Court Opinion

ID: 9527294
Source: CourtListenerOpinion
Date Created: 2023-08-07 03:29:20.269664+00
Date Added: 2024-06-11T13:25:41.718171
License: Public Domain

Ethridge, J.,
dissenting.
I cannot agree with a requirement that an oil lessee must drill a protection well where it would have to do so at an economic loss, and where the land in question does not contain oil in paying quantities. A doctrine of absolute liability for all drainage by adjoining wells is repugnant to a principle basic in the entire development of oil and gas law. Moreover, I cannot see how appellees have been damaged when they have lost nothing of value recoverable at a profit.
The effect of the controlling opinion is to hold an oil lessee of two adjoining tracts absolutely liable for all drainage from one tract by its well on the other, even though the drained tract has such a marginal and small quantity of oil under it that an offset well could not be drilled on it at a profit. The prudent-operator test concerning protection of a lessor from drainage is abrogated by the majority opinion where the same lessee owns both *27tracts, although it applies where there are different lessees. Yet there is no sound reason for the distinction, except where fraud exists, and there is no proof of that here. An oil and gas lease is executed for the mutual benefit of the parties, but here that mutuality of benefit is not the test. The controlling opinion is departing in my view from the majority rule elsewhere, and adopting an approach indicated largely by dicta in a small minority of cases. And pertinent in this respect is the danger that this departure from the prudent-operator test may well forecast a handicap to the future development of petroleum reserves in the State. Such a drastic change from precedent should be made by the legislature and not by the Court.
My views are directed toward two principal points: (1) The original Millette decision in 1950 did not decide the present issue; and (2) the prudent-operator test should be applicable, and is in accord with the great weight of authority.
This case was first before this Court in 1950 in Millette v. Phillips Petroleum Company, 209 Miss. 687, 48 So. 2d 344. The Millettes sued Phillips for cancellation of their lease and for damages for drainage of oil from beneath their lands. The defendant’s general demurrer was sustained, and complainants appealed. On appeal the case was reversed and remanded. There was an express covenant in the lease requiring offset wells where there is a well on adjacent lands within 150 feet of the leased premises, if a ‘‘prudent operator” would drill the offset well. Hence it was held that this express covenant precluded an implied duty to drill offset wells. However, the Court reversed and remanded the case for the reason that the bill was said to state a cause of action for equitable relief by way of compensation for oil drained by lessee from lands leased to it by complainants. It was said that there is an implied covenant that the lessee will not impair the value of the lease and will use “reasonable care” to prevent drainage, and that the implied obli*28gation has been extended to include ‘ ‘ a duty to drill offset wells if practicable and profitable.” This obligation “gains equitable recognition when substantial drainage is caused by the lessee himself.” This duty is “separable from a duty to drill offset wells,” and the “lessee is liable for substantial drainage by him.” Hence the Court concluded ‘ ‘ that the bill states a cause for equitable relief by way of compensation for oil drained by lessee from lands leased by appellants.” But in order to determine what the Court there decided, it is necessary to know what the bill charged with reference to recoverable drainage of oil on appellee’s lands. I here refer to Cause No. 37584 and the record in the original Millette case. The amended bill as submitted on the first appeal was plainly based upon a failure to perform the implied covenants to protect the lands from drainage.
With reference to the quantity of oil under complainants’ land, the bill specifically charged that “a well drilled on complainants’ land . . . would result in production of oil and gas in paying quantities;” and that defendant and “any prudent operator” knew that a well could be drilled on complainants’ lands “as a producer in paying quantities. ’ ’ The bill further charged that more than three years had elapsed since it was known that “complainants’ lands were in a producing area and if drilled would produce oil and gas in paying quantities.” It averred that defendant had violated its obligation “to reasonably develop the lands of complainant after it had been demonstrated and shown that said lands were in a reasonably productive area.”
These quotations from the amended bill of complaint, which was considered by the Court on the original appeal, make it manifest that the Court, when it held that the bill stated a cause of action, was holding that the cause of action was based on the affirmative facts averred in the bill that there were substantial quantities of oil under complainants’ land and that production could be obtained thereon in paying quantities. Hence, *29so far as the first Millette case is a precedent, its decision must be limited as stated above. .'So it is manifest, in my opinion, that the Court there did not pass upon the instant question of whether liability for drainage exists if production cannot be obtained on the leased lands in paying quantities. That question is now open for decision under the express finding of the chancellor, to the effect that there was not sufficient oil under the Millettes’ land to justify a prudent operator drilling a well on it.
With reference to the quantum of damages allowed appellees against appellant, $12,500, there was a conflict in the evidence as to the amount of oil drained from appellants’ premises, and the chancellor apparently undertook to apply the royalty rule. Although the evidence was rather weak to support appellees’ contention that there was any oil at all under their lands, we cannot say that he was manifestly wrong on the facts, in view of the conflicting testimony of the geologists.
The chancery court found that “it was reasonably probable” that appellees had some oil under the northeast corner of this land, “but not of sufficient quantity to justify the drilling of a well.” Nevertheless, the Court held that appellant’s wells drained some oil from under Millette’s land, to his damage, and awarded him $12,500 damages. Hence the second question is whether a lessor can recover damages against a lessee for drainage from his lands, where the lessee is draining the plaintiff’s lands by its own well on adjoining premises, but there is not sufficient oil under the lessor’s lands to justify a prudent operator in drilling a well on lessor’s tract.
Appellant argues that, since the trial court found, and the evidence showed, that there was not sufficient oil under Millette’s land to justify the drilling of a well, appellant as a reasonably prudent operator could not be expected to drill such an offset well, and that therefore drainage, if it occurred, was damage without in*30jury. That view seems to me to be sound, equitable, and in accord with the great weight of authority.
In Hutchins v. Humble Oil and Refining Company, 161 S. W. 2d 571, (Tex. Civ. App. 1942), error refused by Supreme Court of Texas, Hutchins sued his lessee, Humble, for damages for defendant’s failure to protect plaintiff’s land from drainage by its wells on adjoining lands. Humble owned the adjoining lands in fee, and on them had created two units, under a twenty-acre drilling pattern, of about 15 acres each. It had drilled one well on plaintiff’s land. Plaintiff contended that defendant should have obtained exceptions to the spacing rules and have drilled an additional, second well on the plaintiff’s 28 acres. Plaintiff contended that because Humble owned the well on the adjoining lands, there was a greater duty on defendant to protect plaintiff from drainage, than if the draining well had been owned by a stranger. An offset well clause in plaintiff’s lease to defendant was similar to that in the Millette lease, which was discussed in our original decision. The Court held, as we did in the first Millette case, that the express provision for offset wells precluded an implied obligation. It also affirmed the trial court’s decision that the lessee was not under an obligation to prevent drainage beyond that of a reasonably prudent operator. The Court said:
“With reference to the 20-acre tract the jury found, as stated above, that an operator of ordinary prudence in the exercise of reasonable diligence would not have drilled an additional well thereon after well No. 1 thereon had been completed, and prior to the filing of this suit. The evidence in this record bearing on this point is voluminous. It is well settled that an operator is not under a duty to drill a well, at a loss to himself, for protection or for further development. Texas Pac. Coal & Oil Co. v. Barker, 117 Tex. 418, 433, 6 S. W. 2d 1031, 60 A. L. R. 936. And if there was some evidence from which the jury might infer there was some *31drainage from the 20-acre tract, there was also evidence from which it might be inferred this drainage was largely replaced by drainage to the 20-acre tract. Certainly there was ample evidence that would support the jury in concluding that another well drilled on the 20-acre tract could have been drilled only at a loss to appellee. ’ ’
In other words, the Texas Court applied the prudent-operator test to the same type of situation which we are now considering. And the Supreme Court of Texas refused error in the Hutchins case. In developing oil and gas law in Mississippi, we have rather consistently followed the Texas decisions. Moreover, in both Hutch-ins and the instant case the trier of fact found that a well drilled on the complainants’ land would not produce oil in paying quantities.
With reference to the Texas rule, State Line Oil & Gas Company v. Thomas, 35 S. W. 2d 746 (Tex. Civ. App. 1931), illustrates the basic principle upon which liability in damages for drainage has developed. It was a suit for damages for defendant’s failure to drill offset wells in order to prevent drainage of gas, not by wells on adjoining lands owned by defendant, but by strangers. The Court said that “it is well settled law in Texas” that to recover plaintiff must prove that lessee could have produced gas in the offset well at a profit, and that lessee should have drilled a well with a reasonable expectation of receiving a reasonable profit after deducting the expenses. This statement was cited with approval in the significant Stott case, 159 F. 2d 174, 177, hereafter discussed. Perhaps the leading Texas case applying the prudent-operator rule is Texas Pacific Coal and Oil Company v. Barker, 117 Tex. 418, 6 S. W. 2d 1031, 60 A. L. R. 936 (1928), which was cited with approval in Hutchins.
Gerson v. Anderson-Prichard Production Co., 149 F. 2d 444 (CCA 10th, 1945), coming from Oklahoma, is also directly in point on the instant problem. The Ger-*32sons sued defendant, their lessee, to recover damages because of defendant’s alleged failure to develop and to protect from drainage of oil a tract of land owned by plaintiffs. Defendant also owned leases on adjoining tracts upon which it had four producing oil wells. Although there was some drainage, the evidence was not sufficient to show whether a substantial quantity of oil was drained. The Court said:
“A lease of this kind contains an implied covenant that the lessee will exercise reasonable diligence in the development of the leasehold and in the protection of it from undue drainage through wells on adjacent lands. And reasonable diligence in the development and protection of the premises means the doing of that which an experienced operator of ordinary prudence would do in the premises, having due regard for the interests of both lessor and lessee. . . . But the lessee does not bear an implied obligation to drill an offset well to prevent drainage unless, taking into consideration all existing facts and circumstances, it would probably produce oil in sufficient quantity to repay the whole sum required to be expended, including the cost of drilling, equipping, and operating the well, and also pay a reasonable profit on the entire outlay. No obligation rests upon the lessee to carry the operations beyond the point where they are profitable to him, even if some benefit to the lessor would result from them. . . . The burden rested on plaintiffs to prove the breach of the implied covenant to protect the leasehold from undue drainage. It was incumbent upon them to prove that had an offset well been drilled on the Roosevelt Place Addition, it probably would have produced or would produce sufficient oil to repajo the expense of drilling, equipping, and operating the well, and also pay a reasonable return on the outlay. Wilcox v. Ryndak, supra; Ramsey Petroleum Corporation v. Davis, supra. In other words, the ultimate fact necessary for them to establish was that it probably would have paid to drill *33an offset well. Wilcox v. Byndak, supra. As indicated by the findings, the proof submitted was insufficient in that essential respect. Therefore, plaintiffs were not entitled to recover.”
Kansas and Illinois both apply the prudent operator test. Myers v. Shell Petroleum Corp., 153 Kan. 287, 110 P. 2d 810 (1941), especially at page 816; Carter Oil Co. v. Dees, 340 Ill. App. 449, 92 N. E. 2d 519 (1950). In the Dees case the adjoining wells were also operated by the same lessee, the defendant, but nevertheless the Court held that the lessee should do what a prudent operator would do, using reasonable diligence and having in mind the best interests of lessor and lessee. The Court said: “The lessee is not absolutely bound to prevent all drainage ‘where the lessor suffers no substantial pecuniary loss by such drainage. ’ ” To the same effect is Cooper v. Ohio Oil Company, 25 F. Supp. 304 (D. C. Wyo. 1938).
In Broswood Oil and Gas Company v. Mary Oil and Gas Company, 164 Okla. 200, 23 P. 2d 387 (1933), plaintiff sued to cancel a lease for breach of covenant to develop, and to recover damages for alleged drainage by wells of defendant on adjoining lands. The trial court held that there was no drainage, and if any, it was very slight, insufficient to make the drilling of an offset well profitable. The Court applied the prudent operator test, and said:
“It is true in this case that the defendant lessee owned leases on some of the adjoining lands to the premises here involved, and, while that is a circumstance to be considered, it is no more than that. This owning of an adjoining lease is within itself no badge of fraud. It is a circumstance to be considered in connection with all of the circumstances in evidence in determining the diligence used, or lack of diligence in drilling the premises involved, to procure production therefrom and to prevent drainage therefrom. And when all due diligence and good faith is shown the ownership of an adjoining *34leasehold is unimportant.” Compare Deep Rock Oil Corp. v. Bilby, 199 Okla. 430, 186 P. 2d 823 (1947).
Moreover, I think that the first Millette case erred in a dictum insofar as it indicated that there is an independent implied covenant not to injure the lessor’s lease. 209 Miss. 703-4. That statement is not supported by any precedents. This is illustrated in Tide Water Associated Oil Company v. Stott, 159 F. 2d 174 (C. C. A. 5th, 3946). Plaintiffs owned about 200 acres of land in Anderson County, Texas. Defendants, who owned leases on that land, owned about 7,000 acres of leases in the area. In 1939 defendants began recycling operations and unitized practically all of these tracts, except that plaintiffs refused to sign a reasonable unitization agreement. Defendants went ahead with the recycling operations and injected back under the ground large quantities of dry gas. Plaintiffs sued for damages for royalties on condensate which might have been removed from the wet gas under their lands, but which defendants had now replaced with dry gas. The Court first said that there were only five implied covenants, including the covenant to protect the land from drainage through wells on adjoining lands by drilling offset wells. This covenant does not “impose an insurer’s liability upon the lessee.” It was conceded that a prudent operator would not have drilled an additional well upon plaintiffs ’ land. Plaintiffs contended that there was an additional implied covenant, not to injure the lessors’ lease by operations of lessee’s own other premises. The Court observed that the only authority which it could find for such implied covenant was a dictum in Humphreys Oil Company v. Tatum, 26 F. 2d 882, certiorari denied, 278 U. S. 633. It said that, “if a reasonable and prudent operator would not have drilled an additional well on the leased tract, the lessors could not have recovered from the lessees damages for draining the leased tract from adjacent premises.” In other words, “the implied covenant of the lessee to do nothing to impair the value *35of the lease to the lessor is the duty ‘to use reasonable care in good faith to protect appellees from damage caused’ by drilling on the lessee’s adjoining land.” The Court held that the plaintiffs could not recover, since the defendants had done everything they could reasonably be expected to do in order to comply with then-obligations under the lease. The opinion then made this statement with reference to plaintiffs, which is directly applicable to the instant case:
“If a reasonable and prudent operator would not have drilled an additional well on the leased tract, the lessors could not have recovered from the lessees damages for draining the leased tract from adjacent premises. Cooper v. Ohio Oil Co., 10 Cir., 108 F. 2d 535; Hutchins v. Humble Oil & Refining Co., Tex. Civ. App., 161 S. W. 2d 571, error refused by Sup. Ct. Tex. . . . Any damage which they suffer is damnum absque injuria and in nowise are such damages chargeable to appellants.”
Merrill, in his Covenants Implied in Oil and Gas Leases (2d ed. 1940), Sec. 111, raises the question as to whether the duty of protection is rendered more onerous by the fact that the lessee owns the draining wells, as contrasted with a situation where the lessee does not own the draining wells. He then says: “What justification there is for the suggested distinction is somewhat puzzling to me. Why it should be any worse for the lessee to drain off the oil through his own adjoining wells than to permit others to do so, or what greater damage the lessor sustains by such conduct, I cannot see. The only apparent significance is in connection with what the West Virginia Supreme Court of Appeals calls ‘fraudulent’ drainage.”
In the instant case there is no evidence whatever of fraudulent drainage. There would seem to be no reason in fact or equity for a distinction between these two sets of circumstances as posed by Merrill. And the great weight of authority, as discussed above, supports that conclusion.
*36With perhaps the exception of two cases, the decisions cited in the controlling opinion are in my view not in point on the particular issue here. And those two cases represent a rule applied only by an inferior California court and a Federal district court in Illinois.
R. R. Bush Oil Company v. Beverly-Lincoln Land Co., 69 Cal. App. 2d 246, 158 P. 2d 754 (1945), was a decision by an inferior California court, the District Court of Appeals. The court stated in general terms that a lessee of adjoining tracts has the duty to compensate the owner of one of the tracts which it drains, and that the prudent-operator test is not applicable, since the drainage was caused by the lessee’s own affirmative acts. However, the case is clearly distinguishable. There was already one well on the plaintiff’s lands. And one-fourth of the total production from the draining well came from plaintiff’s land. So the Court’s statement of the rule went further than it had to go in that case. Production could have been obtained in paying quantities on plaintiff’s lease.
Hartman Ranch Company v. Associated Oil Company, 10 Cal. 2d 232, 73 P. 2d 1163 (1937), simply held that the express covenant in that lease did not negative the existence of an implied covenant to drill additional protection wells, when the adjoining wells were owned by the same lessee. It did not consider the question of whether production in paying quantities could be obtained.
The citation of Bush Oil Company in the recent case of Federal Oil Company v. Brower, 36 Cal. 2d 367, 224 P. 2d 4, 7 (1950), was a collateral reference and not on facts involving the issue in Bush. Geary v. Adams Oil & Gas Company, 31 F. Supp. 830 (D. C. E. D. Ill. 1940), is the only case other than Bush Oil Company which I have been able to find which supports the majority opinion. The decision of the district court in Geary was not appealed, and it appears to be contrary to the Illinois rule. Carter Oil Company v. Dees, 340 *37Ill. App. 449, 92 N. E. 2d 519 (1950). Without making an extended analysis of the cases relied on in the majority opinion, I will summarize hy saying that a careful examination of them reflects that in all except Bush Oil Company and Geary the courts were concerned with whether the obligation to drill offset wells existed on the assumption that production could be obtained from such offset wells in paying quantities. None of them considered the instant question, where production admittedly could not be obtained in paying quantities.
The controlling opinion indicates that Griffith v. Gulf Refining Co., 215 Miss. 15, 60 So. 2d 518 (1952), is pertinent. However, with deference, I think that case involved an entirely different situation. It dealt with Mississippi conservation statutes and rules of the State Oil and Gas Board. It was held that where a lessee obtained a permit under the spacing rules to drill on a 250-acre unit, and the well was drilled on a 160-acre tract within that unit, and production obtained therefrom, the lessee had created a de facto producing unit of 250 acres, and was liable to the lessors of the 90-acre tract incorporated in the unit for their proportionate share of the royalty. That was based upon the terms of the unitization statutes. Moreover, there was no question that a well producing in paying quantities could be drilled on both tracts within the unit.
In my opinion the following conclusions are warranted by the facts of this case and the authorities:
(1) The original Millette decision is not controlling on the limited issue here — it was not there considered or decided.
(2) The entire law of implied covenants has developed upon the basis of the prudent-operator test, and a departure from it now would depart from stare decisis.
(3) Application of the prudent-operator test to drainage by a lessee through a well on adjoining lands is in accord with the rule in Texas, two Federal Courts of *38Appeal, Kansas, Illinois and Oklahoma. To the contrary, apparently, are a California Court of Appeals and a Federal district court from Illinois, although the Illinois Supreme Court applies the prudent operator test. Leading cases so holding are the Hutchins, Gerson, Dees, Stott and Broswood decisions.
(4) We must enforce the contract or lease of the parties as it was written. It was for their mutual profit. It would not he just and equitable to require a lessee to pay for oil removed from a lessor’s land when it could not have prevented the removal, except by drilling a well at a loss to itself. The chancery court found that no well could have been profitably drilled on appellees’ land. Moreover, as Merrill says, there is no justification for a distinction between drainage through wells of others than lessee, and drainage through other wells on adjoining lands owned by lessee. Under either situation, the fact of drainage is the same. The lessor would sustain no greater damage if the drainage were by a third party, than if it were by the lessee. The only apparent significance of a distinction between the two factual situations would arise where fraudulent drainage occurs, and there is no evidence whatever of fraud here. It is undisputed that appellant acted in complete good faith. Certainly to eliminate the prudent-operator test under these facts will extend the leasehold obligations of the lessee beyond what either of the parties intended, and beyond what any of the courts have done, with two minor exceptions.
(5) This is a suit for damages. Monetary damages cannot be recovered unless appellees show that they have been injured. But they have not been damaged or injured, when the trial court justifiably held that they owned no oil which was recoverable, in an economic sense, at a profit. Since appellees could not have gained by the production of oil from their lands, they could not lose by its subterranean drainage. Hence appellees have lost *39nothing, since they had nothing of economic value. It is damnum absque injuria.
Sept. 27, 1954
74 So. 2d 731
(6) Appellant had a duty to use reasonable care in good faith to protect appellees from drainage caused by drilling on adjoining lands. This necessarily presupposes what a prudent operator would do. It would not be equitable to expand the lease obligations beyond any conceivable intent of the parties, so as to hold that lessee either must prevent the drainage at an economic loss to itself, or pay for it, even though as a prudent operator it could not avoid it.
For these reasons, I respectfully dissent from the majority decision. I would reverse the decree of the chancery court and render judgment for appellant.
Holmes and Gillespie, J.J., concur in this dissent.
ON SUGGESTION OF ERROR