Case Title: Continental Oil Co. v. Blair

Citation: 397 So. 2d 538

Docket Number: 52285

State: mississippi

Court: Mississippi Supreme Court

Date: 1981-04-29T00:00:00Z

Document:
397 So. 2d 538 (1981) CONTINENTAL OIL COMPANY, known as Conoco, Inc. v. Warren L. Blair, James R. Blair, and Joe T. Blair. No. 52285. Supreme Court of Mississippi. April 29, 1981. Leslie H. Southwick, John M. Grower, Brunini, Grantham, Grower & Hewes, Jackson, for appellant. Martha W. Gerald, Walker L. Watters, William F. Blair, Gerald, Brand, Watters, Cox & Hemleben, Jackson, for appellees. Before ROBERTSON, P.J., and BROOM and BOWLING, JJ. ROBERTSON, Presiding Justice, for the Court: Continental Oil Company (Conoco) appeals from a decree of the Chancery Court of Clarke County ordering it to pay Warren *539 L. Blair, James R. Blair, and Joe T. Blair $92,759.07 for damages sustained by them because of drainage of oil from a 38-acre drilling unit (Tract 31-11) in the Davis Field in Clarke County, in which they own three royalty acres. The chancellor found that the drainage was to wells on an adjoining 40 acre drilling unit (Tract 31-10), both drilling units being parts of the same original lease to Conoco. On May 15, 1962, S.B. Kirkland executed an oil, gas and mineral lease to Marion Buchanan covering 437 acres in Section 31, Township 3 North, Range 16 East, in Clarke County. Three days later, on May 18, 1962, Buchanan assigned this lease to Conoco. The State Oil and Gas Board approved 40-acre drilling units for the Kirkland lease. The drilling units which are of primary concern in the case at bar are: Drilling unit 31-11, which covers 38 acres in the NE 1/4 of the SW 1/4 of Section 31, and 40-acre drilling unit 31-10 (the NW 1/4 of the SE 1/4 of Section 31). After the discovery well was brought in on Unit 31-10, but before any wells were drilled on Unit 31-11, on August 21, 1969, James Blair, Joe Blair and Warren Blair purchased 3 royalty acres in 38-acre drilling unit 31-11 from S.B. Kirkland's heirs. Subsequently Conoco drilled and dually-completed 4 oil wells on Unit 31-11 and 4 dually-completed wells on Unit 31-10. Each dually-completed well draws from 2 separate pools of oil, so these four wells on Unit 31-11 would be the equivalent of 8 separate wells, and on Unit 31-10 there would be the equivalent of 10 separate wells since the discovery well was also on Unit 31-10. The Davis Field in Clarke County includes at least 23 separate oil pools or reservoirs. In their amended bill of complaint, the Blairs aver that 20 of these 23 separate pools underlie 38-acre drilling unit 31-11 in which they own 3 royalty acres, and that 9 of these pools are being drained by wells drilled by Conoco on adjacent property (largely 40-acre drilling Unit 31-10), both units being parts of the same Kirkland lease. The Blairs charged that Conoco had "failed and refused to act as a reasonably prudent oil and gas operator in failing to protect Complainants' land from said drainage." Conoco answered: In his opinion in favor of complainants, the chancellor concluded: Conoco has assigned as error: There is a fundamental difference between the obligation of the lessee to protect the lessor from "external" drainage, that is, drainage to wells on adjoining lands under a different lease from "internal" drainage, which is drainage from one well to another within the same lease. The rule is well stated in 2 Williams & Meyers, Oil and Gas Law, § 409.3 (1980): The authors go on to say: This Court referred to the covenant as one "to protect leased premises against drainage by [the operator's] oil well on adjoining land." Monsanto Chemical Company v. Sykes, 245 Miss. 207, 212, 147 So. 2d 290, 291 (1962). (Emphasis added). What then are the duties of the lessee in this situation? This Court has adopted the majority position that the obligations of a lessee are governed by the "prudent operator rule": Under the prudent operator rule, any claim that S.B. Kirkland or his successors could bring against the lessee, Conoco, would have to be expressed in terms of whether Conoco had violated an express or implied obligation owed to the lessor, judged under the prudent operator standard. Five implied obligations have been read into oil and gas leases, where express provisions have been omitted. See, e.g., 2 Summers, Oil & Gas § 395 at 535-6 (1959). These implied covenants, taken together with the express terms of the lease, form the obligations owed by Conoco to its lessor. The case at bar is based solely upon a supposed obligation by Conoco to compensate an owner of royalty interest in one part of the original lease from drainage by wells drilled on other parts of the same lease. Such an obligation did not expressly exist under the original lease. Therefore, the Blairs are arguing that when the heirs of Conoco's lessor conveyed a 3/38 royalty interest in one drilling unit out of eleven drilling units in the original lease (and that conveyance being 7 years after the original lease was entered into, and also after the discovery well had been brought in on an adjoining drilling unit of the same lease), it created a new implied obligation upon its lessee. Such a position is untenable not only under general contract law concepts, but also under the specific terms of the lease that governs the rights of the parties. The May 15, 1962, lease from S.B. Kirkland of 437 acres in Clarke County, which incidentally has been continuously held by Conoco since 1962, contained these express provisions. Paragraph 9 provides: Paragraph 5 provides: On August 21, 1969, when James Blair, Joe Blair and Warren Blair purchased their three royalty acres in 38-acre drilling tract 31-11, they bought with constructive and conscious knowledge of the terms, provisions and covenants of the 1962 Kirkland lease. In Millette v. Phillips Petroleum Co., 209 Miss. 687, 48 So. 2d 344 (1950), (a suit by the original lessor against the original lessee), this Court said, among other things: R. Malone, Problems Created by Express Lease Clauses Affecting Implied Covenants, 2 Rocky Mt.L.Inst. 137-138 (1956), summarizes cases in the area of implied covenants in this way: Paragraphs 5 and 9 of the original Kirkland lease contain what has come to be known in the oil and gas law area as "entirety provisions". 2 Williams & Meyers, Oil and Gas Law, § 521.3 (1980), at page 678.15, has this to say about entirety provisions or clauses: In Krone v. Lacy, 168 Neb. 792, 97 N.W.2d 528 (1959), the Supreme Court of Nebraska said: Texas has also recognized the validity of an entireties clause. See Cockrell v. Texas Gulf Sulphur Company, 157 Tex. 10, 299 S.W.2d 672 (1956). *542 Basic contract law also prohibits one party from unilaterally increasing the burdens of the other under the contract. This point is so clear that the authors in 2 Williams & Meyers, Oil and Gas Law, § 521.3 at 678.15-678.16 (1980), stated it parenthetically in this way: In Felmont Oil Corp. v. Pan American Petroleum Corp., 334 S.W.2d 449 (Tex.Civ. App. 1960), the Texas Court concluded: The Court of Appeals of Kentucky, in Martin v. Graf, 289 Ky. 272, 158 S.W.2d 637 (1942), reached the same conclusion when it held that: The Blairs' witnesses admitted, under cross-examination, that the wells drilled by Conoco were geologically well located and would efficiently drain all of the recoverable oil from the pools under the 437 acres of the Kirkland lease. They also admitted that the only reason the contention could be made that more offset wells should be drilled is because the Blairs, 7 years after the original lease, had acquired separate royalty interests (3/38ths in one drilling unit of eleven in the 437-acre tract originally leased by S.B. Kirkland). Kirkland, if he had been alive, under his lease contract of May 15, 1962, with assignee Conoco, could not have contended that more offset wells should be drilled because such a contention would have been directly contra to the clear provisions of his lease contract with Conoco (Paragraphs 5 and 9). As was said by the Texas Court of Civil Appeals in Felmont Oil Corporation, supra, the lessor cannot do indirectly what he has agreed not to do directly. If Conoco had drilled no wells on the Blair tract (Unit 31-11) and had extensively drilled wells on adjoining property, under Phillips Petroleum Company v. Millette, 221 Miss. 1, 72 So. 2d 176 (1954), there would be some merit to the argument that Conoco had violated an implied duty not to perform any acts that impaired the value of the lease. In Millette, the lessor had received no production, no wells had been drilled on his land, and the lessee had refused to give up the lease or permit others to drill. Phillips had acted unfairly and inequitably, and the prudent operator standard is inextricably tied in with the principles of equity. It requires good faith dealing between the lessor and lessee. Since bad faith was proved in Millette, Phillips Petroleum did not pass the test of being a prudent operator. To the same effect is Shell Oil Company v. James, 257 So. 2d 488 (Miss. 1971). Mrs. Fannye M. James, acting as guardian for two minors, executed an oil, gas and mineral lease covering 200 acres of land in Smith County. A 1/2 interest was assigned by lessee, Pure Oil Company, to Shell Oil Company and by agreement Shell Oil Company became the operator. The lands were legally described as the SW 1/4 of the SW 1/4 of Section 5, the E 1/2 of the SW 1/4 of Section *543 5, and the N 1/2 of the NW 1/4 of Section 8, T-1-N, R-9-E. The 40-acre SW 1/4 of the SW 1/4 was combined with the NW 1/4 of the SW 1/4 (which had been leased by Mrs. E.M. Lane in a separate lease to Shell), to make a drilling unit of 80 acres. The E 1/2 of the SW 1/4 was an 80-acre drilling unit composed entirely of James lands. Lane No. 4 well was drilled on the 40 acres (NW 1/4 of SW 1/4), leased from Mrs. E.M. Lane. It was a good well and 1/2 of the royalty went to Mrs. Lane and 1/2 to the Jameses. The Jameses brought suit against Shell (contending that Lane No. 4 was draining oil from the 80-acre drilling unit [E 1/2 SW 1/4]), to require Shell to drill an offset well on the E 1/2 of the SW 1/4 (the 80-acre drilling unit composed entirely of James lands). It was agreed by all witnesses that a fault line extended east and west along the quarter-section line between the N 1/2 and the S 1/2 of the SW 1/4. In James, the first proposition to determine was whether there was drainage from the NE 1/4 of the SW 1/4 to the Lane well in the NW 1/4 of the SW 1/4. This Court said: In reasoning out the answer to this question, we said that the Oil and Gas Board is authorized: In concluding our opinion in James, this Court said: The situation in the case at bar is clearly distinguishable from James. Conoco has drilled the equivalent of 8 oil wells on 38-acre drilling unit 31-11. All of the witnesses (those for the Blairs and those for Conoco) agreed that the wells on Unit 31-11 were geologically well located and would efficiently produce all of the recoverable oil from those pools on Unit 31-11. The evidence, both oral and documentary, proved that Conoco had met the test of being a prudent operator, who in all good faith had dealt fairly and equitably with all royalty owners large and small under the Kirkland lease. Finally, the Blairs have benefited, rather than suffered, from the way in which the entire Kirkland lease was drilled and the oil produced therefrom. Although the percentage of acre feet of oil in tract 31-11 is only 20.20% of the Davis Field total, the percentage of production from tract 31-11 under the Kirkland lease was 36.13% up to May 1, 1979, and current production is 40.40% of the Kirkland lease. The evidence was that Conoco had drilled far more wells and had conducted far more development in the Davis Field than had been done in any other field in the state of Mississippi. Both the Blairs' expert witness and Conoco's witness, independent geologist Wilbur Knight, testified that Conoco's drilling had resulted in an exceptional amount of development. Moreover, every witness acknowledged that the wells drilled by Conoco would efficiently produce all the recoverable oil under the Kirkland lease. We conclude that the evidence, both oral and documentary, adduced at the trial and *544 contained in the record, clearly proves that Conoco has in all good faith prudently developed the entire Kirkland lease and that this prudent and efficient development of the lease has inured to the benefit of the Blairs, and that, even though they own only a very small fractional share of the royalty (three royalty acres in a 38-acre drilling unit), they have received their fair and equitable share of the royalty. Because they have been treated fairly and equitably, the decree of the lower court in their favor must be reversed and judgment rendered here for appellant Conoco. REVERSED AND RENDERED. PATTERSON, C.J., SMITH, P.J., and SUGG, WALKER, BROOM, LEE, BOWLING and HAWKINS, JJ., concur.