By Sarah Steward-Lindsey
On November 21, 2008, the Supreme Court of Texas decided that a mineral owner’s participation in a validly pooled unit did not cease simply because the lease of that interest terminated. Because the unit continued, it was proper to account for production and costs on a unit-wide basis, and because termination of the lease did not necessarily extinguish the equitable right of reimbursement for improvements on the premises, the Court remanded for a determination of whether there were any “facts not appearing in the record” that would justify denying the operator the right to recoup drilling costs incurred before the lease terminated. The Texas Supreme Court decided the case on contract construction grounds, deeming the unit to be a pooling of lands under the terms of the agreement, not just leases. While lease terminations are unusual once production occurs (the lease at issue terminated by its own terms for failure to pay royalty within 120 days of first production), the decision is important because of the Court’s construction of the pooling clause that appears in many Texas oil and gas leases.