## Facts

- Jane Turner Sheppard owned a 1/8 mineral interest in a 62.72-acre tract in Upshur County, Texas, and leased it to C.W. Resources, Inc. (CWRI).
- The lease contained (1) a pooling clause authorizing pooling with adjacent tracts and (2) an addendum providing that if royalties were not paid within 120 days after first gas sales, the lease would terminate the following month.
- CWRI and Wagner & Brown (and other lessees) executed a September 1, 1996 unit agreement pooling the Sheppard tract with eight other tracts to form the W.M. Landers Gas Unit; unit proceeds and costs were allocated among tracts by acreage.
- A gas well on the unit was completed and began producing in October 1996, and a second well was completed in September 1997; both wells were located on the Sheppard tract.
- Sheppard was not paid royalties within 120 days after first gas sales, triggering the lease’s special termination clause.
- After Wagner & Brown became operator in September 2000, it discovered the nonpayment, offered a new lease, and Sheppard asserted her prior lease had terminated and that production thereafter was without a valid lease.
- Sheppard sought to treat herself as unleased and to receive production benefits without bearing drilling and operating costs incurred while the lease was in effect.

## Issues

1. Whether termination of Sheppard’s lease automatically removed her mineral interest from the pooled unit created by the unit agreement.
2. Whether lease termination barred the operator and working-interest owners from recovering, from Sheppard’s share of production, drilling and operating costs incurred before termination that benefitted her interest.

## Decision

- The Supreme Court of Texas reversed the court of appeals and remanded.
- Lease termination did not, by itself, dissolve the pooled unit or remove Sheppard’s interest from the unit because the unit agreement’s continuation was not conditioned on continuation of all underlying leases.
- Lease termination did not necessarily extinguish the operator’s equitable right to reimbursement for improvement costs that benefitted Sheppard’s interest; the proper accounting of costs and revenues required further proceedings.

## Legal Principles

- A pooling/unit agreement may continue according to its own terms even if an underlying lease within the unit later terminates; expiration of one lease does not automatically “de-pool” that interest absent contractual language requiring that result.
- Equitable reimbursement principles may allow an operator or developing cotenant to recover reasonable, beneficial drilling and operating costs from a non-developing cotenant’s share of production, including costs incurred before a lease terminated.
- A lessor whose lease terminates after pooling and development may be treated as unleased going forward, but remains subject to contractual and equitable burdens arising from pre-termination pooling and development, subject to an equitable accounting.

## Conclusion

The Texas Supreme Court rejected a categorical rule that lease termination automatically removes minerals from a pooled unit and eliminates pre-termination cost recovery, holding instead that unit continuation and equitable reimbursement depend on the unit agreement’s terms and equitable accounting principles, warranting remand for allocation of costs and revenues.


Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419 (Tex. 2008)