Sinclair Oil & Gas Company v. Masterson

• Decision Date: 21 December 1959
• Docket Number: No. 17530.,17530.
• Citation: 271 F.2d 310
• Parties: SINCLAIR OIL & GAS COMPANY, Appellant, v. R. B. MASTERSON et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

271 F.2d 310 (1959)

SINCLAIR OIL & GAS COMPANY, Appellant, v. R. B. MASTERSON et al., Appellees.

No. 17530.

United States Court of Appeals Fifth Circuit.

October 27, 1959.

Rehearing Denied December 21, 1959.

COPYRIGHT MATERIAL OMITTED

Paul A. McDermott, G. B. Mallum, Fort Worth, Tex., Nathaniel J. Harben, New York City, for appellant.

D. H. Culton, Amarillo, Tex., Culton, Morgan, Britain & White, Amarillo, Tex., of counsel, for appellees.

Before RIVES, Chief Judge, and CAMERON and JONES, Circuit Judges.

CAMERON, Circuit Judge.

Sitting without a jury, the court below entered a judgment in favor of plaintiffs Masterson, appellees here, and against defendant Sinclair Oil & Gas Company, appellant here, requiring Sinclair to drill within the ensuing five years thirty exploratory wells prospecting for oil, providing alternatively for the surrender of lease acreage or payment of money penalties. The Mastersons own ninety thousand acres¹ of land in Moore and Potter Counties, Texas, and had, between the years 1916 and 1938, executed thirty-one separate oil and gas leases. By mesne assignments these leases, insofar as they covered oil, had come into the ownership of Sinclair, and the gas rights had become the property of Colorado Interstate Gas Company.² Colorado, or its predecessors in title, had adequately explored and developed the leases as applied to gas by drilling 114 wells, and had by contract with the Mastersons been released from further obligation to drill for gas.

From the decree entered against it Sinclair appeals, specifying sixteen errors which it relies upon for reversal and which it reduces to eight principal issues. In summary, its main contentions for reversal are these:

That Sinclair was under no implied covenant to "explore" the Masterson lands for oil (as differentiated from the implied covenant to develop), because Colorado and its predecessors had extinguished the obligation to explore by drilling the 114 wells, this contention being based upon the claim that such covenants were not divisible as between the owner of gas rights and the owner of oil rights, and that Sinclair was entitled to credit for all of the exploration conducted by Colorado and its predecessors; that Colorado's explorations and the wells drilled by Sinclair after the filing of this civil action had satisfied Sinclair's duty to explore, it being contended that under Texas law, there was no implied duty to explore after the Masterson leases had been proven by these gas and oil wells; that the sole obligation then resting upon Sinclair was to "develop," which obligation did not arise without proof on the part of the Mastersons that the drilling of exploratory wells would probably result in a profit to Sinclair; that the decree of the court below is arbitrary and is unsupported by any evidence which would justify the exploration or the alternative penalties required by the judgment; that as to three of the leases, the presence of express covenants negated the existence of any implied covenants; that as to one lease, a prior suit brought by the Mastersons was res judicata of the present action; and that the judgment of the court below was too ambiguous, uncertain and indefinite to furnish an enforceable guide or standard of what Sinclair was required to do.

The validity of these several points must be tested under the legal principles for which Sinclair contends as applied to the facts as found by the trial court. These facts will be brought into as narrow compass as their complexity will permit.

This civil action was brought June 16, 1955 "to enforce the implied covenant or covenants, alleged to exist in and as a part of each of such leases, for adequate exploration and development of the lands covered by such leases insofar as oil is concerned." The ninety thousand acres of the Masterson ranch were covered by thirty-one leases given to various individuals largely during the period 1916 to 1924 and all prior to 1940. Each of the leases was executed for a small bonus consideration averaging less than $1.00 per acre; the primary terms were short, running from one to four years in most instances. Each lease contained a provision requiring the payment of royalties measured by the quantities of oil produced and a provision requiring the payment of royalty measured by the volumes of gas produced.

By writings executed mostly in 1928 and all prior to 1940, the oil rights and the gas rights under the leases were partitioned, and have, during the intervening period, been held by different producers. This partition was accomplished by conveyances between the different lessees and their assigns, except as to one set of leases covering 1,260.67 acres in which the Mastersons partitioned the oil and gas by separate leases to those owning the respective rights in the other lands. In 1928, the owners of the oil rights and the owners of the gas rights entered into an operating agreement containing, as one of its terms, an option to the owner of the respective oil and gas rights to take over, under the provisions of the agreement, any well which either might sink which encountered the mineral owned by the other.

Prior to the filing of this action, 114 wells had been drilled on the Masterson lands by the owner of the gas rights and for the production of gas only, eleven of which were dry holes. A few of these gas wells had been drilled to a depth sufficient to test the oil horizon, and some of the drilled wells had revealed oil "shows." If oil exists at any point on the Masterson lands, "the better prospect will be to find it at horizons below those from which the gas lessee had been producing gas, and it was not the practice of the gas lessee to drill its well a sufficient depth to test such oil zone." The zone at which oil, if any, may be expected to be found in most of the area is from approximately 200 feet above to approximately 100 feet below sea level. Of the 114 wells producing gas from the Masterson lands, only two have been drilled to sea level, and only five have been drilled into the horizon from 200 feet to sea level, two of which encountered oil shows.

The owner of gas rights had fully explored and developed the leased premises for gas, but after the separation of oil and gas rights and prior to the institution of this action, no owner of the oil rights had drilled a well on the Masterson land. Commencing in June, 1954, plaintiffs commenced negotiation with Sinclair seeking development by it of the oil rights conveyed in the leases. These negotiations terminated when, May 19, 1955, Sinclair stated that "it had reviewed all facts available with regard to development on the lands, had studied geological opinion on those facts, and had reached the conclusion that there had been no default by it in the conduct of exploratory operations on the Masterson lands." This letter precipitated the filing of this action. The complaint does not challenge that the leases are in full force and effect as to both oil and gas, but seeks "an enforcement of the leases by a determination that defendant has violated the implied covenants of the leases requiring the exercise of reasonable diligence in prospecting and developing for oil the leases on plaintiffs' lands, and that defendant be required to proceed with operations under such a program and within such a time as the Court shall find equitable."

Sinclair commenced its first drilling of a well on plaintiffs' lands about three months after this action was begun, choosing to drill at a point where Colorado had encountered oil in deepening one of its gas wells. This Sinclair well was completed as an oil producer Nov. 25, 1955. Prior to the first hearing of this action in June, 1957, Sinclair commenced the drilling of seven other wells, of which five were completed as producers of oil and two as non-producers. All of these wells were in the section in which the discovery well was located except one, which was in the section immediately to the east. All of the wells were in the northwest corner of the Masterson land except one, which was located about ten miles east of the others and near the northeast corner of plaintiffs' land. Over a period of two years from the filing of the suit and three years from the time of plaintiffs' demand, defendant had drilled upon the Masterson 90,000 acres only eight wells, six of which were producers and seven of which were in a limited area.

At the first hearing in June, 1957, a subordinate official of Sinclair predicted considerable activity and drilling by defendant in the immediate future, which included also seismograph explorations on the entire Masterson tract aimed at determining the best places to drill. He predicted that the seismograph work would be completed by the middle of August and that this would reveal what oil deposits probably underlay these lands.

After studying briefs furnished by the parties, the court below addressed a letter to them expressing the opinion that the defendant had been guilty of unreasonable delay in performing the implied covenant to explore for oil, manifesting no interest in oil exploration on these lands for a very long period of time. It expressed the opinion also that the wells which had been drilled for gas were inadequate to test for oil. The court stated that it found the testimony of the likelihood of finding oil under the vast reaches of the Masterson lands in conflict, and that it felt that it ought to await the seismograph survey and the further actions of Sinclair towards performance of the lease provisions before completing the hearing.

When the hearing was resumed about a year later, the court discovered that only three additional wells had been drilled, mostly in the general neighborhood of the discovery well, two of which were good producers, and that arrangements had been made for drilling four more wells, one of which was completed in June, 1958 as a prolific producer. At the reopened hearing, ...