At least that’s what the court of appeals in Trans-Western Petroleum, Inc. v. United States Gypsum Co. (Case Nos. 08-4120 & 08-4121) recently found. In that case, Wolverine Gas & Oil Corp. had acquired a lease on certain properties in Utah containing a unitization provision that read:
In connection with operations for the production of oil and gas or either of them, Lessee may at any time or times pool or unitize this lease . . . with other lands and leases in the same area or field so as to constitute a unit or units whenever, in Lessee’s judgment, necessary or advisable to comply with a law, rule, order or regulation of a governmental authority having jurisdiction, . . . by filing for record an instrument so declaring subject to the following: . . . (b) Units formed . . . shall allocate to the portion of this lease included in any such unit a fractional part of production from any part of such unit on one of the following bases: (i) the ratio between the quantity of recoverable production allocable to the portion of this lease included in such unit and the total of all recoverable production allocable to such unit; or (ii) such other basis as may be approved by the governmental authority having jurisdiction thereof. (Emphasis added.)
The Bureau of Land Management (BLM) approved the creation of a "Wolverine Unit" that included lands under Wolverine’s lease and U.S. government land. It also approved a unit agreement that allocated production on the following basis:
All unitized substances produced from a participating area established under this agreement . . . shall be deemed to be produced equally on an acreage basis from the several tracts of unitized land and unleased Federal land, if any, included in the participating area established for such production. Each such tract shall have allocated to it such percentage of said production as the number of acres of such tract included in said participating area bears to the total acres of unitized land and unleased Federal land, if any, included in said participating area.
Trans-Western challenged Wolverine’s lease, asserting that it had expired by its terms – making a lease acquired by Trans-Western for the same lands valid and effective. The district court held that the Wolverine lease required that Wolverine be allocated a fractional share of production from any part of the Wolverine Unit, and that because the unit agreement failed to so require, the lease terminated by its very terms upon the conclusion of its primary term. The court of appeals agreed.
Wolverine tried to save the lease by arguing that the lease also deferred to the BLM’s determination on how to allocate production – as the "governmental authority having jurisdiction." The court of appeals was unpersuaded, finding that the "deference concerns the choice of the basis used to allocate to the lease ‘a fractional part of production from any part of [the] unit.’ An intent to defer to a governmental approval of any method of allocation–such as the one here that fails to allocate to Wolverine’s lease a fractional part of production from participating areas of which it is not a part–is absent from Paragraph 9." (Emphasis added.)
The lesson: If the parties intend a catch-all provision to supersede more specific production allocation terms (which is not unreasonable under the regulatory circumstances), they should do so expressly.