An Article in the January 2026 Producer’s Edge proclaimed that the Texas Supreme Court had “fundamentally shifted” Texas law in a “drainage” case. Without citing the case, “The Challenge of Quantifying Drainage Damages” announced that the days of “windfalls” and “over-compensating” lessors had ended. But the Article overstated the effect of the case, overlooking fundamental principles and the Court’s actual holding in Coastal Oil & Gas Corp. v. Garza Energy Tr., 268 S.W.3d 1 (Tex. 2008) – 18 years ago.
Contract law, the rule of capture, a century of Texas Supreme Court holdings, and the holdings in Coastal v. Garza demonstrate that case did not rewrite Texas law. And the Article’s litany of hurdles for a royalty owner to prove a “drainage” case just restates the lessor’s burden of proving what a “reasonably prudent operator” would have done – a key element of Texas oil and gas law for decades, long before Coastal v. Garza.
The Basics: Contract Law
Oil and gas leases are a matter of contract. Samson Exploration LLC v T.S. Reed Props., Inc., 521 S.W.3d 766, 774 (Tex. 2017). An action for breach of a covenant in an oil and gas lease thus sounds in contract. Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 571 (Tex. 1981).
When a contract is breached, the injured party may recover damages for loss that is the natural, probable, and foreseeable consequence of the breach. Mead v. Johnson Grp., Inc., 615 S.W.2d 685, 687 (Tex. 1981). Such damages may include both direct and consequential damages. Signature Indus. Servs., LLC v. Int’l Paper Co., 638 S.W.3d 179, 186 (Tex. 2022). Direct damages include restoration of “the benefit of a plaintiff’s bargain.” Id., citing Quigley v. Bennett, 227 S.W.3d 51, 56 (Tex. 2007) (Brister, J., concurring). Such damages give the injured party “the benefit of the bargain by being put in as good a position as he would have been in had the contract been performed.” Id., 227 S.W.3d at 56, citing Restatement (2d) of Contracts § 344 (1981). The general rule for “benefit of the bargain” damages is thus the difference between what was promised and what was received. MSW Corpus Christi Landfill, Ltd. v. Gulley-Hurst, L.L.C., 664 S.W.3d 102, 106 (Tex. 2023).
What is that contractual “bargain” between the parties to an oil and gas lease?
In general, an oil and gas lessee must conduct operations as would a reasonably prudent operator to carry out the purposes of the oil and gas lease. Amoco v. Alexander, 622 S.W.2d at 567–68. That purpose self-evidently includes exploration and production of hydrocarbons profitable to the lessee, with payment of royalty to the lessor. To achieve that purpose, an oil and gas lease obligates the lessee to perform “three broad implied covenants” (absent express covenants that would displace them): (1) to develop the premises, (2) to protect the leasehold, and (3) to manage and administer the lease. Id. at 567. The standard of care is the “reasonably prudent operator standard,” defined as “what a reasonably prudent operator would do under the same or similar circumstances” and having “due regard” both for the interest of the lessee and lessor. Id. at 567-68; Cabot Corp. v Brown, 754 S.W.2d 104, 108 (Tex. 1987). A reasonably prudent operator is thus not required to drill a well unless there is a reasonable expectation of profit from the well. Id.; see Clifton v. Koontz, 325 S.W.2d 684, 695 (Tex. 1959) (“the trial court necessarily must take into consideration all matter which would influence a reasonable and prudent operator”).
A lessee’s duty to protect extends to what a reasonably prudent operator would do under similar facts and circumstances to protect a leasehold from “substantial” drainage, including “(1) drilling replacement wells, (2) re-working existing wells, (3) drilling additional wells, (4) seeking field-wide regulatory action, (5) seeking Rule 37 exceptions from the Railroad Commission, (6) seeking voluntary unitization, or (7) seeking other available administrative relief.” Amoco v. Alexander, 622 S.W.2d at 568. These means enable an operator to protect the leasehold by preventing a draining well from substantially draining the leased premises.
What Happens When a Lessee Fails to Protect the Leasehold?
The Texas Supreme Court long ago applied the benefit-of-the-bargain contract measure of damages to a lessee’s breach of an oil and gas lease. In 1928, the Court ruled that “the law’s fundamental purpose of adequate compensation” requires that a lessor can recover damages for breach sufficient to be “put into the same position as though the contract had been performed.” Texas Pacific Coal & Oil Co. v. Barker, 6 S.W.2d 1031, 1037 (Tex. 1928), citing Freeport Sulphur Co. v. American Sulphur Royalty Co. of Texas, 6 S.W.2d 1039 (Tex. 1928).
The Supreme Court emphasized that the “correct doctrine” for measuring damages for a lessee’s breach of implied covenants is the amount the lessor “actually loses,” which is “the full value of royalty lost to him through the lessee’s failure to exercise ordinary care to either develop the minerals in the leased premises or to protect same from drainage by nearby wells.” Texas Pacific Coal, 6 S.W.2d at 1038 (emphasis added). As for any contract, breach of a covenant entitles the lessor to “what he would have received had the lessee performed his obligation.” Id. at 1037.
If a lessee fails to do so, damages are to be measured based on what the hypothetical reasonably prudent operator would have done. The most common way to protect a lease is to drill a protection well on the leased premises being drained. Damages for failing to protect thus depend on how a prudent operator would operate such a protection well (absent physical or regulatory constraints).
Would a reasonably prudent operator restrict production to the original in situ volume of hydrocarbons under the leased premises? Would it shut in the protection well after it produced a limited quantity? Of course not – that would not be prudent. In the real world, an operator produces any well as much as physically and legally possible for as long as economically feasible. Why can that reasonably prudent operator produce a protection well in that fashion, not limited to the hydrocarbons originally under the leased premises? Thanks to the rule of capture.
The Lease “Bargain” Includes the Rule of Capture
What is the rule of capture, and is it still valid in Texas?
The rule of capture addresses the ownership of minerals based on their production. It vests title in whoever brings the minerals to the wellhead, even if the minerals flowed from outside the lease or property boundaries. Lightning Oil Co. v. Anadarko E&P Onshore, LLC, 520 S.W.3d 39, 50 (Tex. 2017), citing Coastal v. Garz, 268 S.W.3d at 15.
The migratory character of oil and gas gave rise to the rule of capture, i.e., that “the owner of a tract of land acquires title to the oil or gas which he produces from wells on his land, though part of the oil or gas may have migrated from adjoining lands. See Elliff v. Texon Drilling Co., 210 S.W.2d 558, 561-62 (Tex. 1948). The Texas Supreme Court explained over a century ago that the rule of capture permitted draining adjacent tracts: “If the owners of adjacent lands have the right to appropriate, without liability, the gas and oil underlying their neighbor’s land, then their neighbor has the correlative right to appropriate, through like methods of drainage, the gas and oil underlying the tracts adjacent to his own.” Stephens County v. Mid-Kansas Oil & Gas Co., 254 S.W. 290, 292 (Tex. 1923). The Court later emphasized that the rule of capture enabled an owner to retain “all the oil and gas he may [legally] produce”:
It must be conceded that under the law of capture there is no liability for reasonable and legitimate drainage from the common pool. The landowner is privileged to sink as many wells as he desires upon his tract of land and extract therefrom and appropriate all the oil and gas that he may produce, so long as he operates within the spirit and purpose of conservation statutes and orders of the Railroad Commission.
Elliff, 210 S.W.2d at 562 (emphasis added).
The Rule of Capture Is Alive and Well in Texas
The rule of capture is vital to healthy and robust exploration and development of oil and gas in Texas. While governmental (e.g., Texas Railroad Commission) regulation to prevent waste and correlative rights can moderate its application, the rule of capture enables producers to maximize recovery of hydrocarbons and, hence, profits. Coastal v. Garza cited the rule of capture some 20 times (though the Article makes no mention of that doctrine) and emphasized its importance for hydraulic fractures that extend across lease lines: “the law of capture should not be changed to apply differently to hydraulic fracturing,” so “damages for drainage by hydraulic fracturing are precluded by the rule of capture.” Id., 268 S.W.3d at 17.
Since issuing Coastal v. Garza in 2008, the Texas Supreme Court has repeatedly reiterated the viability of the rule of capture. See, e.g., FPL Farming, Ltd. v. Envtl. Processing Sys., L.C., 351 S.W.3d 306, 314 (Tex. 2011) (the rule of capture is a “cornerstone of the oil and gas industry…fundamental both to property rights and to state regulation” by which “a mineral rights owner owns the oil and gas produced from his or her well even if the oil and gas migrated underground from a tract owned by someone else,” citing Coastal v. Garza, 268 S.W.3d at 13); Myers-Woodward, LLC v. Underground Servs. Markham, LLC, 716 S.W.3d 461, 467-68 (Tex. 2025) (“ownership must be considered in connection with the law of capture, which is recognized as a property right as well. The minerals owner is entitled, not to the molecules actually residing below the surface, but to a fair chance to recover the oil and gas in or under his land, or their equivalents in kind”) (quoting Coastal v. Garza, 268 S.W.3d at 15); Ammonite Oil & Gas Corp. v. R.R. Comm’n of Tex., 698 S.W.3d 198, 201 (Tex. 2024) (the rule of capture “gives a mineral rights owner title to the oil and gas produced from a lawful well bottomed on the property, even if the oil and gas flowed to the well from beneath another owner’s tract”) (quoting Coastal v. Garza, 268 S.W.3d at 13).
Coastal v. Garza Did Not Change Texas Law
The Coastal v. Garza jury had been instructed to measure of damages as “[t]he value of the royalty on the gas drained [] by the subsurface trespass” by Coastal’s fracturing operations on adjacent land. Coastal v. Garza, 268 S.W.3d at 8, 18. The Supreme Court held that “damages for drainage by hydraulic fracturing are precluded by the rule of capture” and that the instruction incorrectly assumed what a reasonably prudent operator would have done. With no evidence tying damages to what a reasonably prudent operator would have done, the royalty owners could not recover on their claim for breach of the protection covenant. Id. at 18, 19.
The Supreme Court then recited the general rule for damages for failure to protect a leasehold by restating the benefit-of-the-bargain measure of contract damages:
The correct measure of damages for breach of the implied covenant of protection is the amount that will fully compensate, but not overcompensate, the lessor for the breach—that is, the value of the royalty lost to the lessor because of the lessee’s failure to act as a reasonably prudent operator.
Coastal v Garza, 268 S.W.3d at 18-19 (emphasis added). See also, e.g., Texas Pacific Coal, 6 S.W.2d at 1037 (the lessor is to be “put in the same position as though the contract had been performed” by the lessee). The measure of damages is thus “the value of the royalty” the lessor would have received if the lessee had acted as a reasonably prudent operator.
The Article quotes snippets from Coastal v. Garza about alternative damage measures cited in a treatise and other cases. The Court commented that damages for breach of the implied protection covenant measured as “the amount of royalties that the lessor would have received from the offset well on its lease” would “overcompensate the lessee [sic] if production from the offset well exceeded the drainage,” and that measuring such damages as “the value of the royalty on the drained gas” would “overcompensate the lessee [sic] if not all of the drainage could have been prevented, either because of the nature of the field, or the regulatory system, or for whatever reason.” Coastal v. Garza, 268 S.W.3d at 18. (The Article quotes but ignores the references to overcompensating a lessee, not a lessor, presumably assuming it is a typographical error uncorrected after 18 years.) But the holding was not in those comments; it was that quoted above: damages for such breach equal “the value of the royalty lost to the lessor because of the lessee’s failure to act as a reasonably prudent operator.”
But wait–there’s more! Coastal v. Garza then reiterated the traditional measure of damages for breach of implied covenants. In considering the damages awarded for Coastal’s breach of the covenant to develop, the Texas Supreme Court held that breach of the development covenant entitles a lessor to “the full value of royalty lost” due to that breach. Coastal v. Garza, 268 S.W.3d at 19 and n. 65, citing and clearly echoing its 1928 Texas Pacific Coal holding. In that earlier case, the Court had invoked the contractual benefit-of-the-bargain measure of damages for both development and protection breaches:
[T]he correct doctrine [] requires the lessee to pay the lessor the amount he actually loses by awarding him, without deduction, the full value of royalty lost to him through the lessee’s failure to exercise ordinary care to either develop the minerals in the leased premises or to protect same from drainage by nearby wells.
Texas Pacific Coal, 6 S.W.2d at 1038 (emphasis added).
Is it plausible that the Court retained that benefit-of-the-bargain measure for failure to develop but erased it for failure to protect? Hardly. And it would be inconsistent to limit a lessor with an arbitrary cap on damages, when the law demands proof of what a reasonably prudent operator would have done: maximize its own income, under the rule of capture, within the applicable regulatory framework.
Lastly, the Article’s supposedly novel elements of proof to recover on a failure to protect claim are old hat. Those elements have long been the rule in Texas law:
- That substantial drainage actually occurred from their specific tract.
- Not new; see, e.g., Kerr–McGee Corp. v. Helton, 133 S.W.3d 245, 253 (Tex.2004) Southeastern Pipe Line Co. v. Tichacek, 997 S.W.2d 166, 170 (Tex.1999); Amoco v. Alexander, 622 S.W.2d at 568, 572 (1981).
- That a reasonably prudent operator would have drilled an offset well under the circumstances (i.e., that the offset well would have produced in paying quantities).
- Texas law has imposed the “reasonable expectation of profit” hurdle for at least a century. Amoco v. Alexander, 622 S.W. 2d at 568 (1981); Clifton v. Koontz, 325 S.W.2d at 695-96 (1959); Texas Pacific Coal, 6 S.W.2d at 1031 (1928).
- The quantity and value of minerals that could have been prevented from being drained.
- Not an element for benefit-of-the-bargain damages, but lessors have long had to show drainage was “substantial” (see above).
- The resulting royalty payment under the lease terms.
- Precisely what Texas law has for a century required a lessor to prove: the lost benefit of the bargain. See, e.g., Texas Pacific Coal, 6 S.W.2d at 1038 (“the full value of royalty lost to [the lessor] through the lessee’s failure to exercise ordinary care to either develop the minerals in the leased premises or to protect same from drainage by nearby wells”).
The Article concludes that Coastal v. Garza “explicitly rejected formulations that might give lessors windfalls and insisted on damages that track actual losses.” But the word “windfall” appears nowhere in that opinion. Substantively, proving such “actual losses” for a lessee’s breach of lease covenants has been Texas law for over a century.
The law governing Texas oil and gas leases includes implied (or express) covenants, the reasonably prudent operator standard of care, and the rule of capture. Texas law still entitles royalty owners to damages for breach of those lease covenants – damages that give them the benefit of the bargain of their leases: to be “put in the same position as though the contract had been performed.”