Case Name: SUPERIOR OIL COMPANY v. Edwin L. COX et al.
Court: Louisiana Supreme Court
Jurisdiction: Louisiana
Decision Date: 1975-01-20
Citations: 307 So. 2d 350
Docket Number: No. 54734
Parties: SUPERIOR OIL COMPANY v. Edwin L. COX et al.
Judges: BARHAM, J., concurs in decree only and assigns reasons.
Reporter: Southern Reporter, Second Series
Volume: 307
Pages: 350–360

Head Matter:
SUPERIOR OIL COMPANY v. Edwin L. COX et al.
No. 54734.
Supreme Court of Louisiana.
Jan. 20, 1975.
Rehearing Denied Feb. 21, 1975.
George J. Bailey, Bailey & Hollier, Lafayette, for defendants-applicants.
Gene W. Lafitte, Liskow & Lewis, New Orleans, Lawrence E. Donohoe, Jr., Davidson, Meaux, Onebane, Donohoe, Bernard, Torian & Diaz, Lafayette, for plaintiffs-respondents.
James D. Rives, Jr., New Orleans, for defendant-respondent.

Opinion:
DIXON, Justice.
Plaintiff, Superior Oil Company, and third party plaintiffs, Midwest Oil "Corporation and Belco Petroleum Corporation, claim an interest in certain oil and gas leases which Midwest and Belco assigned to defendants, Edwin L. Cox and others. The case involves the interpretation of the "acreage or cash contributions" clause in a joint operating agreement.
From an adverse judgment in the district court, Cox appealed. Plaintiffs answered the appeal, seeking a modification so that the interest of Cox would bear the overriding royalty interest which he assigned to other parties. The Court of Appeal affirmed, but amended in accordance with the answer to the appeal. Upon the application of Cox, we granted certiorari.
The facts were stipulated and are not in dispute. They are generally as follows. Superior, Midwest and Belco owned certain oil, gas and mineral leases shaded yellow on Exhibit 40. Midwest and Belco, but not Superior, owned other mineral leases on adjoining land shaded blue on the exhibit.
By agreement dated February 10, 1967 (hereinafter referred to as the yellow farmout), Superior, Midwest and Belco, owners of the yellow leases, contracted with defendant Cox that if Cox, at his sole expense, drilled and successfully completed a well at a certain specified location on one of the yellow .leases (hereinafter referred to as the test well or Broussard No. T), they would transfer a one-half interest in the yellow leases to him. The yellow .farmout agreement also provided that, if jjfie well was successful, the parties would then enter into a joint operating agreement, a copy of which was attached to the yellow farmout and which would govern the drilling of future wells or other operations on the yellow leases.
On March 8, 1967 (about a month after the yellow farmout was executed), Midwest and Belco owners of the blue leases, entered into a separate agreement with Cox (hereinafter referred to as the blue farmout) with regard to the blue leases. In this instrument, Cox obligated himself to drill (as distinguished from the mere option to drill under the yellow farmout), at his own expense, the same test well provided for in the yellow farmout. Cox also obligated himself to reimburse Midwest and Belco 100% of all rentals falling due under the blue leases while he was engaged in drilling operations under this agreement.
Under the blue farmout, Midwest and Belco agreed that, if the test well was productive and if any portion of the blue leases was unitized with said well by the Louisiana Department of Conservation, they would assign to Cox certain interests in those portions of the blue leases included in said unit. In this regard, the blue farm-out agreement provides, in essence, that Midwest and Belco would assign to Cox all of their rights in and to the farmout acreage included in said production unit, subject to the. condition and reservation that Cox would receive 100% of the production from the test well attributable to the farmout acreage and the full working interest therein, subject to a total lease burden of 25%. The difference between the 25% and the present lease burdens represented the overriding royalty reserved by Midwest and Belco. This would continue until such time as Cox had recovered out of production the cost to drill, complete, equip and operate said test well. At the time of payout, Midwest and Belco had the option of converting their overriding royalty to a one-third working interest in all rights above 16,000 feet, and a one-fourth working interest in all rights below 16,000 feet. They further agreed that whether or not the test well would be completed as a producer, Cox was granted the right, within a period of six months after completion of the test well, to drill an additional well or wells under the same terms and conditions as set forth for the initial test well.
On or about May 14, 1967 Cox commenced drilling the test well (Broussard No. 1) at the location on the yellow leases specified in both the yellow and blue farm-outs and completed it as a producer on or about August 4, 1967. The entire cost of approximately $718,722.00 was paid by Cox, as well as the rentals on the blue leases in the aggregate of $27,672.50. It is acknowledged by Superior, Midwest and Belco that the Broussard well fulfilled all-of the requirements of both the yellow and blue farmouts.
Upon completion of the test well, and pursuant to the yellow farmout, Superior, Midwest and Belco, by instrument dated October 1, 1967, assigned to Cox one-half of their interest in the yellow leases to a depth of 16,000 feet. On the same day, Superior, Midwest and Belco and Cox executed a second joint operating agreement, using the form attached to the yellow farmout. This joint operating agreement provided that, in the event any party desired to drill an additional well on the yellow acreage, such party was required to notify the other parties and afford them an opportunity to join in the operation. If all parties elected to participate, the cost would be borne in proportion to their respective interests.
After completion of the Broussard well, Cox proposed the drilling of another well, known as Pellerin No. 1, on the yellow leases. Under the joint operating agreement, Superior, Midwest and Belco elected to participate. Cox commenced drilling the Pellerin well on October 6, 1967 and completed it as a producer on February 6, 1968. As drilling progressed, Superior, Midwest and Belco, in accordance with the operating agreement, paid to Cox their proportionate share of the costs as they accrued.
Subsequently, the Louisiana Department of Conservation by Order No. 800, dated May 13, 1968, effective May 1, 1968, created separate units for the Broussard (Mary Tex Sand Unit B) and Pellerin (Mary Gex Sand Unit A) wells. Included in each unit was certain acreage covered by the blue leases. Under the provisions of the blue farmout, Midwest and Belco assigned to Cox interests in the mineral leases covering the blue acreage insofar as those leases were included in the units for the Broussard well (Unit B) and the Pellerin well (Unit A).
No claims are asserted by Superior, Midwest and Belco to any interests in the mineral leases covering the blue acreage included in the Broussard unit. The question to be decided in this case is: were the blue leases in the Pellerin unit governed by the contribution clause in the joint operating agreement of October 1 ? That clause is as follows:
"ACREAGE OR CASH CONTRIBUTIONS
"If any party receives, while this agreement is in force, a contribution of cash toward the drilling of a well or any other operation on the subject leases such contribution shall be paid to the party or parties who conducted the drilling or other operation and same shall be applied against the cost of drilling or other operation. If the contribution be in form of acreage, the party to whom the contribution is made shall promptly execute an assignment of the acreage, without warranty of title, to the other parties who participated in such operation for which the acreage contribution was made to support in the proportion of their interest therein. Each party shall promptly notify the other parties of all acreage and money contributions it may obtain in support of any well or other operation on the Joint Area."
No jurisprudence clarifying the "contributions" clause has been cited to the court. Cox argues that the blue leases under the Pellerin unit were in no sense a "contribution;" that, in fact, they were earned by him in performing the obligation to drill the Broussard well under the blue farmout, and completing the Pellerin well under the blue farmout and the joint operating-agreement of October 1.
The Contentions
Cox further argues that the "contributions" clause has been misconstrued by the courts below, in spite of the fact that the parties themselves properly interpreted the agreement after the formation of the conservation units.
Superior, Midwest and Belco, on the other hand, contend that the "contributions" clause is clear and unambiguous, lending itself to no interpretation other than that required by the plain words of the agreement.
The purpose of the "contributions" clause, argues Superior, Midwest and Bel-co, is that "if any party to the operating-agreement receives a contribution, in cash or acreage, made toward the drilling of a joint well, it is to inure to the benefit of all parties to the operating agreement who participated in the drilling of the well. If by cash, the contribution is applied toward the total well cost, with the result that the total well cost is reduced and each party participating in the joint well pays less. If the contribution is paid by acreage, that contribution is to be distributed to all parties who participated in drilling the joint well."
The Acquisition by Cox (the "Contribution")
The Pellerin well was a joint operation, and was drilled on yellow leases. The Cox interests owned about half the yellow leases, Cox having received an assignment of a half interest in the yellow leases from Superior, Midwest and Belco as a result of drilling the Broussard well under the yellow and blue farmouts. As to Midwest and Belco, owners of the blue leases, under the blue farmout, Cox had earned the right to drill another well after the completion of the Broussard well. The blue farmout also gave Cox the right to receive certain interests in the blue leases if they were included in conservation units with producing wells. Superior, not an owner of blue leases, was not a party to the blue farmout. Cox's obligation under the blue farmout was different from that under the yellow farmout; Cox's obligation to drill a well was mandatory under the blue farmout, but only potestative under the yellow farmout. Consequently, as far as Superior was concerned, the right to drill the Pellerin well arose under the yellow farmout; as far as Midwest and Belco were concerned, the right to drill the second well arose under the blue farmout.
Nevertheless, the Pellerin well was also drilled under the terms and conditions of the joint operating agreement of October 1. This joint operating agreement set out the proportionate ownership of the yellow leases, and provided that the expenses of exploration were to be borne by the parties in the proportion of their ownership.
It was not until the formation of the conservation department unit that it was known whether any blue leases would be included in the Pellerin unit. At the hearing before the conservation commissioner, Superior, Midwest and Belco attempted to exclude all the blue leases from the Peller-in unit. The record does not disclose the factual explanation, but these parties had agreed to delay the formation of the Broussard unit until after 'the completion of the Pellerin well. The Broussard well had been drilled in the eastern portion of Section 19, as specified in the blue farm-out. The Pellerin well had been drilled in the western portion of Section 19. All the blue leases lay in Section 24, adjoining Section 19 to the west. Cox proposed a "geological" unit; Superior, Midwest and Belco proposed "geographical" units. Geographical units would have excluded blue leases from participation in the two wells drilled by Cox.
The commissioner's order of May 13, effective May 1, established units based on geological evidence which did not follow geographical lines. Consequently, relatively small blue acreage was included in the Broussard unit and relatively large blue acreage was included in the Pellerin unit:
It was only after unitization, and the inclusion of blue acreage in the units, that Cox, for the first time, was entitled to assignments of interests in the blue leases. No one could have known, prior to the formation of the units, that Cox would own any interest in any blue leases. The inclusion of the blue leases in the production unit was also a condition to Cox's acquisition of the right to have blue leases assigned to him.
This is the transaction — the assignment of interests in blue leases from Midwest and Belco to Cox — which Superior (followed by Midwest and Belco when they were brought into the suit) claims is an "acreage contribution."
Application of the "Contributions" Clause if Unambiguous
If the "contributions" clause is read as if it is clear and specific in its meaning, we note that the only "contribution" covered by the paragraph is a contribution received by a party while the agreement is in force, "toward the drilling of a well."
That is, if the "contributions" clause is clear and unambiguous, it only purports to cover acreage acquired as an incentive toward, or compensation for, drilling a well.
Since Cox's right to an interest in the blue leases never matured until they were included in the production units, it is difficult to state without serious doubt that Cox received the interest in the blue leases as either an incentive for drilling the Pellerin well, or compensation for drilling the well. The hope for the acquisition of blue leases was surely present, but depended ultimately upon the decision of the conservation commissioner in establishing units along geological, not geographical, lines.
Cox's acquisition of the blue leases has no more effect on the relative rights of Superior, Midwest and Belco than would have been the case if Midwest and Belco had conveyed interests in blue leases to third parties, not a party to the joint operating agreement. For the alienation of the leases, Midwest and Belco received the consideration for which they had contracted. Their rights to participate in the production unit were diminished, not because of a side deal between Cox and some person not a party to the agreement, but because of their own arrangement, freely made.
At this point we can note that promptly after Midwest and Belco assigned the blue leases to Cox, they demanded from Cox an adjustment, and received from Cox a return of part of the costs of drilling which Midwest and Belco had previously paid, based on the ownership interests set out in the joint operating agreement. When Cox received the blue leases, he made an adjustment, assuming for himself a greater portion of the costs of drilling.
The adjustment of the ownership interests in the blue leases between Cox on the one hand and Midwest and Belco on the other hand did not in any way affect Superior's percentage participation in the production of the unit. Superior's percentage of the production in the Pellerin unit was the same before Midwest and Belco conveyed Cox's interest in the blue leases to him as it was afterwards. Cox's per- . centage of production was increased, not at the expense of Superior, but at the expense of Midwest and Belco, who had contracted to assign the blue leases long before the formation of the joint operating agreement.
If the "contributions" clause is to protect the participants of a joint operating agreement against the possibility that one of them might obtain an undue advantage from an outsider at the expense of those paying for the operations, it has a function. No reason has been advanced, however, why the participants might suffer if two or more of them, but not all, rearrange the proportion of their ownership between or among themselves.
The joint operating agreement listed all the leases it covered. All of them were yellow leases. All of them in the Pellerin unit are in Section 19 (except for small yellow acreage in the eastern edge of Section 24 and small acreage in Section 24 lying west of the blue leases). There was no change in ownership of the yellow leases.
The proportionate ownership and proportionate sharing in production from the yellow leases — the only leases covered by the joint operating agreement' — were not changed by Cox's acquisition of the blue leases.
The blue leases were outside the "joint area" covered by the joint operating agreement, and are important only because they were included in the production unit. The interests of Superior, Midwest and Belco are no more prejudiced or diminished than if the blue leases had been sold to an outsider.
Therefore, even if the "contributions" clause is clear and unambiguous, it does not apply here for two reasons: (1) the blue leases were not acquired by Cox as a "contribution . . . toward drilling a well;" (2) Cox's acquisition of the blue leases did not affect Superior's proportionate interest in the production of the unit, and only affected Midwest's and Belco's because of their prior contract to assign.
"When There is Anything Doubtful..."
The "contributions" clause is found in many oil and gas form books. No judicial interpretation of the clause has been cited to us, and the only discussion of the clause located is in the 3rd Annual Rocky Mountain Mineral Law Institute at page 299:
"CONTRIBUTIONS OF CASH OR ACREAGE
"Not infrequently, the owner of a lease or leases within the limits of a prospect is unwilling to participate in the joint operation, but is willing to make a contribution of money or acreage to the drilling of a test well by the parties to the joint operation. This, however, is only one of the situations that may result in a contribution to the drilling of a well in the course of the joint operation.
"To eliminate any possibility for misunderstanding on this score, the agreement should provide that any contribution of money that is made by outsiders to any party in the joint operation will be shared with the other parties in proportion to their interests. If the contribution consists of a lease or leases, the party receiving the contribution should be required to notify all of the other parties, with full particulars concerning such lease or leases, whereupon each of the other parties would have the option to participate therein in proportion to its interest in the joint operation. However, care should be taken to make the participation in a contribution of acreage optional, so that no party will be obligated to assume the burdens imposed by the lease or leases, otherwise than at its election. Of course, if all parties elect to participate in an acreage contribution the lease or leases acquired should be made subject to the operating agreement."
The one clear idea, applicable to the case before us, to be drawn from this discussion, is that "contributions" are made by outsiders — those not party to the joint operating agreement. Only in this way— when one of the participants in the joint operating agreement receives a contribution toward the operations from someone not a party to the joint operating agreement — does the function of the clause become clear. Only in this way does the recipient of the "contribution" profit at the expense of his partners.
Since the clause before us does not limit "contributions . . . toward the drilling of a well" to those made by outsiders, there are doubts about its function and meaning. "When there is anything doubtful in agreements, we must endeavor to ascertain what was the common intention of the parties, rather than to adhere to the literal sense of the terms." C. C.1950. Crow Drilling & Producing Co. v. Hunt, 254 La. 662, 226 So.2d 487 (1969); Jacka v. Ouachita Parish School Board, 249 La. 223, 186 So.2d 571 (1966). French law would add that "an agreement includes, however general its terms may be, only the object to which the parties have intended to contract." Civil Law Translations 1, Aubry & Rau, Kinds of Obligations, § 347 at page 349.
Therefore, what the parties did after the inclusion of the blue leases in the Pellerin production unit is relevant to determine the common intention of the parties. After the formation of the unit, Belco demanded an adjustment in a letter in which it set out that its working interest had been reduced from 9.120% to 1.47312%, before payout. This adjustment resulted from the inclusion of the blue leases in the Pellerin unit. The adjustment was made and Cox made a refund of well costs to each of the plaintiffs. Midwest and Belco cashed the refund checks and retained the funds. Superior remained silent for four months and returned the check.
Midwest and Belco did not join Superior as plaintiffs in this litigation, but were brought in as defendants.
This adjustment, the assignment of the blue leases by Midwest and Belco and the failure of Midwest and Belco to make any demand until required to by Superior's suit, constitute evidence that the parties to the agreement did not contemplate that the assignment to Cox of the blue leases would be considered an "acreage contribution."
For these reasons, Superior has failed to establish a right to share in the blue leases, and the plaintiff's and third party plaintiffs' demands should be rejected.
There is now judgment in favor of defendants, Edwin L. Cox, Fred Snuggs, C. F. Braun & Company, Diamond Shamrock Corporation, Ralph H. Snuggs, Winnifred Ray and Hilton T. Ray, and against plaintiff, Superior Oil Company, and against Midwest Oil Corporation and Belco Petroleum Corporation, rejecting the demands of plaintiff and third party plaintiffs, at their cost.
BARHAM, J., concurs in decree only and assigns reasons.
SANDERS, C. J., concurs for the reasons assigned by BARHAM, J.
MARCUS, J., dissents and assigns reasons.
. Superior, Midwest and Belco urged in their answer to the appeal that the judgment be affirmed in all respects except that it be amended to provide that Cox would bear exclusively out of his interest, the overriding royalty interest which Cox (in consideration of geological services) assigned to Raleigh W. Up-shaw, Stanrich Oil Company and Walter S. Mott. The Court of Appeal so amended the judgment. In the application íor writs, Cox did not assign as error this portion of the judgment. The brief of Cox filed in this court does not mention this issue. Hence, the holding that the Cox interest would bear, exclusively, the Stanrich, et al. overriding royalty interest is apparently not at issue.
. 290 So.2d 916 (La.App.3d Cir. 1974).