one,” said Baker Botts appellate partner Macey Reasoner Stokes, who argued the case before the Texas Supreme Court.  

Under the provision at issue, if a well was drilled within 467 feet of Murphy’s lease line, Murphy was required, within 180 days, to drill a well adequate to test the same formation, pay compensatory royalties as if an equivalent amount of production was obtained from an offset well on the lease, or release sufficient acreage to constitute a spacing unit as if the initial well had been drilled on the leased premise.

In siding with Murphy, the Texas Supreme Court discussed the context in which the lease was negotiated – horizontal drilling in the Eagle Ford shale. Citing prior precedent, the Texas Supreme Court recognized that the term “offset well” could describe a vertical well drilled to prevent drainage, but also noted that this provision was drafted in a different context, one where production from tight shale presented little risk of drainage.  

Baker Botts lawyers who worked on the case include: Jason Newman (Partner, Houston), Macey Reasoner Stokes (Partner, Houston), J. Mark Little (Senior Associate, Houston), Benjamin Sweet (Senior Associate, Houston), and Johnathan Havens (Associate, Houston).  

Read the full Baker Botts alert discussing the case.

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