AFE Oil and Gas, L.L.C. and EXPLO Oil, Inc. v. Charles Armentrout, Susan Armentrout Girvin, Lynn A. Morris, Sally Nelms, and Birds Fort Lake, Ltd.

Citation: Not availableDocket: 02-07-00100-CV

Court: Court of Appeals of Texas; March 5, 2008; Texas; State Appellate Court

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Appellants AFE Oil and Gas, L.L.C. and Explo Oil, Inc. are appealing a judgment from the 48th District Court of Tarrant County, which ruled in favor of Appellees Charles Armentrout, Susan Armentrout Girvin, Lynn A. Morris, Sally Nelms, and Birds Fort Lake, Ltd., declaring that a mineral lease had terminated. Appellants contended that evidence was insufficient to support the jury’s finding that the well was incapable of producing gas when shut-in royalties were offered. The court upheld the jury's finding, affirming the trial court's judgment. 

The underlying facts reveal that the Appellees executed a mineral lease with AFE in 1997 for approximately 120 acres in the Barnett Shale, later executing successor leases in February 2002, including a 40-acre tract known as 'Tract A.' The well in question, Armentrout No. 2, was drilled during the 1997 lease. The lease had a primary term of one year, extending as long as operations were conducted without a cessation of more than 90 days. Operations were defined broadly to include various activities aimed at mineral production. 

An extension of the primary lease term was executed on December 16, 2002, lasting until August 1, 2003, or until production resumed. PRII began operations on July 30, 2003, with an acid perforation performed in August. However, when PRII and AFE tendered shut-in royalties in October 2003, the Appellees rejected the payments. Subsequently, the Appellees filed a lawsuit for a declaratory judgment that the leases had expired and sought to quiet title to the land. A partial summary judgment confirmed the 1997 lease had expired, but the trial focused on the 2002 lease, particularly whether the well could produce gas when the shut-in royalties were paid. The court ultimately found sufficient evidence to support the jury's conclusion.

Appellants argued that the lease was extended upon payment of shut-in royalties if the well was capable of producing gas at that time. The trial court posed a question to the jury regarding the capability of the Armentrout No. 2 Well to produce gas in October 2003, instructing that a well must not require further work or repairs to be considered capable. The jury inquired whether gas must flow for the well to be deemed "producible," to which the judge clarified that the gas must indeed be able to flow. The jury concluded that the well was not capable of producing gas, leading to a final judgment favoring Appellees.

In addressing Appellants’ first issue, they claimed the evidence was insufficient to support the jury's finding regarding the well's capability at the time of the shut-in royalties. Legal sufficiency can only be challenged under specific conditions, such as a lack of evidence or evidence that contradicts a vital fact. A well-structured gas lease typically has a primary term, after which it continues indefinitely if producing gas; otherwise, it ends automatically unless shut-in royalties are paid and the well is capable of production. The lease in question, expiring on August 1, 2003, could be extended for up to ninety days if the well was shut-in and capable of producing gas. Appellants maintained that the lease required only the capability to produce, not in paying quantities, asserting that the well was capable of production when royalties were paid.

At trial, Appellees presented evidence indicating that a gas well in the Barnett Shale required fracture stimulation (frac) to produce gas, a procedure distinct from acid perforation, and that the well in question had not undergone fracing by the end of the primary term. The jury could conclude that Appellants failed to adequately challenge this claim. Appellants relied on testimony from Sanford Dvorin, an officer of AFE, who confirmed that fracture stimulation was necessary for gas production and stated that he would need to hire a service company to perform this work after October 2003. Expert Nick Steinsberger testified that after the well was acid perforated in August 2003, it could not flow on its own, asserting that it was incapable of production without fracing, despite some gas flowing at that time, which he believed to be CO2, not natural gas. He maintained that all Barnett Shale wells require fracing for production, contradicting Appellants' assertion that it was only necessary for optimal output. Additionally, Carlos Sandoval, president of Explo Oil, indicated in a June 2004 letter that the gas purchase contract necessitated gas samples, which could not be obtained until the well was fraced, suggesting that the well was not capable of production at that time. The jury could reasonably find Appellees' evidence more credible than Appellants’. Randy Mosley, Appellants' expert, admitted he lacked measurement data for gas production when the well was shut in and had limited experience compared to Steinsberger, which further undermined the reliability of his testimony.

Steinsberger claimed extensive expertise in completion technology specific to the Barnett Shale, asserting he has authored numerous papers on the subject, enhancing his credibility as a witness. In contrast, Mosley testified without having published any articles on the same topic. The jury may have viewed Steinsberger’s testimony as more credible, influenced by Mosley’s demeanor and the court’s repeated admonitions to him for being nonresponsive during questioning. The court intervened multiple times to direct Mosley to answer questions directly, suggesting that his performance may have diminished his credibility in the eyes of the jury.

Regarding the evidence presented at trial, the court concluded that there was sufficient evidence to support the jury's finding that the well was not producing at the time it was shut in, thereby overruling the Appellants’ first issue. In addressing the Appellants’ second issue concerning factual sufficiency, the court noted that the evidence must be evaluated in totality, including both supporting and contradicting evidence. While Appellants presented testimonies suggesting the well had gas production potential in August 2003, the overall assessment allowed the jury’s verdict to stand, indicating that the evidence against the jury's findings was not overwhelming enough to warrant a new trial.

The judge informed the jury that there was no definitive analysis to confirm whether the gas in the well was CO2 or natural gas, despite the operator's testimony suggesting CO2. The well operator's daily reports indicated varying casing pressures, with a report on August 3, 2003, stating 'no gas or very little,' while subsequent reports noted that the well was flowing and recorded casing pressures of 240 lbs on August 5, 330 lbs on August 6, and 750 lbs on October 27. The jury found the evidence presented by the Appellants less credible than that of the Appellees, leading to a conclusion that supported the jury's finding. The court found that the evidence was factually sufficient to uphold the jury's decision and overruled the Appellants' arguments, affirming the trial court's judgment. The judgment was delivered by Justice Lee Ann Dauphinot with concurrence from Justices Livingston and Walker on March 6, 2008.

In Garcia v. King, the Texas Supreme Court held that a lease term of ten years and continuation as long as minerals are produced implies that "produced" refers to production in paying quantities. Further, the case of Reid established that drilling or reworking operations can maintain a lease if conducted in good faith, with due diligence, and without interruptions exceeding sixty consecutive days. Ridge Oil Co. Inc. elaborated on what operations qualify to keep a lease active. The definition of 'McF' as one thousand cubic feet of natural gas is provided by the Railroad Commission of Texas. In Turner v. KTRK Television, the court emphasized that credibility determinations are for the trier of fact, placing the burden on the jury to assess competing expert testimonies. Other cited cases reinforce these principles, ensuring a comprehensive understanding of lease terms and operational standards in oil and gas law.