Title: Sonat Exploration Co. v. Superior Oil Co.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Sonat Exploration Co. v. Superior Oil Co.1985 WY 198710 P.2d 221Case Number: 84-293Decided: 12/04/1985SONAT EXPLORATION COMPANY, SUBSTITUTED FOR EASON OIL COMPANY, APPELLANT (PLAINTIFF), 

v. 

SUPERIOR OIL COMPANY, TRUE OIL COMPANY, FRANK W. WINEGAR, AND PETROLEUM, INC., APPELLEES (DEFENDANTS).
Supreme Court of Wyoming
SONAT EXPLORATION 
COMPANY, SUBSTITUTED FOR EASON OIL COMPANY, APPELLANT (PLAINTIFF), 

v. 

SUPERIOR OIL COMPANY, 
TRUE OIL COMPANY, FRANK W. WINEGAR, AND PETROLEUM, INC., APPELLEES 
(DEFENDANTS).

 
 
Appeal from the District 
Court, CampbellCounty, Paul T. Liamos, Jr., 
J.

 
 
Thomas E. Lubnau 
and Thomas E. Lubnau, II, Gillette, and Richard B. Bates, Okla., for appellant 
(plaintiff).

Houston G. 
Williams, of Williams, Porter, Day and Neville, P.C., Casper, for appellees 
(defendants).

Before THOMAS, C.J., and 
ROSE,* ROONEY,** BROWN and CARDINE, JJ.

* Retired November 1, 
1985.

** Retired November 30, 
1985.

ROSE, 
Justice.

[¶1.]     This appeal originates 
from a complaint filed by Eason Oil Company (Eason) seeking cancellation of an 
oil and gas lease by reason of the lessees' alleged breach of the implied 
covenant to develop. The trial court refused to grant the cancellation and Eason 
has appealed to this court.1 One of the issues presented by this 
appeal is whether a lessor - or one standing in the shoes of a lessor2 - must prove a reasonable 
expectation of profit from further drilling in order to establish a breach of 
the implied covenant to develop. A second issue is whether the evidence supports 
the conclusion that Eason failed to prove a breach of the implied covenant. We 
hold that, even after a substantial delay between the last drilling and the 
commencement of the action to cancel the lease, a lessor - in order to establish 
the breach in question - must carry the burden of proving lack of reasonable 
diligence on the part of the lessee, which burden includes the showing of a 
reasonable expectation of profit for both the lessor and lessee from further 
drilling. In this case, the trial court did not err in concluding that the 
lessor failed to establish that the lessees breached the implied covenant of 
development.

[¶2.]     We will 
affirm.

BACKGROUND

[¶3.]     In January, 1978, 
appellant Eason purchased 6,006.85 net mineral acres in Crook and Campbell Counties, Wyoming, from Colorado National Bank of Denver, Colorado. At the time of the purchase, some of 
these lands were subject to an oil and gas lease, dated December 8, 1957, which 
lease was entered into with Eason's predecessor in interest as lessor and 
appellee Superior Oil Company (Superior) as lessee. Although this lease was of 
record, Eason mistakenly believed that the lands which were subject to the lease 
had been released when, in fact, only a portion of the lands had been 
released.

[¶4.]     Superior's lease from the bank included six separate tracts 
of land located from two to nine miles away from each other in the PowderRiver Basin, and its term was for a period 
of ten years and as long thereafter as oil or gas was being produced. Although 
there were originally six tracts3 under lease, Eason, in this action, 
does not ask that all of this land be released. In May of 1960, production was 
obtained by Superior on tract 6 and was unitized as part of 
the Rozet Muddy Sand Unit, and the land covered by the unitization agreement was 
not subject to cancellation for failure to develop. Appellees True Oil Company 
and Frank W. Winegar obtained their interest in the Superior lease by way of 
assignment following True's drilling of a dry hole prior to the execution of the 
Superior lease.

[¶5.]     In 1964, pursuant to a 
farmout agreement, Continental Oil Company drilled a dry hole on tract 5. No 
other wells have been drilled on the property covered by the subject lease and 
the appellant contends that for the last 20 years appellees have not further 
explored or developed the lease as they were obligated to 
do.

[¶6.]     In July of 1977, demand 
was made upon appellee Superior Oil Company that the lands outside the unit be 
further developed or released. Thereafter, appellant received a letter from 
Superior which said it was being recommended that 
all of said lands be released, but it turns out that Superior released only the 
320-acre tract upon which Conoco had drilled a dry hole. Appellant erroneously 
believed, however, that all lands had been released. Later, when Eason came to 
realize that the bulk of the properties remained encumbered by Superior's lease, Eason 
brought suit seeking to require appellees to either drill additional wells or 
have the lease upon the undeveloped portions of the leasehold cancelled on 
grounds that the lessees had breached the implied covenant to 
develop.

[¶7.]     In defense of the 
failure-of-development charges, appellees/lessees point to additional activities 
which they contend were sufficient to hold the lease. First, they note that 
Superior had 
entered into a farmout agreement on tract 1 in April of 1984, a little over a 
month before this action was filed. Additionally, Superior was a party to a farmout on tract 3 
under date of July 10, 1984, and has negotiated for another farmout on tract 2. 
In addition to this flurry of activity near the commencement of the suit, 
Superior had also entered into various farmout options offsetting tract 2, and 
the record reflects that it supported another company's offset to Superior's 
well with dry-hole contributions. Lessees have presented other evidence, which 
we will discuss later in this opinion, to support their claim that there has not 
been a breach of the implied covenant to develop.

[¶8.]     Lessees have called to 
the court's attention the fact that Eason purchased the minerals under these 
lands in 1978, believing that they were not subject to any lease. Although Eason 
did exploratory work on other tracts which were acquired at the same time, it 
did not drill on the lands in controversy here during the six years it believed 
it owned the minerals in question free from other ownership burdens, except that 
Eason did give a farmout option offsetting tract 1, which turned out to be a dry 
hole.

[¶9.]     Following a bench 
trial, the court found generally in favor of the lessees and against Eason on 
all issues. The court held that before the lease could be cancelled for failure 
to develop the plaintiff had the burden of proving that the development, which 
was undertaken, was inadequate, and, as a part of this burden, it was the 
plaintiff's additional obligation to prove that further development would result 
in a reasonable expectation of profit for both the lessees and the lessor. The 
court found that Eason did not carry this burden, and refused to cancel the 
lease.

[¶10.]  Eason claims that there are three issues 
for our review:

"A. WHETHER THE COURT 
BELOW ERRED IN FAILING TO DETERMINE WHETHER APPELLEES HAD BREACHED AN IMPLIED 
COVENANT TO REASONABLY DEVELOP THE OIL AND GAS LEASE.

"B. WHETHER THE COURT 
BELOW CLEARLY ERRED IN HOLDING THAT APPELLANT MUST PROVE THAT FURTHER DRILLING 
WOULD BE REASONABLY PROFITABLE.

"C. ASSUMING, ARGUENDO, 
THE COURT BELOW WAS CORRECT IN ITS FINDINGS, IT CLEARLY ERRED IN NOT SETTING 
FORTH A TIMETABLE FOR FUTURE DEVELOPMENT."

[¶11.]  It is our judgment that the trial court 
decided the question which asks whether appellees had breached an implied 
covenant to reasonably develop, and, therefore, appellant's first issue will not 
be considered. Instead, we consider whether the record contains sufficient 
evidence to support the trial court's finding that the implied covenant to 
develop was not breached. This issue leads us to the second question which asks 
whether further drilling would carry with it a reasonable expectation of 
profitability and whether the court erred in holding that it was appellant's 
burden to make the proof on the profitability issue. Finally, we will 
contemplate appellant's contention that the trial court was required to 
implement a timetable for future development.

[¶12.]  It is clear from Eason's statement of the 
issues that it believes the trial court failed to determine whether the lessees 
breached the implied covenant to reasonably develop. Eason relies upon the 
court's reference to the following sentence in paragraph 16 of the 
lease:

"* * * The conduct of 
drilling or producing operations at any place within any pooled area shall 
constitute at all times full compliance with and performance of all development, 
drilling and producing obligations, expressed or implied, under this lease, 
insofar as they occur upon or affect respective tracts comprising part or parts 
of the pooled area, and shall also constitute development, drilling or producing 
operations affecting all lands under this lease, and no obligations either 
expressed or implied shall be imposed upon Lessee as to any lands in any such 
pooled area or as to lands adjoining such pooled area where the well site is or 
has been fixed elsewhere by such state or federal spacing regulations, 
notwithstanding that at any time or from time to time said regulations or any of 
them may be amended, revoked or cancelled. * *"

[¶13.]  Paragraph 16 was referred to by counsel 
for appellees in his opening statement where he urged that this sentence 
supports the position which holds that drilling at any place within a pooled 
area would constitute full compliance with all expressed or implied obligations. 
Appellant argues that a careful reading of the sentence shows that "the parties 
expressly agreed that implied obligations were to be applied to all 
noncontiguous lands under the lease" and that the trial court erred in not 
addressing itself to whether there was an implied covenant to develop. 

[¶14.]  It is not necessary that we contemplate 
the issue which asks whether the language of the lease negated the usual implied 
obligations. Although the trial court may have referred to this argument in its 
decision, it also considered the implied-covenant-to-develop issue and 
specifically observed that the appellant had the burden of proving development 
was reasonable under the facts of record; that there was a reasonable 
expectation of profit; and that the appellant failed to discharge its burden of 
proof. This statement was made after the court had heard the evidence of both 
parties pertaining to the issue having to do with the question of reasonable 
development of the lands in issue here. The alleged breach of the implied 
covenant was pleaded and argued by counsel, evidence was introduced, and the 
question was decided by the trial court.

[¶15.]  Although appellant directs much of its 
attack to the statements of the trial court pertaining to paragraph 16, we hold 
that whether those statements are or are not subject to challenge is not 
decisive here. We said in Chesney v. 
Valley Live Stock Co., 34 Wyo. 378, 244 P. 216, 221, 44 A.L.R. 1255 
(1926):

"* * * [The court] 
arrived at the correct conclusion, and we cannot reverse the case, because such 
conclusion is founded partially or wholly upon the wrong 
premises."

Accord Robinson Transportation Company v. 
Hawkeye-Security Insurance Company, Wyo., 385 P.2d 203 
(1963).

[¶16.]  It is well established that where the 
decision of the trial court is correct on any theory it will not be disturbed. 
ABC Builders, Inc. v. Phillips, Wyo., 632 P.2d 925 (1981); Miller v. Hedderman, Wyo., 464 P.2d 544 (1970); Gardner v. Walker, Wyo., 
373 P.2d 598 (1962). The trial court considered the question of breach of the 
covenant to develop and decided that the appellant failed to present sufficient 
evidence establishing a breach. We will review this 
decision.

IMPLIED COVENANT TO 
DEVELOP

[¶17.]  It is well established that oil and gas 
leases such as that with which we are concerned contain an implied covenant of 
development. We recognized this in Phillips v. Hamilton, 17 Wyo. 41, 95 P. 846 
(1908), where we followed the rule developed in Brewster v. Lanyon Zinc Co., 140 Fed. 
801 (8th Cir. 1905), to the effect that the lessee must act with reasonable 
diligence in developing the minerals under the lease.

[¶18.]  The court in Brewster established the following 
guidelines for determining whether a lessee had failed to act with the diligence 
required under the implied covenant:

"* * * No obligation 
rests on [the lessee] to carry the operations beyond the point where they will 
be profitable to him, even if some benefit to the lessor will result from them. 
* * * Whether or not in any particular instance such diligence is exercised 
depends upon a variety of circumstances, such as the quantity of oil and gas 
capable of being produced from the premises, as indicated by prior exploration 
and development, the local market or demand therefor * * *, the extent and 
results of the operations, if any, on adjacent lands, the character of the 
natural reservoir * * *. Whatever, in the circumstances, would be reasonably 
expected of operators of ordinary prudence, having regard to the interests of 
both lessor and lessee, is what is required. * * *" 140 Fed. at 
814.

The court said 
that the lessee's diligence must be measured by the "prudent operator" 
test.

[¶19.]  The court, in Brewster, having established these 
guidelines, went on to note that breaches of implied covenants to develop are 
questions of fact which must be resolved in each case according to its 
particular circumstances. 140 Fed. at 813. In LeBar v. Haynie, Wyo., 
552 P.2d 1107 (1976), we agreed that reasonable diligence on the part of the 
lessee is a factual issue when we said: 

"* * * Phillips v. Hamilton, 17 Wyo. 41, 95 P. 846, 849 * 
* * leaves the clear inference that diligence is a question of fact and 
intention which must be developed and decided in each case. * * *" 552 P.2d  at 
1111.

[¶20.]  We found the following statement 
applicable to and demonstrative of the proposition that the diligence of a 
prudent operator to develop as contemplated by the implied covenant of an oil 
and gas lease is a factual question:

"`In cases questioning 
the development done by an operator under the prudent operator rule, the actions 
of the operator are examined item by item. * * * These items constitute fact 
questions and on appeal the findings made in such a suit must be treated 
accordingly. * * *' Chenoweth v. Pan 
American Petroleum Corporation, 10 Cir., 314 F.2d 63, 65-66." 552 P.2d  at 
1111.

Chenoweth v. Pan American 
Petroleum Corporation, 314 F.2d 63 (10th Cir. 
1963), also held that a lessee is not required to further develop the lease in a 
proven field unless there is a reasonable expectation of 
profit.

[¶21.]  Having held that diligence is a question 
of fact which must be decided in each case, the applicable appellate 
fact-question rule is:

"* * * We will not 
substitute our judgment for that of the trier of fact, findings of fact will be 
presumed to be correct and we will set them aside on appeal only where such 
findings are `clearly erroneous or contrary to the great weight of evidence,' Kvenild v. Taylor, Wyo., 594 P.2d 972, 
976 (1979) * * *." Yost v. Harpel Oil 
Company, Wyo., 674 P.2d 712, 716 
(1983).

[¶22.]  With these well-established rules in 
mind, we proceed to examine the evidence in this case. Appellees obtained their 
lease of the six tracts in 1957 for a primary term of ten years and as long 
thereafter as oil or gas is produced. Appellee Superior drilled a productive well, in 1960, on 
tract 6. Also, Superior paid one-half of the cost of drilling 
two offset wells drilled by Davis Oil Company in 1960-1961 near tract 6. 
Superior 
expended a total of approximately $180,000 on these producing wells and the 
lessor has participated in the production from these efforts ever since. 
Superior and appellant's predecessor in interest 
joined in the Rozet Muddy Sand Unit in 1967, committing all acreage and 
production in tract 6 to the unit agreement, and Superior has contributed approximately $212,000 
toward the drilling of other wells in this unit.

[¶23.]  The record contains evidence of other 
efforts to develop employed by Superior. In 1970, Superior contributed 
dry-hole money in the amount of $4,386.50 to support a well in the Rozet Muddy 
Sand Unit. In 1974, this same appellee entered into a farmout agreement for an 
offset to tract 2. In 1976, Superior granted yet another farmout option to 
the same tract. In 1983, Superior entered into a farmout option 
agreement to lands in tract 2. In this farmout, the company receiving it drilled 
a dry hole offsetting the land contemplated by the farmout agreement and then 
decided not to exercise its option to drill on the lands within the 
lease.

[¶24.]  In 1964, Superior assigned a part of the lease in 
question to Continental Oil Company. After Continental drilled a dry hole on 
tract 5, it reassigned the lease back to Superior. Three hundred twenty acres of tract 5 
were released to appellant's predecessor in 1978, after it had demanded release 
of all of the acreage outside the Rozet Muddy Sand Unit.

[¶25.]  Shortly before this action was commenced, 
Superior 
committed to a farmout on tract 1. In addition, there had been negotiations 
concerning farmouts on tracts 2 and 3. This recent activity, along with the 
above-mentioned drilling activity, contributions, and farmouts, constituted the 
extent of Superior's actions.

[¶26.]  In addition to their own activities, 
appellees presented evidence of a number of Minnelusa4 dry holes drilled by others 
offsetting most of the tracts in the lease. There was also a dry hole drilled in 
tract 4 by appellee True prior to the execution of the Superior lease. Finally, appellees pointed out that 
although Eason believed that these tracts had all been released in 1978, it had 
failed to drill upon any of the tracts during the six years of ownership and had 
entered into only one farmout agreement during this time.

[¶27.]  While observing that it had been a long 
time since any actual development efforts had been undertaken, the trial court 
noted that it was the appellant's burden to prove that further development is 
reasonable and that the appellant had failed to carry its burden of proving this 
proposition. The court therefore held that the lease would not be cancelled.5

[¶28.]  When we review the development history of 
the lessees' efforts, we cannot say that the trial court erred in holding that 
appellant failed to establish the breach of the covenant to 
develop.

[¶29.]  While we are aware that there have been 
20 years since the last drilling on these tracts, we hasten to observe that the 
required development consists of more than just drilling. Other courts have said 
that dry-hole contributions and farmouts are also exploratory acts. Felmont Oil Corporation v. Pan American 
Petroleum Corporation, Tex.Civ.App., 334 S.W.2d 449 (1960). In 1974, 1976 
and 1983 Superior entered into farmout-option agreements 
offsetting various tracts of the lands in question. Shortly before Eason 
initiated this suit, Superior had negotiated for a number of other 
farmouts. In addition, a Superior production geologist testified that he had 
been studying the Minnelusa of the PowderRiver 
Basin since January, 1982, but that he could not 
recommend that his company drill on these tracts. These activities indicate 
that, although Superior may feel it is not now prudent to drill upon these 
properties, this is not to say that it is engaged in the business of preventing 
or hindering the development of the properties in question. In fact, just the 
opposite conclusion must be drawn from a careful analysis of Superior's 
efforts.

[¶30.]  It is to be further noted that, when 
considering the issue of reasonable diligence, the activities of appellees are 
not the only factors which must be taken into account. "In determining what is 
required by ordinary prudence, developments made by other operators in the 
territory and the results obtained by them may and should be considered." 58 
C.J.S. Mines and Minerals, § 202 at 476 (1948). Brewster v. Lanyon Zinc Co., supra, 
supports this proposition, where the court said that determining whether 
reasonable diligence is exercised depends in part upon "the extent and results 
of the operations, if any, on adjacent lands." 140 Fed. at 814. In the case at 
bar, the record discloses that tract 1 was bracketed by two Minnelusa dry holes. 
There were also two Minnelusa dry holes adjacent to portions of tract 2. On 
tract 3 there were no offsetting wells drilled but a number of dry holes had 
been drilled "all around." Finally, on tract 4 appellee True had drilled a dry 
hole to a shallower formation and there were other dry holes close to this tract 
which had been drilled to the Minnelusa. So, although the PowderRiver Basin, of which these tracts are a 
part, contains many productive wells, it appears that the drilling in the near 
proximity to the leased lands consistently resulted in dry holes. These efforts 
and results experienced by others who have attempted to develop on adjacent or 
geologically relevant properties are part of the circumstances which are 
important to the resolution of the reasonable-diligence 
issues.

[¶31.]  Additionally, we hold it to be 
informative to look at the inaction on the part of Eason. Eason believed for six 
years that it owned the mineral interests to these tracts, free from any 
encumbrance. Despite this, the appellant did not drill upon any of the tracts 
and only entered into one farmout agreement. For us, this course of inactive 
conduct tends to have the effect of diluting Eason's contention that an operator 
of reasonable diligence would have conducted a more energetic development 
program than that undertaken by Superior.

[¶32.]  The facts and factors discussed and 
disclosed above must properly be taken into account when considering whether a 
lessee has acted with reasonble diligence in the discharge of its 
leasehold-development obligations. The only indication of lack of diligence 
which we find to be present is the lapse of time from appellees' last drilling 
to the commencement of the suit. Other courts have properly stated that although 
the time factor is an important consideration in determining reasonable 
diligence, it is not all controlling. Sun 
Oil Company v. Frantz, 291 F.2d 52, 54 (10th Cir. 1961). Along with the 
delay and other considerations discussed above, it is also imperative, when 
contemplating a reasonable-diligence issue, to consider whether further drilling 
would prove profitable, not only to the lessor but also to the 
lessee.

PROFITABILITY

[¶33.]  Eason contends that the trial court erred 
by placing upon it the burden of proving that additional drilling would be 
profitable. We hold that the trial court correctly assigned this burden of proof 
and error was not committed in this respect.

"In actions based upon 
alleged breach of implied covenants it is the uniform rule that the burden of 
proof is upon the lessor to establish such breach by a preponderance of the 
evidence." 2 Brown, The Law of Oil and Gas Leases, § 16.03, at 16-114 and 
16-114.1 (2nd ed. 1985).6

[¶34.]  In Oklahoma this rule has been modified. 
Oklahoma 
places the original burden upon the lessor to establish breach of the implied 
covenant of development. Union Oil 
Company of California v. Jackson, Okla., 489 P.2d 1073 (1971). However, in Oklahoma, where 
there is an unreasonable time lapse between the last well drilled and action to 
have the lease cancelled, the burden shifts and the lessor is relieved of the 
burden of proving that the other wells would be profitable. Lyons v. Robson, Okla., 330 P.2d 593, 596 (1958). Exactly what constitutes 
an unreasonable length of time in these cases has not been, and probably cannot 
be, defined with any satisfactory precision.

[¶35.]  While some courts have adopted the 
Oklahoma position of shifting burdens, see, e.g., Nolan v. Thomas, 228 Ark. 572, 309 S.W.2d 727 (1958), others continue to place the burden upon the lessor to prove 
that additional drilling would carry with it a reasonable expectation of 
profitability. When the lessors sought cancellation in Felmont Oil Corporation v. Pan American 
Petroleum Corporation, supra, 334 S.W.2d  at 455, the court 
held:

"* * * [T]he burden rests 
upon appellants [lessors] to do more than merely prove that a ready, able and 
willing operator would drill, regardless of the certainty of profit. * * 
*"

The lessor must 
also show

"* * * [t]hat by the 
drilling of additional wells, there would be a reasonable expectation of profit, 
not only to the lessor, but also the lessee. [Citations.]" Id. at 
455.

See also Superior Oil Company v. Devon 
Corporation, 604 F.2d 1063 (8th Cir. 1979).

[¶36.]  While we concede that the rule of placing 
the burden upon the lessor to prove profitability might not be uniformly 
followed, it is, nonetheless, well settled that "[i]n general, in order to 
require a lessee to drill and develop under an implied covenant, there must be a 
reasonable expectation that oil or gas will be produced in paying quantities," 
58 C.J.S. Mines and Minerals, § 202 at 475 (1948), and that "the burden has been 
held on the lessor to prove a breach by the lessee of his obligations under the 
lease." Id., § 204 at 497.

[¶37.]  Even though the general rule is that a 
lessor must show that there is a reasonable expectation of profit in order to 
prove that the lessee has breached the implied covenant to further develop, 
appellant treats the Oklahoma holdings as though they were 
representative of the general rule and argues that the trial court was required 
to follow this approach. From this predicate, Eason urges that the trial court 
therefore erred in charging it with the burden of proving reasonable expectation 
of profit. Regardless of whether the rule in Oklahoma is contrary to the uniform rule, we do not 
understand it to be the rule in Wyoming, and we 
do not believe that the Oklahoma rule should be 
adopted.

[¶38.]  As noted above, this court followed Brewster v. Lanyon Zinc Co., supra, in holding that there is an implied 
covenant to develop. In Brewster, it 
was said that "no breach can occur save where the absence of such diligence is 
both certain and substantial." 140 Fed. at 814. We noted in Phillips v. Hamilton, supra, 95 P.  at 
849, that, "the evidence in this case is insufficient to show * * * a failure to 
exercise reasonable diligence in the work of prospecting and drilling for oil 
and gas on the leased premises." These statements stand for the proposition that 
the Brewster court and this court have placed the burden of establishing a lack 
of diligence upon the lessor.

[¶39.]  Appellant argues in its brief that the 
burden-shifting concept, for which it contends, is the "modified Brewster rule" and would have this court 
follow Oklahoma's modification of Brewster by shifting the burden to the 
lessee to establish his diligence where there had been an "unreasonable" length 
of time between the last well drilled and the suit seeking cancellation of the 
lease. From this, appellant would have us hold that an unreasonable length of 
time has elapsed under the facts of this case as a matter of law. The case upon 
which Eason primarily relies establishes three burden-of-proof standards having 
to do with the time of delay. Blake v. 
Texas Co., 123 F. Supp. 73 (E.D.Okla. 1954). In Blake, the court concluded that proof of 
a number of years' delay would irrebuttably establish lack of diligence, while 
proof of such delay may under other circumstances only shift the burden to the 
lessee to establish his diligence, and still other delays would not be 
sufficient to shift the burden from lessor to lessee. Attempting to decide which 
factual circumstances operate to shift the burden under differing periods of 
delay would seem to be a difficult if not impossible task, and one which we do 
not believe should be undertaken. Instead, we will continue to follow the rule 
that the lessor must prove that the lessee has breached the implied covenant of 
development under the prudent-operator test.

[¶40.]  In reaching our conclusion on this point, 
we do not hold that the time factor is unimportant. The length of time between 
the lessee's last development effort and the suit seeking cancellation is of 
critical importance in determining whether the lessee has acted with the 
required diligence. We do not believe, however, that it would be wise to modify 
the rule in Brewster, and declare that, following an allegedly unreasonable 
delay, the burden upon the issue of profitability should be shifted to the 
lessee. It is our judgment that the process of ascertaining the circumstances 
and lengths of delays which would shift the burden would unduly impede the 
determination of the ultimate question, i.e., whether the lessee has acted as a 
prudent operator. Therefore, we hold that, while the length of delay is an 
important element in determining due diligence, it is not, however, necessarily 
the controlling factor. Sun Oil Company 
v. Frantz, supra.

[¶41.]  Having decided that the trial court 
correctly placed the burden upon the lessor to establish that there was a lack 
of diligence (which encompasses the burden of proving reasonable expectation of 
profit from additional drilling), we have no difficulty in sustaining the 
finding that Eason failed to carry its burden. When asked on direct examination 
whether there was a probability of obtaining oil from the tracts of land in 
question, Eason's expert (Darnall) stated:

"* * * [T]he possibility 
is there, but I'd want to do the other work before I drilled or recommended 
drilling."

[¶42.]  Mr. Darnall did testify that the average 
Minnelusa well produced 600,000 barrels of oil valued at $14,700,000. He also 
testified that the success ratio in the area was 28%, and that the costs of 
drilling were approximately $250,000 for a dry hole and $500,000 for a producing 
well.

[¶43.]  On the other hand, Darnall admitted that 
the success ratio of 28% was for the entire PowderRiver 
Basin area, and that this percentage did not pertain 
to the tracts in question or the ranch in the immediate vicinity of those 
tracts. In fact, he explained that any wells which would be drilled to the 
Minnelusa on the tracts which are in issue here would be wildcat prospects and 
that the success ratio is one in ten to fifteen for wildcat wells. It was also 
established that a number of dry holes had been drilled near these tracts (with 
one dry hole on tract 5), and Darnall said that "any dry hole * * * cuts down 
the size of a potential producing area in the vicinity unless the well was 
plugged by mistake."

[¶44.]  Perhaps most informative was this 
witness' conclusion that, without further testing, he could not recommend that 
his company drill on any of the tracts in question at the present time. Eason's 
own inaction with respect to the development of these tracts is consistent with 
its own expert's judgment. Although Eason believed for six years that it owned 
these minerals free from any lease, it did not attempt to drill upon any of the 
tracts.

[¶45.]  This was the only evidence appellant 
produced in attempting to show that there was a reasonable expectation of profit 
if more wells were drilled. It must be assumed that the trial court did not 
believe that this testimony was sufficient to support a holding that appellant 
had discharged its burden, and we cannot say that the trial court erred in this 
finding. We therefore affirm the trial court's conclusion that appellant failed 
to establish a reasonable expectation of profit from further drilling, and 
reiterate that the other factual disclosures support the conclusion that 
appellees did not fail to exercise reasonable diligence in pursuit of their 
obligation to develop the lease.

[¶46.]  We note that Eason relies upon Byrd v. 
Bradham, 280 Ark. 11, 655 S.W.2d 366 (1983), for the 
proposition that the lessee, who claims he is not under an obligation to drill 
when it would not be profitable, loses nothing by cancellation of the lease. The 
facts of Byrd make that case distinguishable because there the lessee had taken 
no action regarding the leasehold for 28 years. Additionally, the lessee in Byrd 
could not rely on other activity which showed that drilling would be an 
unprofitable venture. In any event, we believe that a lessee who is acting 
prudently by not developing under present circumstances indeed would lose a 
great deal if the lease were to be cancelled and shortly thereafter market 
conditions change or technological advancements are made so that further 
development becomes prudent.

[¶47.]  Eason also urges that the decision in Sauder v. Mid-Continent Petroleum Corp., 
292 U.S. 272, 54 S. Ct. 671, 78 L. Ed. 1255 
(1934), is controlling. In Sauder, 
the trial court "found that there was some probability that damage was being 
done to the leasehold through drainage by wells on adjoining property." 
Id. at 277, 54 S. Ct.  at 672. There were no farmouts given to explore the lease and there was 
"no present intention of drilling at any time in the near or remote future." 
Id. at 281, 54 S. Ct.  at 674. We believe that Sauder is distinguishable from the case at bar and 
again note that what constitutes a breach of the implied covenant to develop is 
"a question which is so largely one of fact that it must be resolved in each 
case according to its particular circumstances." Brewster v. Lanyon Zinc Co., supra, 140 
Fed. at 813. 

TIMETABLE

[¶48.]  Lastly, appellant contends that the trial 
court erred in failing to set a timetable for future development. Appellant 
bases its contention on the premise that the implied covenant of development was 
breached. This, of course, is not what the trial court found. Although we might 
agree that a court could establish a timetable for development if the implied 
covenant of development is breached, see, e.g., Rush v. King Oil Company, 220 Kan. 616, 
556 P.2d 431 (1976); 5 Williams and Meyers, Oil and Gas Law, § 834 at 247 
(1984), we find no authority for the proposition that it must set a timetable 
when no breach of the implied covenant was found.

[¶49.]  Affirmed.

1 Sonat Exploration 
Company was substituted for Eason Oil Company after the briefs in this case had 
been submitted.

2 Eason's predecessor in 
interest was in fact the lessor in the case in controversy here where Superior 
Oil Company is the lessee.

3 In this opinion we refer 
to the tracts by number, as they were referred to throughout this 
litigation.

4 Eason's geological 
expert dealt primarily with the Minnelusa formation, which is below other 
producing formations in the area.

5 While the record is 
confusing concerning the exact words utilized by the judge, we are of the 
opinion that this is what his holding is.

6 Even though Eason is not 
Superior's 
lessor, it stands in the shoes of the lessor in a lease-cancellation suit since 
its purchase from its predecessor in interest must have been subject to any 
valid and existing oil and gas leases.