Amoco Production Co. v. Braslau

• Decision Date: 01 February 1978
• Docket Number: No. B-6786,B-6786
• Citation: 561 S.W.2d 805
• Parties: AMOCO PRODUCTION COMPANY et al., Petitioners, v. Morris BRASLAU et al., Respondents.
• Court: Texas Supreme Court

Page 805

561 S.W.2d 805

AMOCO PRODUCTION COMPANY et al., Petitioners,

v. Morris BRASLAU et al., Respondents.

No. B-6786.

Supreme Court of Texas.

Feb. 1, 1978.

Clark & Tartaglia, W. Scott Clark, Fort Worth, for petitioners.

James E. Klager, Corpus Christi, Ellis, Andrews & Lawrence, Thomas M. Andrews, Aransas Pass, for respondents.

GREENHILL, Chief Justice.

In this oil and gas case, the problem is whether term royalties expired because there was a cessation of production after the expiration of the primary terms of the term royalty deeds. Our holding is that while production did cease, there is evidence to support the trial court's finding that there was but a temporary cessation; and consequently the term royalties did not expire. As will be indicated below, the holding under the particular facts is one of first impression; and it extends our previous holdings on temporary cessation of production.

Amoco Production Company and others (Amoco) are the owners of term royalties in Frank Braslau Gas Unit in Live Oak County. They brought a declaratory judgment to determine whether the cessation of production after the primary term had caused their term royalties to expire. If they did expire, these interests reverted to the Braslaus and the Kugerls.

Trial was to the court without a jury. The judgment included findings that reworking operations on the well in question were begun and continued with diligence and good faith; that production from the gas unit was restored within a reasonable time, and that the cessation of production was temporary. The holding was that the term royalty interest did not expire.

The Court of Civil Appeals reversed. It rendered judgment that because of the cessation of production, the term royalties expired. 549 S.W.2d 260. We granted the writ of error of the Amoco group.

There is little dispute in the facts, and most of them are stipulated. By instruments dated September 2, 1946, and February 4, 1958, Frank and Morris Braslau conveyed the term royalties now owned by the Amoco group. Also on February 4, 1958, John and Anna Kugerl executed a term royalty deed to other property within the same Frank Braslau Gas Unit. Each of the grants was for a period of 15 years and as long as oil or gas was produced from the lands described. If at the end of the 15 year term there was no such production from "the lands described," the term royalties terminated.

The unit operator, Atlantic Richfield Company (Arco), drilled and completed what we will call Well Number One. During the drilling of the well, the well logs contained "positive showings" of four producing sands. We shall call the four sands A, B, C, and D, and their depths are here approximated.

Sand A (the Wilcox) was at 7,700 feet. Sand B (the Slick) was at 7,800 feet. Sand C (the Mackhank) was at 8,500 feet; and Sand D (the Massive) was at 8,800 feet.

As Well Number One was being drilled, it reached the 8,550 foot sand, Sand C. When this depth was reached, the testimony is that the well "started to kick and started to blow out." That meant to the testifying consulting geologist that these occurrences were "a very good show" of a producing sand. He further testified that the drillers "tried to balance the drilling, to hold back the pressure so they could go ahead and penetrate the sand." This meant to the witness that these occurrences gave "an indication of production."

The drillers were able to control the well, and they drilled through Sand C to the deeper Sand D at 8,800 feet.

The witness further testified, and his testimony is undisputed, that there were "probably four sands (capable of production) in the well at that time."

The well was ultimately completed in Zones B and D; i. e., in the 7,800 foot (Slick) sand and in the deepest sand, the 8,800 foot (Massive) sand. The well was not then completed in the shallowest sand, Sand A, or in the 8,500 foot Sand C (the Mackhank).

The testimony is that the operators intended ultimately to produce from all four sands sequentially through the same well bore of Well Number One.

Production from Sands B and D commenced during the 15 year primary term of the term royalties in question and continued until August of 1971. At that time, the production from Zone B was depleted. On October 9, 1972, Arco, the operator, notified the owner of the working interest that production from Zone D, the deepest sand, was becoming marginal because of the high cost of handling the water produced with the oil. ^* So at that time, Arco decided to complete the same well in the other two zones, A and C.

Production ceased from the deepest Zone D on November 13, 1972; and work was begun the next day to recomplete the well in the other two zones.

However, Well Number One was "lost" due to mechanical difficulties in trying to recomplete the well. The casing collapsed inside the well bore.

Without delay, Arco obtained permission from the Railroad Commission to "move over" 700 feet on the same "said land" in order to produce from Zone C, the Mackhank sand at approximately 8,500 feet. This Well Number Two, begun on January 12, 1973, was completed in Zone C on February 17, 1973. Commercial production was begun from Zone C on February 24, 1973, approximately 20 days after the expiration of the last of the 15 year primary terms provided for in the term royalty agreements.

Subsequently, a third well was completed on "said land" by Arco to produce from Zone A, the shallowest of the sands. Both these wells produced continuously, and were producing at the time of this suit. There is also evidence that Zone A was productive in the immediate area because of production from a well on an adjacent tract. The problem, then, is whether there was a termination of the term royalties because there was no production for 103 days or approximately three and a half months, and because production, when resumed, was from a different sand.

The owners of the term royalties contend, as the trial court held, that there was but a temporary cessation of production from known sands or zones. The owners of the reversionary interests contend that there had not been any production from Zones A and C; and that it is impermissible to call it a temporary cessation of production if it is necessary to drill a second well to produce from a separate zone.

Our view is that the term royalty agreement speaks in terms of production from "said land," or "the lands described," and not from any particular zone or sand. But the term royalty is in the nature of a determinable fee; and if "production" ceases, the interest terminates by its own terms. The courts have ingrafted upon that concept the holding that temporary cessation of production will not trigger the extinction of the interest.

We turn now to the cases. If there is a cessation of production after the primary term, which is not a temporary one, the estate terminates. This was the holding of Watson v. Rockmill, 137 Tex. 565, 155 S.W.2d 783 (1941), in which there was a cessation of two years and seven months. The cause was not any mechanical failure but a severe depression in the price of oil. ¹

In Holchak v. Clark, 284 S.W.2d 399 (Tex.Civ.App.1955, writ refused), oil was "discovered" (a favorable drill stem test) during the primary term, but there was no production in paying quantities during the primary term. After the primary term had expired, a second well was drilled into another sand or zone, and it was productive. The holding was that the royalty interest terminated. The emphasis was upon the difference between oil "discovered" during the primary term, and oil "produced." There being no production during, or upon the expiration of the primary term, the royalty interest terminated. The opinion commented upon the absence of a "continuous drilling" provision in the instrument; i. e., that if oil were discovered, it would be sufficient if the operator thereafter proceeded with diligence until production was obtained even after the expiration of the primary term. The court would not write such a provision into the contract for the parties; and the Court of Civil Appeals in this case considered the Holchak case and that language to be determinative of this case.

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