In Williams O & G Resources, LLC v. Diamondback Energy, Inc., a federal magistrate judge concluded that the Texas Relinquishment Act does not apply to public-school lands patented after 1931. The report and recommendation was adopted by the district court.
The facts
Williams’ predecessor-in-interest acquired a tract of public land from the State of Texas in 1948 reserving a 1/16th royalty to the State. Diamondback ultimately acquired rights to the Bone Springs annd wolf camp formations under a 1957 lease. In 2017 the parties entered into a Surface Use Agreement covering various operational matters, including water purchases for hydraulic fracturing.
Williams sued Diamondback alleging duties to drill offset wells or pay compensatory damages under the Texas Relinquishment Act, breach of the implied covenant to manage and administer the lease, and breach of the SUA’s water provisions.
Relinquishment Act or Land Sales Act?
The Relinquishment Act of 1919 applies to permanent school fund lands sold by the State and reserves to the State 1/16th of the minerals (other than sulfur) designating the landowner as the State’s leasing agent for minerals. The Act and compelled operators to drill offset wells (or pay compensatory royalties) when a well on a neighboring tract is drilled within 1,000 feet.
Sales under the Land Sales Act of 1931 conveyed 15/16ths of the minerals to patentees and left the State 1/16th of the minerals.
Tracing legislative history (see pp 3-6), the court concluded that post‑1931 land conveyances are governed by the Land Sales Act, not the Relinquishment Act. Because the tract was patented in 1948, Diamondback was not subject to any duty under the Relinquishment Act. The court dismissed both the offset-well and compensatory-royalty counts.
Pooling allegations run dry
Williams claimed Diamondback breached an implied covenant to pool. Texas law’s implied covenants to develop, protect against drainage, and manage leases as a reasonably prudent operator arise only where necessary to effectuate the lease and never override express terms. A lessee has no power to pool absent express authority. The Williams Lease permits pooling for gas but is silent on pooling for oil. Moreover, Williams offered no evidence of actual drainage and supplied no information about either the costs of pooling or the profits that such pooling might reasonably yield. The court declined to graft an implied covenant onto a lease that already addresses the subject and found Williams’ pleadings deficient on drainage facts. The pooling claim was dismissed.
Water clause: “and/or” and other ambiguities
Finally, Williams asserted Diamondback violated the SUA by purchasing frac-water from off-lease sources even though surface water was available on the premises.
The SUA obligates Diamondback to buy from Williams all water for wells on the leased premises “and/or other lands” when Lessor can supply it and relieves Lessee only if Lessor lacks sufficient water and expressly excludes water for wells “drilled from the Drillsite Location to other lands.”
The court flagged several ambiguities in the SUA. For example,
- “other lands” could refer narrowly to tracts horizontally drilled from the leased premises or broadly to any property.
- “and/or” introduced two possible interpretations (Courts have long noted that the term “and/or” can be ambiguous. Think it through before using it).
- There was an apparent contradiction between the first and last sentence of a provision that required extraneous evidence of the parties’ intent.
The magistrate judge recommended denying Diamondback’s motion to dismiss that claim. The district court approved.
A musical interlude for your Memorial Day.
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