Webb v. Hardage Corp.

• Decision Date: 12 June 1985
• Docket Number: No. 17016-CA,17016-CA
• Citation: 471 So.2d 889
• Parties: Vernon E. WEBB, et al, Plaintiffs-Appellees, v. The HARDAGE CORPORATION, Defendant-Appellant.
• Court: Court of Appeal of Louisiana — District of US

Page 889

471 So.2d 889

Vernon E. WEBB, et al, Plaintiffs-Appellees, v. The HARDAGE CORPORATION, Defendant-Appellant.

No. 17016-CA.

Court of Appeal of Louisiana Second Circuit.

June 12, 1985.

Supplemental Opinion Aug. 21, 1985.

Kennedy, Goodman & Donovan by John M. Frazier, Shreveport, for defendant-appellant.

Bethard & Davis by James G. Bethard, Coushatta, for plaintiffs-appellees.

Before HALL, FRED W. JONES, Jr. and SEXTON, JJ.

HALL, Judge.

In this appeal by a mineral lessee from a judgment ordering cancellation of three mineral leases, the principal issue is whether the leases were maintained in force and effect under the shut-in clause of each lease. Finding that this issue and the other issues raised by the parties were correctly resolved by the trial court in favor of the lessors, we affirm the judgment.

In May 1976, the plaintiffs, Vernon W. Webb, Clarence H. Smith, Jr., and Jim W. Wilson, leased the mineral rights to three tracts of land in Red River Parish to Enerco, Inc. Because the three separate leases covering the three separate tracts each had a primary term of 5 years, they expired in May 1981 unless continued in effect beyond the primary term by activities of the lessee as provided in the leases.

Enerco filed for bankruptcy in May 1978, and assigned its interests in the leases to William Neary, as trustee, who in turn assigned his interest in the leases to the Hardage Corporation. By another series of transfers, working interest in the leases was given up by Hardage, but was regained by Hardage in February 1983. In the interim, a shallow gas well was drilled on each of the three leased premises. The three wells were drilled in April 1981, one month before expiration of the primary terms of the leases. The wells were cored, logs were run, casing was set, the wells were perforated, and the formation was fracked. However, the only surface testing done to get an indication of production potential was simply igniting the gas at the mouth of the pipes coming from the wells and then observing the flares produced for four or five hours. After the wells were flared in this manner, the wells were then shut-in for lack of a market for the gas. Work on the wells was completed in July, 1981. The initial potential test required by the State Office of Conservation was not performed.

Shut-in royalty payments were tendered but returned. By letters dated August 19, 1981, August 20, 1981, January 19, 1982 and January 20, 1982, lessors notified lessees of non-compliance with the leases, but lessees did no further work on the wells. In May 1982, a gas purchase contract was entered into by an agent of the lessee and Tennessee Gas Transmission Company.

In March 1983, the Hardage Corporation performed an initial potential test on one of the wells. While the state requires that this surface production test, consisting of quantitative measurement of gas production of a well over a twenty-four hour period, be done within a few days after the well is drilled, performance of the test in this instance was delayed for nearly two years. When the Hardage Corporation attempted to perform the test on one of the two other wells, the company official at the well site was escorted from the premises by a sheriff's deputy called by the owner of the land.

That same month suit was filed by plaintiffs against Hardage seeking a declaration that the three leases were terminated, seeking a temporary restraining order and preliminary injunction to prevent Hardage from taking further action on the properties, and seeking damages and attorney fees. A temporary restraining order was issued and, after a hearing, a preliminary injunction was granted. The Hardage Corporation then filed a reconventional demand alleging that damages were due for the wrongful issuance of a temporary restraining order and preliminary injunction, alleging the three leases were still in full force and effect, and alleging that plaintiffs owed attorney fees and damages to Hardage.

After trial, in an opinion rendered in August 1984, the trial court held that the three leases were terminated, and that defendants were indebted to plaintiffs in the amount of $2500.00 for plaintiffs' attorney fees. This appeal by defendants followed; we affirm.

ISSUES PRESENTED

The principle issues presented by this appeal are:

1. Were the leases extended beyond the primary term by virtue of the wells being shut-in pursuant to the shut-in clauses of the leases?

2. Did Paragraph 13 of the leases, a "force majeure" provision, extend the lease beyond the primary term?

3. Did Paragraph 12 of the leases apply so that even if the leases had expired, the lessee was entitled to retain a 40-acre square around each well?

4. Are damages and attorney fees owed by plaintiffs to defendants or by defendants to plaintiffs?

WERE THE LEASES CONTINUED IN EFFECT UNDER THE SHUT-IN CLAUSE?

All three leases at issue were executed on the same form. Paragraph 2 of these leases provides:

2. Subject to the other provisions herein contained, this lease shall be for a period of five (5) years from this date (called "primary term") and as long thereafter as (1) oil, gas, sulphur, or other mineral is produced from said land hereunder or from land pooled therewith, or (2) it is maintained in force in any other manner herein provided. (Emphasis Added)

Another manner provided in the leases for extending their life beyond the primary term is set forth in Paragraph 5 of the leases which provides in part:

5. If lessee obtains production of minerals on said land or on land with which the lease premises or any portion thereof has been pooled, and if, during the life of this lease either before or after the expiration of the primary term, all such production is shut in by reason of force majeure or the lack either of a market at the well or wells or of an available pipeline outlet in the field, this lease shall not terminate but shall continue in effect during such shut-in period as though production were actually being obtained on the premises within the meaning of Paragraph 2 hereof....

Thus, the leases at issue could be continued in full force and effect beyond the primary term if production were obtained and the wells were then shut-in for lack of a market.

"Production" as used in Paragraphs 2 and 5 of the leases must be understood in the context of LSA-R.S. 31:124 which provides in part:

When a mineral lease is being maintained by production of oil or gas, the production must be in paying quantities. It is considered to be in paying quantities when production allocable to the total original right of the lessee to share in production under the lease is sufficient to induce a reasonably prudent operator to continue production in an effort to secure a return on his investment or to minimize any loss....

Reading LSA-R.S. 31:124 in conjunction with the terms of the leases, the shutting-in of the gas wells on the three leased properties could only extend the leases beyond their primary terms if the wells were capable of producing in paying quantities. See Taylor v. Kimbell, 219 La. 731, 54 So.2d 1 (1951). Since none of the three gas wells were put into actual production, the questions raised are:

1. Who has the burden of showing the presence or absence of a well's capability of producing in paying quantities?

2. What evidence is sufficient to carry the burden of proving or disproving that capability?

3. Was the burden successfully carried by the party bearing it in this case?

Generally, the lessor has the burden of proving the propriety of cancellation of a mineral lease. Frazier v. Justiss Mears Oil Co., 391 So.2d 485 (La.App.2d Cir.1980), writ denied, 395 So.2d 340 (La.1980). However, the situation encountered in this case presents an exception to that general rule. A lessee cannot place the burden of proving the propriety of cancellation on the lessor by simply alleging that a well that has never been placed into actual production is capable of producing in paying quantities. Rather, the lessee must prove by a preponderance of the evidence that prior to the expiration of the primary term or the continuous drilling operations term a well was completed and surface tested to the extent that the well was at that time demonstratively capable of producing in paying quantities. See Taylor, supra.

Ordinarily, proof sufficient to carry this burden is a finding of commercial productivity resulting from the performing of the initial potential test required by the Department of Conservation. See Lee v. Goodwin, 174 So.2d 651 (La.App.2d Cir.1965). This test, referred to previously, is performed under standard conditions over a twenty-four hour period, and is witnessed by a representative of the Office of Conservation. The test is a necessary prerequisite to classification of the well as a gas or an oil well, and to the obtaining of an allowable and the authority to sell oil or gas from the well. While other kinds of evidence of production potential could also be considered, such as the results of logs and cores, the flaring of the wells for periods of time and the history of the wells in the same zone in the field, the importance of actual testing of surface production is obvious and is the most direct indication of production capability.

The importance of surface testing is illustrated by the provisions of LSA-R.S. 31:34 and 31:90 which address the testing of shut-in wells in the context of interrupting prescription on...