## Facts

- Community Bank of Raymore (CBR), acting for a trust, leased oil and gas rights covering approximately 16,000 acres in Loving County, Texas, to Chesapeake Exploration, L.L.C.; Anadarko Petroleum Corporation held a working interest with Chesapeake.
- The lease divided the acreage into four blocks; the dispute concerned Block Two.
- During the primary term (ending January 26, 2010), Chesapeake drilled and completed 13 producing wells on Block Two.
- At the primary-term expiration, the deepest producing formation on Block Two had a base at 5,672 feet.
- After January 26, 2010, CBR demanded a release of Block Two rights as to formations below 5,672 feet, relying on a horizontal termination (horizontal Pugh) clause and a severance clause.
- Chesapeake refused, asserting the lease continued in effect because production and a contractual continuous-development program extended the lease beyond the primary term.
- CBR sued for declaratory relief and breach of contract, seeking a ruling that deep rights terminated at the end of the primary term.
- The trial court entered a take-nothing judgment for Chesapeake and Anadarko; CBR appealed.

## Issues

1. Whether the lease’s horizontal termination (horizontal Pugh) clause required termination of rights in formations below the specified depth at the expiration of the primary term, even though continuous-development operations were ongoing.
2. Whether the lease’s severance clause created separate leases by unit at the end of the primary term, causing the horizontal termination clause to operate on a unit-by-unit basis and sever deep rights in Block Two.

## Decision

- The court of appeals affirmed the take-nothing judgment for Chesapeake and Anadarko.
- The court held the horizontal termination clause did not cut off deep rights at the end of the primary term because the lease was being maintained and extended by production and compliance with the continuous-development program; the continuous-development program had not “concluded.”
- The court rejected CBR’s reading that “at the expiration of the Primary Term or the conclusion of the continuous development program” mandated automatic depth severance at primary-term expiration regardless of ongoing continuous development.
- The court held the severance clause did not convert the lease into multiple separate leases that independently triggered the horizontal termination clause while continuous development continued.
- Chesapeake and Anadarko retained rights to develop formations deeper than the then-producing interval in Block Two so long as they complied with the lease’s continuous-development requirements.

## Legal Principles

- Oil and gas leases are construed as a whole to give effect to all provisions and avoid interpretations that render contractual terms ineffective.
- In a horizontal Pugh clause stating termination occurs at “the expiration of the Primary Term or the conclusion of the continuous development program,” the disjunctive “or” identifies alternative triggering events; the depth-limitation does not apply when the lease is extended by an ongoing continuous-development program that has not concluded.
- Courts will avoid constructions that defeat an express continuous-development scheme by imposing an automatic partial termination not supported by the lease text when read in context.
- A severance clause will not be construed to create separate leases or unit-by-unit termination absent clear language overcoming the lease’s unified term and continuous-development provisions.

## Conclusion

The court affirmed that the lease’s horizontal Pugh clause did not sever deep formations at primary-term expiration because continuous development continued under the lease, and the severance clause did not create separate unit leases that would trigger depth termination while the lease remained extended by ongoing operations.


Cmty. Bank of Raymore v. Chesapeake Expl., L.L.C., 416 S.W.3d 750 (Tex. App.—El Paso 2013)