Interpretation of Depth Limitation Clauses in Mineral Transfers

Ambiguous or conflicting property descriptions in conveyance instruments have been around as long as property conveyances have been made. With the radical increase in recent years of mineral production at deeper and deeper depths, the need for carefully describing what depths are being conveyed or reserved has become all the more important.  A lackadaisical attitude over such issues can lead to headaches down the line.

The Court in BRP LLC (Delaware) v. MC Louisiana Minerals LLC, 196 So.3d 37 (La. App. 2d Cir. 5/18/16) recently offered guidance on interpreting an ambiguous depth limitation clause found in a mineral transfer.  Often times when interpreting a depth limitation clause in a particular agreement, some basic knowledge of the geology of the region where the minerals at issue are located is helpful to fully understand the clause.  Further, new geologic structures capable of producing oil and/or gas can be discovered over time which may change the interpretation of such a clause or disclose an ambiguity in such a clause.

The BRP, LLC case involved a 2008 transfer of certain depths in approximately 13,000 acres from International Paper Company (“IP”) to Chesapeake Royalty, LLC and then a later transfer from IP of its remaining mineral rights to BRP, LLC.  A dispute arose between Chesapeake and BRP over which rights were conveyed to Chesapeake and which were reserved by IP.  BRP asserted that IP intended to transfer to Chesapeake its mineral rights only in the Haynesville Shale.  But Chesapeake claimed that it acquired from IP all the mineral rights below the Cotton Valley formation, thus including both the Bossier Shale and Haynesville formations.  BRP sued for a declaratory judgment that BRP owned the mineral rights in the Bossier Shale.  The Bossier Shale, according to the expert testimony presented in the case, exists between the Cotton Valley formation and the Louark Group, which in turn consists of the Haynesville and Smackover formations.  The expert testimony from geologists presented during the trial indicated that the productive portion of the Bossier Shale was the Bossier C Shale located in the middle to the lower portion of the structure.

In the Purchase and Sale Agreement between IP and Chesapeake, the mineral rights being transferred to Chesapeake were described in pertinent part as follows:

The “Assets” shall mean the following: all of Sellers’ right, title and interest in and to (a) the oil, gas and other minerals in, to and under the lands described in the attached Exhibit A, and any and all oil and gas leases covering such lands, INSOFAR AND ONLY INSOFAR as such oil, gas and other minerals are located below that depth which is the stratigraphic equivalent of the base of the Cotton Valley formation and the top of the Louark Group defined as correlative to a depth of 10,765’ in the Winchester Samuels 23 # 1 well (API # 1703124064) located in Section 23-14N-13W, DeSoto Parish, LA, and correlative to a depth of 9,298’ in the Tenneco Baker # 1 well (API # 1701320382) located in Section 12-16N-10W, Bienville Parish, LA

The ambiguity in the definition exists because the Bossier Shale is understood to exist between the Cotton Valley formation and the Louark Group. However, the description in the transfer does not recognize any formation between the Cotton Valley formation and the top of the Louark Group.  Chesapeake claimed to have known about the productive capability of the Bossier Shale at the time of the transfer while IP did not.

The lower court after hearing conflicting testimony from expert geologists on both sides and from the individuals on each side that negotiated the deal between IP and Chesapeake ruled in favor of Chesapeake. The trial court found that IP’s main intent in the depth limitation language was to reserve the Cotton Valley depths because of the shallow production it had established at those depths.  Further, the lower court noted that the correspondence between the parties during the negotiations appeared to focus on the Haynesville depths being transferred to Chesapeake.  Most importantly, the trial court found that the well depth footage markers contained in the depth limitation clause both denoted locations that were considered above the Bossier C Shale.  The well depth footage markers were given considerable weight by the trial court in the interpretation of which zones were reserved and conveyed in the transfer.

On appeal BRP argued that because the footage markers given in the description erroneously (mis)described the top of the Louark Group, the depth clause should be interpreted to convey all minerals below the lowest depth listed, which was the top of the Louark Group. The well depth footage markers given in the transfer created ambiguity because the markers denoted depths that were located within the Bossier Shale and that left several hundred feet of Bossier Shale between the well depth markers and the top of the Louark Group.  Thus, BRP contended that the only way to give effect to all depths given in the depth limitation clause was to set the depth at the deepest depth given, being the top of the Louark Group.  The effect of such an interpretation would be to reserve to the transferor not only the Cotton Valley formation, but also the Bossier Shale formation.

The appellate court rejected BRP’s position. It noted that the evidence presented at trial and the expert testimony given showed that interpretations about the location and composition of formations and groups may change over time and may be subject to disagreement by geologists.  The oil and gas industry has often handled this uncertainty by referencing specified stratigraphic markers such as the well depths rather than just by naming a particular formation.  The problem here was the instruments specified both wells depths and formation names.  Like the trial court, the appellate court found that the stratigraphic markers identified by well depths should control as the boundary line for the mineral rights conveyed.  This interpretation was supported by Chesapeake’s expert testimony, which the appellate court did not find manifestly erroneous.  Furthermore, the letter of intent executed by IP and Chesapeake clearly stated that the mineral rights being transferred fell below the Cotton Valley formation.

The lesson from this case is clear. To avoid ambiguities and competing interpretations of what depths are or are not included within a particular geologic formation, parties to a conveyance of depth-severed mineral interests should generally identify the boundary of any applicable depth severance by reference not to undefined geologic formations, but instead to specified, measured depths (for example the stratigraphic equivalent of a particular measured depth in a particular well, or a specified true vertical depth).  Where possible, avoid using just the name of a geologic formation as a boundary line—at least where the instrument does not also define for purposes of the instrument where the pertinent boundary of such formation is located.

footer image footer image footer image