Anadarko Production Co. v. Taylor

• Decision Date: 10 March 1982
• Docket Number: Civ. No. 79-1111.
• Citation: 72 O. &G. R. 438,535 F. Supp. 103
• Parties: ANADARKO PRODUCTION COMPANY, Plaintiff, v. Ross E. TAYLOR, et al., Defendants.
• Court: U.S. District Court — District of Kansas

535 F. Supp. 103

72 O. &G. R. 438

ANADARKO PRODUCTION COMPANY, Plaintiff, v. Ross E. TAYLOR, et al., Defendants.

Civ. No. 79-1111.

United States District Court, D. Kansas.

March 10, 1982.

Jack D. Sage, Wichita, Kan., for plaintiff.

Bernard Nordling, Hugoton, Kan., for defendants Taylor, Coulter, Webb, Phillips, Peterson, Ubelhart and French.

Gene H. Sharp, Liberal, Kan., Mark E. Singer, Wichita, Kan., for defendants Chapline.

Robert J. Spayde, Oskaloosa, Iowa, for defendants Butler and Cauldwell.

Mark H. Adams, Wichita, Kan., for defendants Sidwell.

Charles J. Woodin, Wichita, Kan., for defendant Texaco, Inc.

Ferd E. Evans, Jr., Wichita, Kan., for defendants Huffman, and Derrick.

Paul A. Wolf, Hugoton, Kan., for defendant Herbel.

MEMORANDUM AND ORDER

(As Revised by Order 3/16/82)

KELLY, District Judge.

Pending before the Court are a partial summary judgment motion filed by the plaintiff, Anadarko Production Company (Anadarko), and a crossing partial summary judgment motion filed by some of the defendants jointly. The remaining defendants support the plaintiff's motion, and all of the parties seek the Court's interpretation of various natural gas leases and agreements. At issue here is the applicability of a natural gas unit agreement controlling gas production from a well since 1944 to a second and much newer well drilled in 1975. Although the newer well is located on the acres included in the unit, it is producing gas from a geological formation completely distinct from the formation being drained by the first well on the unit's acreage. The landowners of the tract where the newer well is located contend that the unit agreement only applies to gas production from the geological formation or horizon which the first and older well drains, the Hugoton formation. The other landowners in the unit arrangement, as well as the gas production company, contend that production and royalties from the second, newer well are controlled by the unit agreement and that these landowners are entitled to royalties from the newer well. Since an impasse arose regarding royalties from the new well, Anadarko filed the instant interpleader action against all of the landowners in the gas production unit to obtain a judicial determination of to whom it is to pay the additional royalties.

After a review of all the pertinent instruments, the applicable case law and counsels' well prepared arguments, the Court finds that gas production and royalties from the second, newer well are not covered by the instruments discussed below. The following is the Court's narrative findings of fact and conclusions of law.

I. INTRODUCTION

Plaintiff is a Delaware corporation, and federal jurisdiction for its suit is based on 28 U.S.C. § 1335. The plaintiff's predecessor in interest in all of the suits, the Stevens County Oil and Gas Company, signed an oil and gas lease in 1935 with the owners of the Northwest Quarter (NW/4) of Section Fifteen (15), Township Thirty-four (34) South, Range Thirty-eight (38) West, Stevens County, Kansas. The plaintiff is also the successor in interest of D. D. Harrington and the Panhandle Eastern Pipe Line Co., but to avoid confusion all of the lessees and sublessees shall be referred to here as the "production company". A commercial gas well was completed on the above quarter section in 1936, and it began producing from the Hugoton formation. The next significant event in this case occurred in 1943 when the production company signed oil and gas leases with parties owning land adjacent to the above quarter section. (For reference, a map of the various tracts is attached hereto). In August of 1943, Marie Stout, predecessor in interest to Ross E. Taylor and Bertha Taylor ("Taylor" defendants), leased the entire and individual mineral interest in the Southeast Quarter (SE/4) of Section 16 to the production company, and in the same instrument she leased an undivided ½ mineral interest in the Northeast Quarter (NE/4) of Section 16 to the production company. In the same month, by separate instruments, the other owners of individual interests (aggregating an undivided ½ interest) in the NE/4 of Section 16 leased mineral interests to the production company. In addition, the owners of an undivided one-half (½) mineral interest in the Southwest Quarter (SW/4) of Section 10 leased said interest to the production company on August 8, 1943.

On March 21, 1944, the Kansas State Corporation Commission (KCC) promulgated the Basic Proration Order for the Hugoton Gas Field ("Hugoton Basic Order"). One of the purposes for this action by the KCC was the regulation of the production rates from all wells drawing from the Hugoton formation. Due to the regulations imposed by the Hugoton Basic Order, the production company and all of the above parties signed a multilateral consolidation agreement on July 8, 1944. The result of this agreement was the creation of a gas production unit of four hundred and eighty (480) acres. The purpose and intent of the parties to this Agreement was to consolidate an additional one hundred and sixty (160) acres into a gas production unit in order to obtain the maximum allowable production rate under the Hugoton Basic Order from the well drilled in 1936 in the NW/4 of Sec. 15.

Since the production company was only able to obtain an undivided one-half (½) mineral interest in the SW/4 of Sec. 10 through the lease executed on August 3, 1943, the production company needed to obtain the remaining one-half (½) mineral interest in this tract. On February 10, 1945, the Texas Company (predecessor in interest of Texaco, Inc., a defendant herein) owned and leased to the production company the remaining undivided one-half (½) mineral interest in the SW/4 of Sec. 10. This lease was subsequently modified on or about January 4, 1946, by the Texas Company and the production company.

The Court notes that according to the complaint the plaintiff Anadarko Production Company only operates the well producing gas since 1975 from the Panoma-Council Grove formation. The production company operating the older well producing from the Hugoton formation had earlier leased to the plaintiff the production rights for all geological formations below the Hugoton formation, and this includes the Panoma-Council Grove horizon. Consequently, the plaintiff does not operate the well producing from the Hugoton horizon.

II. POOLING AND UNITIZATION

In order to decide the pending summary judgment motions, this Court must necessarily interpret all of the above instruments and other related agreements which will subsequently receive the Court's attention. However, a general discussion regarding the nature of unit agreements would be appropriate first.

The theory of pooling and unitization was first widely discussed in the mid-1920's as a means to achieve conservation of oil and gas and to achieve greater efficiency in their production from the field. Oil and gas engineers were initially in the forefront of the movement for the acceptance of unitized production. See Myers, "The Law of Pooling and Unitization," § 1.02 (2nd ed. 1967). Unitization is based on the practical fact that a single mineral lease described by surface boundary lines generally will not cover an entire field or even a substantial portion of it. Prior to pooling and unitization, unnecessary wells were often drilled on adjacent tracts because a well could drain gas or oil from a formation extending under a neighboring tract of land. Consequently, unitization represents:

... a deliberate effort to consolidate all, or a sufficiently high percentage of the royalty and working interests in a pool as will permit reservoir engineers to plan operation of the pool as the natural energy mechanism unit which it is. This means taking production at the locations and rates it is most efficient to take it, without disruption of the scheme by the legal rights inhering in competing properties. In the case of secondary recovery and pressure maintenance units it means injecting gas and fluids where these will most efficiently aid in expelling reservoir contents, again without the scheme being disrupted by property lines, or the withdrawal by a competing producer of the gases and fluids injected at great expense. To realize the significance of what is attempted it must be appreciated an oil pool is a highly complex energy mechanism, capable of desirable and undesirable responses depending on how it is handled. The artificial property lines man has drawn upon these pools, coupled with the lessor/lessee rights and obligations arising from competitive production methods sanctioned or even required by law, make virtually impossible maximum ultimate recovery in the absence of unitization, and this is true even though a state has otherwise excellent conservation regulations to limit the worst rule of capture competitive producing practices.

5 Summers, Oil and Gas § 951, p. 55 (1966).

In Kansas the State Corporation Commission first provided for the orderly development and production of gas from the Hugoton Field in the early 1940's when the KCC issued Basic Proration Orders for the Hugoton Gas Field in 1942 and 1944. Here the KCC noted that in Kansas the Hugoton Field was 65 miles long and 40 miles wide, and that at that time there were 252 gas wells producing from the Hugoton Field. Republic Natural Gas Co. v. Baker, 197 F.2d 647, 648 (10th Cir. 1952). "The avowed purpose of the second order was to adopt a formula which would enable each well to currently produce its allowable and ultimately produce the amount of gas underlying the lease upon which it was located. The Commission found that one completed well in the formation could adequately and sufficiently drain 640 acres without causing waste ...." Id., 197 F.2d at 648-49. With the above general background in mind, the Court must now interpret the various leases and modifications thereto involved in this litigation.

III. THE LEASES AND THE...