EnerQuest Oil & Gas, LLC v. Plains Exploration & Production Co.

EnerQuest Oil & Gas, LLC (EnerQuest) (plaintiff) acquired mineral leases from mineral owners (defendants). The leases had two-year primary terms and could be maintained as long as minerals covered under the leases were being produced in paying quantities. The leases contained a royalty provision providing that if the wells were still capable of producing minerals but were shut in (i.e., temporarily closed), or if paid production had not occurred for a consecutive 90-day period, EnerQuest could pay shut-in royalties on or before the end of the 90-day period to keep the leases in effect. The royalty provisions also provided that if the leases were “otherwise being maintained by the payment of [delay] rentals,” no shut-in royalty would be due until 90 days after the end of the lease term. The royalty provision’s mention of delay rentals (i.e., periodic payments to postpone oil-and-gas exploration during the primary lease term) was apparently inadvertent because the leases otherwise contained only a few scattered references to rentals and no drilling or delay-rental clauses. EnerQuest purportedly prepaid all delay rentals for the two-year term when the leases were executed. However, the leases did not state that EnerQuest had prepaid any delay rentals. Instead, the top right corner of each page contained the notation “Paid Up,” which EnerQuest contended was an industry term reflecting delay-rental prepayment. EnerQuest never produced minerals under the leases during the primary term, and the mineral owners notified EnerQuest that the leases had terminated. EnerQuest paid shut-in royalties a few days later, asserting that the delay-rental prepayment gave EnerQuest an additional 90 days after the rental period ended to tender the royalties. However, the mineral owners proceeded to sign new mineral leases with someone else. Plains Exploration & Production Company (PXP) and EOG Resources, Inc. (EOG) (defendants) subsequently obtained the new leases. EnerQuest sued PXP, EOG, and the mineral owners for breach of lease and trespass. During discovery, an EOG employee testified that paid-up leases are leases under which the lessee pays a bonus (i.e., a payment in addition to royalties and rent to incentivize the lessor to sign the lease), not rentals, to hold the lease during the primary term. The parties cross-moved for summary judgment.