To Offset or Not to Offset: Murphy and the Meaning of “Offset Well” in Horizontal Shale Drilling

Toward the end of the 2017 – 2018 term, the Texas Supreme Court issued a 5-4 split opinion in Murphy Exploration & Production Co.—USA v. Adams interpreting the phrase “offset well” in a 2009 oil and gas lease.[1]  In doing so, the Court indicated that the common meaning and industry usage of “offset well” as a well protecting against drainage may be obsolete in the context of horizontal, tight-shale wells.   In Murphy, a well drilled on an adjacent tract triggered a lease provision requiring an offset well on the leased premises.[2]  Murphy, the lessee, drilled a well 1,800 feet from the pertinent lease line of the triggering well.[3]  At issue was whether this well satisfied the offset-well provision, “despite the absence of a significant possibility that drainage was in fact occurring” due to the nature of the tight Eagle Ford Shale formation.[4]  The Herbsts, as lessors, argued that the common meaning and industry usage of the term “offset” requires the offset well to be close enough to the lease boundary to protect against drainage.[5]  In contrast, Murphy argued that the clause was satisfied because the lease’s explicit language required only that the offset well is drilled on the leased premises to the same depth as the triggering well and does not impose a proximity to the triggering well requirement.[6]  The trial court agreed with Murphy; the court of appeals agreed with the Herbsts.[7] The Court held that Murphy complied with the offset provision as a matter of law.[8] The Court concluded that although it may be reasonable in the context of vertical drilling to interpret “offset well” as necessarily protecting against drainage and imposing a proximity requirement, the same principle does not apply in the context of horizontal drilling in the Eagle Ford Shale.[9]  Thus, the use of the word “offset” in the lease does not imply any additional requirements to satisfy the offset provision besides satisfying the express lease requirement of drilling a well on the lease premises with due diligence to the specified depth.[10]  Given its reliance on the surrounding circumstances, the Court limited its holding “to the circumstances at hand, which involve unconventional production in tight shale formations,” and explicitly “express[ed] no opinion as to the proper interpretation of similar clauses outside this context.”[11] In an extensive dissent joined by three other Justices,[12] Justice Johnson concluded the Court’s interpretation would read “offset” out of the lease.[13]  For “offset” to have any meaning, according to the dissent, the well must be drilled “[i]n a location that a reasonably prudent operator would consider sufficient to protect from potential drainage.”[14]  Thus, the use of the term “offset” imposes a proximity requirement for drilling, even if there is no actual drainage, which is consistent both with the common meaning of the term and the long-standing industry usage of the term “as a well located and drilled to protect against drainage.”[15]  Accordingly, the dissent would “reject Murphy’s attempt to ascribe either a new meaning or none at all to offset in the Lease[].”[16]Nathan PalmerThompson & Knight LLP [1] No. 16-0505, 2018 WL 2449313 (Tex. June 1, 2018).[2] The clause at issue provided: “It is hereby specifically agreed and stipulated that in the event a well is completed as a producer of oil and/or gas on land adjacent and contiguous to the leased premises, and within 467 feet of the premises covered by this lease, that Lessee herein is hereby obligated to . . . commence drilling operations on the leased acreage and thereafter continue the drilling of such off-set well or wells with due diligence to a depth adequate to test the same formation from which the well or wells are producing from on the adjacent acreage.” Id. at *1.[3]Id.[4]Id. at *6.[5]Id. at *2.[6]Id.[7]Id.[8]Id. at *4. [9]Id. at *5.[10]Id. at *6.[11]Id. at *7.[12] Justice Johnson authored the dissent, joined by Justice Green, Justice Guzman, and Justice Boyd.  The dissent is more than twice as long as the majority opinion. [13]Id. at *11.[14]Id. at *12.[15]Id. at *13–14.[16]Id. at *18.