Court Opinion

ID: 7823169
Source: CourtListenerOpinion
Date Created: 2022-09-07 18:01:04.767711+00
Date Added: 2024-06-11T16:30:47.610246
License: Public Domain

Jack Holt, Jr., Chief Justice, dissenting. I do not find the chancellor’s decision to be clearly against the preponderance of the evidence and would therefore uphold the cancellation of the lease for the lessees’ breach of the covenant to develop the leasehold. The majority states that it does not find Byrd v. Bradham, 280 Ark. 11, 655 S.W.2d 366 (1983), rehearing denied, controlling. To the contrary, the recitals in Byrd are sound and fully supported by case law, and they apply in this case. In Byrd, we stated: In oil and gas leases where royalties constitute the chief consideration, an implied covenant exists that the lessee will explore and develop the property with reasonable diligence. Smart v. Crow, 220 Ark. 141, 246 S.W.2d 432(1952). The duty to explore extends to the entire tract, and this is especially true where paying quantities of oil have been found on a part of the tract. Standard Oil Co. of Louisiana v. Giller, 183 Ark. 776, 38 S.W.2d 766 (1931). Of course, due deference must be given to the judgment of the lessee in determining whether to drill, but the lessee must not act arbitrarily. Ezzell v. Oil Associates, Inc., 180 Ark. 802, 22 S.W.2d 1015 (1930); Smart v. Crow, supra. Furthermore, the lessee must act not only for his own benefit but also for the benefit of the lessor. Amoco Production Co. v. Ware, 269 Ark. 313, 602 S.W.2d 620 (1980). The lessee’s obligation to explore is a continuing one, even after paying quantities of oil are discovered, in order to effect the purpose of the lease. Ezzell, supra. Production on only a small portion of the leased land does not justify allowing the lessees to hold the entire leasehold indefinitely, thus depriving the lessor of receiving royalties from another arrangement. Nolan v. Thomas, 228 Ark. 572, 309 S.W.2d 727 (1958). A duty to explore in this instance extends to the entire tract inasmuch as paying quantities of oil have been found on part of the tract. Stevenson’s testimony that the No. 1 well was high on the oil producing structure and that all of the oil would eventually migrate to that point and “will eventually get it all” is disputed by the testimony of the appellees’ principal witness, Mr. Gaffney, who stated that he believes the four wells each drain a ten acre area. He was not sure that they would drain twenty. Gaffney further testified: “Well, the general consensus, in my experience, has been that if wells are drilled at ten acre spacings, they believe that ten acres will be adequate to drain the ten acres.” In further review of Stevenson’s testimony, the record reflects he made no attempt to drill the north forty acres of the leasehold. Stevenson explains his failure to explore the north acreage by stating that after drilling the No. 1 well, the further north he went the less oil he found. I cannot follow the logic of his statement in this regard. Stevenson describes the No. 1 well as a good well. His No. 2 well on the adjacent ten acres to the north, is described as a poor well, which is now used for salt water disposal. Well No. 4 which is north of No. 2, yet south of the north forty acres, is a producing well. Stevenson testified it is producing at a loss, however, he envisions that it may begin to produce at a profit. Although he makes this statement, he does not furnish us with any information about the extent of current production. Inasmuch as Stevenson moved north of well No. 2 and found production in well No. 4, one could assume that moving further north to the north forty, he might find even better conditions for locating oil. Likewise, Stevenson’s assertion that well No. 1 is high on the oil producing structure and that all oil will eventually migrate to that point calls for a migration from the furthermost northern forty through the intermediate forty down to the lower forty. This seems incredible, particularly in light of the testimony of Gaffney, that each one of these wells would only drain ten acres. Both Gaffney, and Gary Rutledge, Land Manager for Hudson Resources (had he been able to obtain a lease from Mrs. Barnes in 1983) would have drilled Mrs. Barnes’ north forty acres. Stevenson has the duty to explore the entire tract which includes the north forty with reasonable diligence. This he has not done. He assumes the position that the further north he goes the less oil he will find and there would be nothing for him to gain in exploration of this area. We have held that if there is nothing gained then there is nothing to lose by cancellation of the lease, Byrd, supra. See also Skelly Oil Company v. Scoggins, 231 Ark. 357, 329 S.W.2d 424 (1959). A close question develops as to whether or not Stevenson was in further violation of his implied covenant, when he failed to explore the eastern portion of the appellee’s 120 acres. I find the testimony of appellee’s expert and the appellant in hopeless conflict, the appellant standing on the fact that he has drilled five wells in what he considers the most promising part of the lease and his producing wells can eventually take all the oil in the leasehold, even though it takes twenty years or so, as opposed to the appellee’s expert who would expect the appellant’s wells to drain from ten acre areas. If one assumes that appellants’ wells would drain somewhere in the neighborhood from ten acres, then it is obvious the eastern portion of Mrs. Barnes’ property is still subject to exploration. By allowing the lessee to hold the entire leasehold, Mrs. Barnes is being deprived of potentially “receiving royalties from another arrangement” as discussed in Byrd, supra. On the other hand, if one assumes that the appellants’ producing wells can eventually take all the oil in the leasehold, to take such oil over a twenty year or so period, deprives Mrs. Barnes of a receipt of her royalties over an unreasonable period of time. In either event, the chancellor’s decision is not against a preponderance of the evidence. I would cancel the lease on the 120 acres except as to the ten acre tracts surrounding each of the four wells presently utilized by the appellee. Newbern, J., joins in this dissent.