Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-87-02460/USCOURTS-ca10-87-02460-0/pdf.json

Nature of Suit Code: 290
Nature of Suit: Other Real Property Actions
Cause of Action: 

---

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

FILED 

United States Court of Appeals 

Tenth r.ircuit 

CABOT PETROLEUM CORPORATION, 

a Delaware Corporation 

Defendant-Appellant, 

v. 

) 

) 

) 

) 

) 

) 

) 

PAUL M. BARBY, in his ) 

individual capacity, PAUL M. ) 

BARBY, Trustee for the ) 

Celestine Barby Revocable ) 

Trust, LELAND D. BARBY, ) 

Trustee of the Otto C. Barby ) 

No. 1703 Trust, LELAND D. ) 

BARBY, Trustee of the Otto C. ) 

Barby No. 1704 Trust, ) 

BARBY ENERGY CORPORATION, and) 

SMN VENTURE, an Oklahoma ) 

General Partnership, ) 

Plaintiffs-Appellees. ) 

JUL 2 0 1990 

ROBERT L. HOECKER 

Clerk 

Nos. 87-2454 

87-2460 

(W.D. Okla. CIV-84-1840-A) 

ORDER AND JUDGMENT* 

Before SEYMOUR, Circuit Judge, McWILLIAMS, Senior Circuit Judge, 

and EBEL, Circuit Judge. 

This case concerns the development of twenty-four tracts of 

land in Eastern Beaver County (Oklahoma) covered by six oil and 

gas leases. Under the leases, plaintiffs are the lessors and 

defendant is the lessee. Plaintiffs, alleging the breach of an 

implied covenant to develop, seek the cancellation of the leases 

* This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppel. 10th Cir. R. 36.3. 

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 1 
as to the twenty-four tracts except those portions of the leases 

capable of being drained by the existing wellbores. The district 

court, after a non-jury trial, ordered that unless defendant 

conducted additional drilling within 180 days, the leases would be 

canceled as to certain specific formations. Defendant appeals the 

district court's order requiring the additional drilling. 

Plaintiffs appeal the district court's refusal to order defendant 

to drill increased density wells. We reverse in part, affirm in 

part, and remand for further proceedings. 

FACTS 

The leases in question were executed from 1945 to 1956, and 

the primary terms of the leases have expired. See R. Vol. II at 

11-13. Defendant has completed wells in various formations 

covered by the leases. See R. Vol. VI at 736. Several of the 

formations have been spaced by the Oklahoma Corporation Commission 

as 640-acre drilling and spacing units. See R. Vol. VI at 733-34. 

Defendant has not developed the deep horizons of the lawsuit 

tracts, which include the Middle and Lower Chester and the lower 

formations of St. Genevieve and St. Louis. See R. Vol. II at 153-

54.1 

Western Beaver County experienced a surge of development in 

the 1980s, with wells being drilled to the deeper formations of 

St. Genevieve and St. Louis. See R. Vol. II at 23. However, a 

similar increase of development in the deeper formations of 

1 Therefore, when we refer to the "shallow formations" in this 

order and judgment we include the Upper Chester and all the 

formations above the Upper Chester. The "deep horizons" or "deep 

formations" include all the formations below the Upper Chester. 

-2-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 2 
Eastern Beaver County did not occur. See R. Vol. II at 126. 

Plaintiffs sent numerous letters to defendant demanding additional 

drilling in the undeveloped portions of the lawsuit tracts. 

Plaintiffs' Exhibits 19-49. Defendant declined to do any further 

drilling. Plaintiffs' Exhibits 50-64. Subsequently, plaintiffs 

filed this action. 

After a bench trial, the district court ordered that if 

additional drilling was not conducted by defendant within 180 

days, the leases at issue would be canceled as to certain 

formations. However, the district court refused to order 

increased density drilling in the developed formations because 

plaintiffs' demand letters to defendant did not properly seek 

increased density wells. Because the district court's order is 

primarily grounded on its factual findings concerning whether a 

prudent operator would drill additional wells, the district 

court's findings will be reversed only if they are clearly 

erroneous. See Boise Corp. v. Consumers Union of United States 

Inc., 466 U.S. 485, 498 (1984); U.S. Indus., Inc. v. Touche Ross & 

Co., 854 F.2d 1223, 1238 n.22 (10th Cir. 1988). "A finding is 

'clearly erroneous' when although there is evidence to support it, 

the reviewing court on the entire evidence is left with the 

definite and firm conviction that a mistake has been committed." 

United States v. Gypsum Co., 333 U.S. 364, 395 (1948). 

-3-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 3 
I. WHETHER DEFENDANT BREACHED AN IMPLIED DUTY OF DEVELOPMENT BY 

NOT DRILLING TO THE UNDEVELOPED FORMATIONS IN THE LAWSUIT 

TRACTS. 

The Oklahoma Supreme Court has clearly stated that "there is 

no implied covenant to further explore after paying production is 

obtained, as distinguished from the implied covenant to further 

develop." Mitchell v. Amerada Hess Corp., 638 P.2d 441, 449 

(Okla. 1981). Therefore, defendant is subject only to an implied 

covenant to develop the lawsuit tracts and is not required to 

complete exploratory wells. The pivotal issue in this case is 

whether the additional wells that plaintiff demands be drilled to 

the deep formations are exploratory or developmental. 

Whether an implied covenant of further development was 

breached is determined by applying the ordinary prudent operator 

test. See,~, Mitchell, 638 P.2d at 447; Union Oil Company of 

Cal. v. Jackson, 489 P.2d 1073, 1077 (Okla. 1971). Under that 

test, the implied covenant of further development limits the duty 

to drill to "instances where a prudent operator would expect a 

probability of potential profit from the well contemplated." 

Mitchell, 638 P.2d at 449. If there is no probability of 

potential profit, the well is exploratory in nature. 

The district court found "credible the testimony that the 

farmout, or any drilling in the lower zone, would have been 

profitable" and ordered drilling in the lower formations. Barby 

v. Cabot Petroleum Corp., No. CIV-84-1840-A at 8 (W.D. Okla. Dec. 

31, 1986) (hereinafter "Dist. Ct. Order"). 2 However, a thorough 

2 Defendant interprets the district court order as requiring 

wells to the deep formations in all 24 tracts. See Appellant's 

(footnote continued] 

-4-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 4 
review of the record reveals that the extensive development 

ordered by the district court went beyond that which is required 

under defendant's implied covenant to develop the lawsuit tracts. 

In general, the lessor bears the burden of showing that the 

implied covenant of further development has been breached. 

However, "where the lessor has established an unreasonable or 

unconscionable length of time in developing an oil and gas lease, 

the lessee shoulders the burden of proof to excuse his delay." 

Mitchell, 638 P.2d at 450; see also Dixon v. Anadarko Production 

Co., 505 P.2d 1394, 1396 (Okla. 1973). Determining whether a 

delay in unreasonable or unconscionable depends on the 

circumstances of each case. See Crocker v. Humble Oil & Refining 

Co., 419 P.2d 265, 270 (Okla. 1966); Neff v. Jones, 288 P.2d 712, 

716 (Okla. 1955). 

In ordering the deep horizon wells, because of what the court 

characterized as an "unreasonable and unconscionable delay" on the 

part of defendant, the district court relied in part on the 

shifting of the burden to defendant to excuse its delay in 

drilling additional wells. Dist. Ct. Order at 8. 3 The district 

[footnote continued] 

Brief-in-Chief at 4. However, we disagree with that 

interpretation. The district court ordered only shallow drilling 

in the following lawsuit tracts: 24-5N-25ECM, 25-5N-25ECM, 31-4N27ECM, 32-4N-27ECM, 1-3N-26ECM, 12-3N-26ECM, 8-2N-27ECM. See 

Dist. Ct. Order at 9-17. 

3 The court specifically stated that "below the Chester, the 

Court finds that the plaintiffs have met their burden of 

establishing an unreasonable and unconscionable delay in 

development on the part of Cabot" and that defendant therefore had 

the burden of showing that the delay was excusable. Dist. Ct. 

Order at 8. However, in footnote 8 of the order, the court stated 

that the burden-shifting applied to only 12 of the tracts and then 

[footnote continued] 

-5-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 5 
court's finding of unreasonable delay in developing the lower 

formations is clearly erroneous. 

Drilling to the deep horizon in Beaver County did not begin 

in earnest until the late 1970s and early 1980s. See R. Vol. II 

at 23, 145; R. Vol.Vat 597; Plaintiffs' Exhibits 118, 119. This 

action was filed in July of 1984. See R. Vol. II at 26. The 

majority of the wells which penetrated the lower formations were 

in Western Beaver County, whereas the lawsuit tracts are located 

in Eastern Beaver County. Few of the deep horizon wells were 

productive by the date that the suit was filed. See R. Vol. II at 

145, 169-172. Even assuming that the existing wells created a 

situation where a prudent operator should have drilled to the 

lower formations in the lawsuit tracts, defendant's delay in this 

case, in light of the minimal success of the deep horizon wells, 

was not unreasonable. 

In determining whether there was an unreasonable delay in 

drilling additional wells, courts have considered whether existing 

wells have been successful. For example, the court in Sparks v. 

Midstates Oil Corp., 148 F. Supp. 551 (E.D. Okla. 1957), aff'd, 

251 F.2d 71 (10th Cir. 1958), stated that: 

"In terms of time alone the period of non-development 

since real activity in the lower sands began in this 

area does not stand out .... In view of the marginal 

character of many of these vicinal wells the court does 

not believe that under all the circumstances there has 

been an outright breach of the implied covenant to 

further develop all these lower sands thereby calling 

[footnote continued] 

only to the lower formations. Because we conclude that defendant 

did not unreasonably delay development in the lower formations, we 

will not distinguish between the 12 tracts for which the district 

court shifted the burden to defendant and the other 12 tracts. 

-6-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 6 
for a blanket cancellation of the deeper sands. It 

cannot be said that the defendants have failed to act as 

prudent operators, considering the legitimate interests 

of both the lessors and the lessees by failing to 

generally exploit the deeper sands on this lease. 

Although the operator's occupational hazard forever 

includes the element of chance nonetheless, an operator 

is not required to rush recklessly into shot-gun 

development where no rational expectancy of profit 

exists." 

Id. at 554 (emphasis in original) (footnotes omitted). The delay 

in this case does not approach the length that Oklahoma courts 

have found sufficient to justify shifting the burden of proof. 

See Vincent v. Tideway Oil Programs, Inc., 620 P.2d 910, 916 

(Okla. App. 1980) (noting that delays of 14 and 30 years have been 

considered sufficient to shift the burden of proof). Therefore, 

plaintiffs should not have been relieved of the burden of showing 

that defendant breached its implied covenant to develop. 

To establish a breach, the lessor must show the "'probable 

costs of drilling, equipping and operating the well or wells, 

which lessor contends should have been drilled,'" and "'that oil 

or gas would probably have been discovered thereon, and that the 

amount thereof would probably have been sufficient to have yielded 

a reasonable profit upon the total outlay.'" Union Oil Co. of 

Cal. v. Jackson, 489 P.2d 1073, 1077 (Okla. 1971) (quoting Texas 

Consolidated Oils v. Vann, 208 Okla. 673, 258 P.2d 679 (1953)). 

For some of the lawsuit tracts, plaintiffs failed to show that the 

ordered deep horizon drilling could yield a reasonable profit. 

Therefore, additional drilling as to some of the lawsuit tracts 

would be exploratory in nature and should not have been ordered by 

the district court. 

-7-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 7 
The record contains little evidence indicating that drilling 

to the lower formations in the lawsuit area had a probability of 

potential profit. A large portion of plaintiffs' evidence 

concerning the deep formations related to the drilling practices 

of Funk Exploration, Inc., in Western Beaver County. See R. Vol. 

II at 120-21, 157-58. The Funk wells were several miles from the 

lawsuit tracts, and only twenty-two of the 180 wells drilled to 

the lower formations established production in the deep horizons. 

See R. Vol. II at 144-45. Because of their distant location, 

those wells provided minimal information as to the probability of 

success in the lawsuit tracts. Moreover, the fact that only 

twenty-two of Funk's wells were productive in the deep horizons 

casts doubts on the probability that defendant would receive a 

reasonable profit by conducting extensive deep drilling. 

Plaintiffs' evidence at trial was that there were only 

twenty-eight wells that had penetrated the deep formations in the 

general lawsuit area.

4 See R. Vol. II at 168-74; Plaintiffs' 

Exhibit 127. Of those twenty-eight wells, only six of the wells 

were productive. Id. Plaintiffs' expert stated that one of the 

six wells could be characterized as a mediocre producer and one as 

a poor producer from the deep formations. Id. at 169-71. The 

other wells could not be characterized because of lack of 

information or comingled production from the deep and shallower 

4 Defendant's evidence is that in Eastern Beaver County 108 wells 

had penetrated one or more of the deep formations. However, only 

14 of the wells were completed as deep formation producers. 

Defendant's Exhibit I.(I). 

-8-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 8 
formations. Id. at 170-71. The Oklahoma Supreme Court has 

explained that: 

"'There is no duty to embark upon deeper drilling if 

adjacent operations indicate its futility .... [T]here 

must be some reasonable ground to anticipate production 

in the lower horizons before deep drilling becomes a 

duty. The lessor ought not to demand that his lessee 

shall be a perpetual wildcatter.'" 

Union Oil Co. of Cal. v. Jackson, 489 P.2d 1073, 1077 (Okla. 1971) 

(quoting Merrill, Covenants Implied in Oil and Gas Leases§ 69, at 

176 (2d ed. 1940)). 

Plaintiffs' own expert characterized as exploratory those 

wells drilled with the primary target being the deeper formations. 

See R. Vol. III at 199. Of the nine other operators of wells on 

the lawsuit tracts, as of trial, none had penetrated down through 

the deeper formations. See R. Vol. II at 153-54; R. Vol. III at 

191. Although defendant received and rejected various farmout 

requests covering the lawsuit area, including a farmout request 

from Funk to drill a well to the deeper formations in each of the 

lawsuit tracts, 5 see R. Vol. II at 31-39, 150-51, the existence of 

5 Defendant did enter into farmout arrangements involving lawsuit 

tracts with Shar-Alan Oil Company, Kennedy & Mitchell, Inc., and 

Texas Oil & Gas. Defendant moved for the suit to be dismissed for 

failure to join the farmout operators as indispensable parties. 

See R. Doc. 20. The district court denied the motion without 

explanation. See R. Vol. II at 3. 

However, the wells operated by Kennedy & Mitchell and Texas 

Oil & Gas were excluded from this case in plaintiffs' Amended 

Complaint. See R. Doc. 10 at 5-7; Defendant's Exhibit III. In 

addition, Shar-Alan did not own an interest in the lawsuit tracts 

until after suit was filed, see R. Vol. II at 39-42, and 

plaintiffs stated at trial that they would not ask the district 

court to cancel Shar-Alan's interests in the leases. See R. Vol. 

VI at 703-04. Plaintiffs agreed to seek cancellation of only the 

defendant's interest in the leases in question. Id. 

A district court's refusal to dismiss for inability to join 

an indispensable party is reversed only if the district court 

[footnote continued] 

-9-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 9 
farmout requests alone does not establish a probability of 

success. "[A] theory requiring the lessee to drill when a ready, 

willing and able operator would drill regardless of the certainty 

of profit 'is untenable and diametrically opposed to our 

established prudent operator rule where expectation of profit is 

an essential element.'" Mitchell, 638 P.2d at 447 (quoting 

Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684 (1959)). 

A. Development ordered to only the deep formations. 

The district court ordered drilling to the lower formations 

of Section 19-3N-26ECM because there is production from the lower 

formations in a nearby section of Section 19-3N-26ECM. Dist. Ct. 

Order at 16; Plaintiffs' Exhibit 306. Therefore, because there is 

evidence of potential profitability which supports the district 

court's order, we affirm the district court's order of deep 

drilling in Section 19-3N-26ECM. 

However, in the absence of offsetting production, because of 

the lack of evidence concerning profitability, the district 

court's order to conduct deep horizon drilling is not warranted in 

the following sections: 28-4N-28ECM, 33-4N-28ECM, 28-4N-27ECM, 

29-4N-26ECM, 30-4N-26ECM, 5-3N-28ECM, 8-3N-28ECM, and 18-3N-26ECM. 

In those sections, the district court's order requires drilling to 

the lower formations even where development in the upper 

[footnote continued] 

abused its discretion. See Navajo Tribe of Indians v. New Mexico, 

809 F.2d 1455, 1471 (10th Cir. 1987). The burden is on defendant 

to show that the farmout operators are indispensable parties. See 

Wright & Miller, Federal Practice & Procedure§ 1609 (2d ed. 

1986). Defendant has failed to satisfy that burden. 

-10-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 10 
formations is not warranted and regardless of whether production 

in shallower formations is found. 

Plaintiffs' own expert indicated that drilling with the lower 

formations as the primary target was exploratory. See R. Vol. III 

at 199. Moreover, the deep wells have a lower profit potential 

because the costs of drilling those wells are higher. If the deep 

horizons are the primary target, calculating the costs of drilling 

the deep wells should include the cost of drilling an entirely new 

well to the deep formations, not merely the cost of drilling an 

additional 750 feet to reach the lower formations once a well to 

the shallower formations has been drilled. See R. Vol. II at 148; 

R. Vol. III at 179-83. In addition, once a well has been 

completed to a deep formation, there is a risk of losing 

production in that formation if the well is later completed in a 

shallower zone without first depleting the deep formation. See R. 

Vol. IV at 376; R. Vol.Vat 604. Therefore, as to those 

sections, defendant would have to drill entirely new wells to the 

lower formations to comply with the district court's order. 

B. Development ordered in either the shallow or deep formations. 

In Sections 19-5N-26ECM, 30-5N-26ECM, 27-4N-28ECM, 34-4N26ECM, 36-4N-26ECM, and 7-3N-27ECM the district court found that 

development was warranted in specified shallower formations. As 

to those sections, the district court ordered development in 

either the shallower formations or the lower formations. 

The lawsuit area enjoys a serendipity structure in those 

sections because an operator drilling to a lower formation often 

-11-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 11 
has the potential of penetrating several productive shallower 

formations. See R. Vol. III at 260; R. Vol. IV at 472. 

Therefore, there is a greater likelihood of finding oil or gas 

when drilling through several shallower formations to reach the 

deep formations. Expert testimony supports a finding that if 

development is warranted in the shallower formations, a prudent 

operator may also drill to the lower formations because the 

additional costs are minimal compared to the value of the deeper 

drilling. See R. Vol. II at 147-49; R. Vol.Vat 606. Therefore, 

as to Sections 19-5N-26ECM, 30-5N-26ECM, 27-4N-28ECM, 34-4N-26ECM, 

36-4N-26ECM, and 7-3N-27ECM the district court's order, which 

required drilling to either specified shallow formations or to the 

deep horizons, was not clearly erroneous. 

The district court also found that development was warranted 

in the Upper Chester in Sections 13-4N-26ECM and 6-3N-27ECM. 

However, as will be discussed later in this order and judgment, 

the district court's finding that development was warranted in the 

Upper Chester formation of these sections, was clearly erroneous. 

Therefore, because development was not warranted in the Upper 

Chester, the district court erred in ordering development in the 

shallow or deep formations of Sections 13-4N-26ECM and 6-3N-27ECM. 

If additional drilling indicates that deep horizon production 

is practicable elsewhere in the lawsuit area, then arguably 

defendant may be required to drill additional wells on the basis 

of that additional information. However, the district court's 

order requires extensive deep drilling prior to defendant having 

adequate information. Oklahoma courts have held a decree ordering 

-12-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 12 
extensive drilling may be "unreasonable, inequitable and unjust" 

if: 

"[i]t does not take into consideration whether the 

drilling of any one of such wells, comes in as a dry 

hole, or whether it will reasonably produce oil or gas 

in paying quantities. Under the reasonable operator 

rule a lessee has never been required to drill 

additional wells, in the absence of a showing the well 

would be profitable to both lessor and lessee." 

Texas Consolidated Oils v. Vann, 208 Okla. 673, _, 258 P.2d 679, 

690 (1953). 

C. The .5 bcf benchmark used in ordering development in the 

shallow formations. 

In addition to challenging the order to drill to the lower 

formations, defendant challenges the district court's use of a 

.5 bcf threshold for drilling additional wells to the shallow 

formations. The district court's finding that a reserve of .5 bcf 

justified drilling additional wells to the shallow formations is 

not clearly erroneous and is supported in the record by expert 

testimony that the district court found credible. See R. Vol. IV 

at 429; Dist. Ct. Order at 8 n.7. Although alternative levels 

could have been chosen, we are not left with a definite and firm 

conviction that the finding was in error. 

Defendant also argues that the district court did not 

accurately apply the .5 bcf benchmark to the lawsuit tracts and 

ordered drilling where that level was not met. For example, 

defendant argues that the district court erred when it ordered 

development of formations when two formations together contained 

reserves of .5 bcf or more, without finding specifically that each 

formation contained .5 bcf reserves. However, defendant 

-13-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 13 
misconstrued the district court's order. The district court 

stated that the .S bcf benchmark would be used only as a general 

guideline. Dist. Ct. Order at 8 n.7. We cannot conclude that the 

order to develop two formations which have combined reserves of at 

least .5 bcf was clearly erroneous. 6 

Defendant also argues that for Sections 31-4N-27ECM and 8-2N27ECM the district court improperly ordered defendant to drill to 

the Morrow, or the formations below the Morrow would be released 

even though the district court did not find that development in 

the formations below the Morrow was warranted. Defendant's 

challenge fails because, as discussed in part V, the cancellation 

of the undeveloped portion of a lease is an equitable tool of the 

court and the partial cancellation of the leases would not be 

unjust if defendant fails to develop the section as ordered by the 

court. 

However, the district court erred in ordering development of 

the Upper Chester in Sections 13-4N-26ECM and 6-3N-27ECM. As to 

Section 13-4N-26ECM, the district court ordered development to the 

6 Defendant also argues that the return on investment ratios are 

too low in Sections 24-4N-26ECM and 36-4N-26ECM to warrant the 

development ordered by the district court. Appellant's Brief-inChief at 48. 

However, the district court's order did not address the 

profitability of Section 24-4N-26ECM and did not order any 

drilling in that section. Even assuming that defendant was 

referring to Section 34-4N-26ECM, that section has been addressed 

earlier in this order and judgment and the district court's order 

is affirmed as to that section. 

The defendant also mischaracterized the district court's 

order as requiring development of the Morrow in Section 36-4N26ECM despite a low return on investment. Because the district 

court order did not require development in the Morrow in Section 

36-4N-26ECM, defendant's argument is flawed. See Dist. Ct. Order 

at 14. 

-14-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 14 
Chester even though there was only .4 bcf reserves and a 1.6 

return on investment. Plaintiffs' Exhibit 306. The district 

court's finding was directly contrary to its expressed .5 bcf 

benchmark and should therefore be reversed as clearly erroneous. 

As to Section 6-3N-27ECM, the district court ordered drilling to 

the Chester even though plaintiffs' summary sheet, which indicated 

what formations plaintiffs believed warranted additional 

development, did not support drilling to the Chester at that 

location. Plaintiffs' Exhibit 306. Therefore, the district 

court's order as to Section 6-3N-27ECM was clearly erroneous 

because it is without adequate support in the record. 

II. WHETHER THE DISTRICT COURT ERRED IN FINDING THAT THE UPPER 

CHESTER LIMESTONE AND NOT THE ENTIRE CHESTER FORMATION WAS 

DESIGNATED BY THE OKLAHOMA CORPORATION COMMISSION ( "OCC") AS 

A COMMON SOURCE OF SUPPLY. 

In a motion for a new trial, plaintiffs sought a 

clarification of whether the court's references in its opinion to 

the Chester Sand corresponds to the OCC's references to "Chester 

Lime." The Chester Lime was also referred to as the "Upper 

Chester" during trial. See R. Vol.Vat 618-19. When plaintiffs 

filed their motion for a new trial, they also had an action before 

the OCC to establish the Lower Chester, which was previously 

unspaced, as a common source of supply. In its August 31, 1987 

order, responding to plaintiffs' motion for a new trial, the 

district court stated that its references to the Chester Sands 

corresponded to the Chester Lime or Upper Chester as a common 

source of supply. See R. Doc. 80. 

-15-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 15 
Defendant argues that the district court ruling is erroneous 

because it is based on post-trial exhibits which presented a new 

theory different from that presented at trial. After a bench 

trial and a motion for a new trial, Fed. R. Civ. P. 59(a) allows 

the district court to "open the judgment if one has been entered, 

take additional testimony, amend findings of fact and conclusions 

of law or make new findings and conclusions, and direct the entry 

of a new judgment." A district court's decision to grant or deny 

a motion pursuant to Rule 59 is reviewed for abuse of discretion. 

See Varley v. Tampax, Inc., 855 F.2d 696, 700 (10th Cir. 1988); 

McMahon v. Libbey-Owens-Ford Co., 870 F.2d 1073, 1078 (6th Cir. 

1989). 

Although defendant argues that the admission of new evidence 

after trial is improper if it presents a new theory, it is 

unnecessary to reach that issue. There is evidence in the record 

which demonstrates that plaintiffs argued at trial that only the 

Upper Chester and not the entire Chester formation is a common 

source of supply. See~, R. Vol. II at 124, 132-34; R. Vol. 

III at 200-02; R. Vol.Vat 618-19. The district court may 

consider evidence after trial even if it is not "newly 

discovered." See McGraw v. Simpson, 141 F.2d 789, 790 (10th Cir. 

1944); 25 Federal Procedure§ 58:40 (Lawyers Ed. 1984). The 

district court's order was not a collateral attack of an OCC 

decision but merely a permissible interpretation of its own 

opinion. See Nilsen v. Ports of Call Oil Co., 711 P.2d 98, 101 

(Okla. 1985). 

-16-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 16 
The district court did not abuse its discretion in clarifying 

that it used the term "Chester Sand" to refer to the Chester Lime 

or the Upper Chester. Treating the Upper Chester separate from 

the Lower Chester is adequately supported in the record and is not 

clearly erroneous. Therefore, the district court's order in 

response to plaintiffs' motion for a new trial will not be 

disturbed. 

III. WHETHER PLAINTIFFS' DEMAND LE'l"l'ERS TO DEFENDANT SUFFICIENTLY 

REQUESTED INCREASED DENSITY WELLS. 

Plaintiffs not only requested that the court order additional 

drilling in the undeveloped portions of the lawsuit tracts, but 

also requested increased density wells in the formations where 

defendant had already completed wells. "[A] prerequisite to 

forfeiture for breach of the implied covenants to develop is that 

the lessor make timely demand upon the lessee to comply 

therewith." Vincent v. Tideway Oil Programs, Inc., 620 P.2d 910, 

916 (Okla. 1980); see Spaeth v. Union Oil Co. of Cal., 710 F.2d 

1455, 1458 (10th Cir. 1983). The district court found that 

plaintiffs had failed to properly demand increased density wells 

and that, plaintiffs therefore could not bring an action against 

defendants for failure to drill increased density wells. Dist. 

Ct. Order at 4. 

Plaintiffs sent multiple demand letters to defendant 

requesting additional drilling in the lawsuit tracts. Plaintiffs' 

Exhibits 19-49. The letters consistently sought drilling in the 

"undeveloped formations" of the lawsuit tracts and did not make 

any reference to a need to commence additional drilling in 

-17-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 17 
developed portions of the tracts. Id. Plaintiffs' demand letters 

did not give defendant sufficient notice that it was also seeking 

increased density drilling in the lawsuit tracts. 

In response to plaintiffs' letters, defendant stated that it 

had met its legal obligations under the lease and refused to 

comply with plaintiffs' demands. Plaintiffs' Exhibits 50-64. 

Defendant's letters in response to the demand letters, although 

general in their language, do not suggest that defendant knew that 

plaintiffs were seeking increased density wells. Moreover, 

defendant's letters do not suggest that it would be futile for 

plaintiffs to send demand letters requesting increased density 

wells. Defendant's letters were rejecting only plaintiffs' demand 

for additional drilling in the undeveloped formations. Because 

the demand letters were specific in seeking drilling in the 

undeveloped formations, the district court did not err in 

determining that plaintiffs' demands were not sufficient to 

support a claim against defendant for failure to drill increased 

density wells. 

IV. WHETHER THE DISTRICT COURT ERRED IN NOT CANCELLING 

UNPRODUCTIVE PORTIONS OF SPACING UNITS BECAUSE IT VIEWED THE 

ACTION AS A COLLATERAL ATTACK OF OCC DECISIONS. 

The OCC has established 640-acre spacing units in the 

formations in the lawsuit tracts which form the common sources of 

supply. "Once an area is properly classified as a common source 

of supply, all hydrocarbon production from that area will be 

controlled by the spacing and drilling order classifying the area 

until completely or partially replaced by a later order." 

-18-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 18 
Corporation Comm'n v. Union Oil Co. of Cal., 591 P.2d 711, 716 

(Okla. 1979). In the district court, plaintiffs sought a 

determination that defendant had not acted as a prudent operator 

because it had not drilled sufficient wells to drain the 

formations under the leases. Defendant would have had to seek a 

respacing of the formations by the OCC in order to drill 

additional wells in those formations presently characterized as a 

common source of supply. Therefore, the district court could have 

found that a prudent operator would have sought a decision from 

the OCC that the formations were not common sources of supply but 

were separate sands requiring separate drainage. The district 

court refused to consider the issue because it found that it 

lacked jurisdiction to review OCC decisions and that the suit was 

in effect a collateral attack on an OCC decision. Dist. Ct. Order 

at 5. 

Whether the district court has jurisdiction to collaterally 

review orders of the OCC is a legal question that is reviewed de 

nova. See Walden v. Bartlett, 840 F.2d 771, 772-73 (10th Cir. 

1988). By statute, collateral attacks on the orders of the OCC 

are prohibited. See Okla. Stat. tit. 52, § 111; see also Pelican 

Prod. v. Wishbone Oil & Gas, Inc., 746 P.2d 209 (Okla. App. 1987). 

A collateral attack is any "attempt to avoid, defeat, evade, or 

deny the force and effect of a final order or judgment in an 

incidental proceeding other than by appeal, writ of error, 

certiorari, or motion for new trial." Woods Petroleum Corp. v. 

Sledge, 632 P.2d 393, 396 n.4 (Okla. 1981). 

-19-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 19 
Plaintiffs sought a determination by the district court that 

defendant failed to act as a prudent operator would have acted 

given the limitations of the OCC's spacing and drilling order. 

The prudent operator rule is applicable even where the OCC has 

established spacing and drilling units. See Spaeth v. Union Oil 

Co. of Cal., 710 F.2d 1455, 1458 (10th Cir. 1983) (discussing 

Oklahoma law). Compliance with OCC orders does not provide an 

absolute defense, and a defendant may have a duty to seek 

administrative relief from unreasonable limitations imposed by the 

OCC. See Spaeth, 710 F.2d at 1458; see also Sinclair Oil & Gas 

Co. v. Bishop, 441 P.2d 436, 447 (Okla. 1967); 5 Williams & 

Meyers, Oil & Gas Law,§ 861.4 (1989). 

The district court did not reach the issue of whether a 

prudent operator would have sought the necessary relief from the 

OCC. Therefore, we must remand the action for a determination of 

whether there was sufficient evidence justifying a request for 

modification of the spacing order of the OCC so that a prudent 

operator would have asked the OCC to modify its previous orders to 

allow additional drilling to the separate lenses within a section. 

V. WHETHER THE DISTRICT COURT ERRED BY NOT CANCELLING ALL OF THE 

LEASES EXCEPT THOSE PORTIONS CAPABLE OF BEING DRAINED BY 

EXISTING WELLBORES. 

Once a district court finds that a lessee has breached its 

implied covenant to further develop, the district court has 

equitable jurisdiction to order a total or partial cancellation of 

the lease or to render an alternative decree ordering that if 

additional wells are not drilled, the lease will be canceled. See 

-20-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 20 
5 Williams & Meyers, Oil & Gas Law,§ 834 (1989); 3 Summers Oil 

and Gas§ 463 (2d ed. 1938) (discussing Oklahoma law). The 

district court in this instance entered an alternative decree 

ordering that if additional wells did not commence within 180 

days, it would partially cancel the leases. Oklahoma law permits 

partial cancellation of leases because: 

"a lessee may neglect a portion of an oil and gas lease, 

while prudently tending to another portion of the same 

lease. If so, it may be inequitable to penalize a 

lessee by extending a cancellation to the entire 

undeveloped portion of the lease. Each case should be 

governed by its own facts within the principle of 

equitable justice." 

Crocker v. Humble Oil & Refining Company, 419 P.2d 265, 275 (Okla. 

1965). 

Plaintiffs have argued on appeal that once the district court 

found that defendant had breached its implied covenant to develop, 

it should have ordered the cancellation of all the leases. 

However, because the district court found that further development 

was not necessary as to every formation, it was appropriate for it 

to order only partial cancellation of the leases if defendant did 

not comply with the court order to drill additional wells. "[T]he 

implied covenant requires a consideration of the rights of both 

the lessor and the lessee and .•• in the end the final 

determination and protection of those right resides with a court 

of equity and not alone with either the lessor or the lessee." 

Gregg v. Harper-Turner Oil Co., 199 F.2d 1, 3 (10th Cir. 1952). 

The district court properly exercised its equitable jurisdiction 

in threatening only a partial cancellation of the leases. 

-21-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 21 
CONCLUSION 

The district court order is REVERSED to the extent that it 

ordered deep horizon drilling in the following sections: 28-4N28ECM, 33-4N-28ECM, 28-4N-27ECM, 13-4N-26ECM, 29-4N-26ECM, 30-4N26ECM, 5-3N-28ECM, 8-3N-28ECM, 6-3N-27ECM, and 18-3N-26ECM. 

The district court order is also REVERSED to the extent that 

it ordered development of the Upper Chester in Sections 13-4N26ECM and 6-3N-27ECM. 

The district court order is AFFIRMED as to the deep drilling 

ordered in Section 19-3N-26ECM. 

The district court order is AFFIRMED to the extent that it 

ordered drilling to either specified shallow formations or the 

deep horizons in the following sections: 19-5N-26ECM, 30-5N26ECM, 27-4N-28ECM, 34-4N-26ECM, 36-4N-26ECM, and 7-3N-27ECM. 

Because we interpret the district court order as not 

requiring drilling to the deep formations in the following 

sections, the district court order is AFFIRMED: 24-5N-25ECM, 25-

5N-25ECM, 31-4N-27ECM, 32-4N-27ECM, 1-3N-26ECM, 12-3N-26ECM, and 

8-2N-27ECM. 

We AFFIRM the district court's order of August 31, 1987, 

which clarified that its references to the Chester Sand in its 

original December 31, 1986 order correspond to the Chester Lime. 

We AFFIRM the district court's finding that plaintiff's 

demand letters were insufficient to support a suit for increased 

density wells. 

-22-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 22 
We AFFIRM the district court's use of an alternative decree 

which ordered partial cancellation of the leases if defendant did 

not comply with its order. 

We REMAND for further proceedings the issue of whether a 

prudent operator would have asked the OCC to modify its previous 

orders establishing the 640-acre spacing units and for such other 

proceedings as may be necessary and which are not inconsistent 

with this order. 

Entered for the Court 

David M. Ebel 

Circuit Judge 

-23-

Appellate Case: 87-2460 Document: 010110038719 Date Filed: 07/20/1990 Page: 23