Atlantic Richfield Co. v. Gruy

• Decision Date: 17 September 1986
• Docket Number: No. 04-85-00188-CV,04-85-00188-CV
• Citation: 720 S.W.2d 121
• Parties: ATLANTIC RICHFIELD COMPANY, Appellant, v. Joseph GRUY, Jr., Viggo Gruy, & Dagmar Gruy Cole, Appellees.
• Court: Texas Court of Appeals

Page 121

720 S.W.2d 121

ATLANTIC RICHFIELD COMPANY, Appellant, v. Joseph GRUY, Jr., Viggo Gruy, & Dagmar Gruy Cole, Appellees.

No. 04-85-00188-CV.

Court of Appeals of Texas San Antonio.

Sept. 17, 1986.

Rehearing Denied Oct. 21, 1986.

Stephen R. Kirklin, Edward J. Howlett, Jr., Houston, for appellant.

Marion E. Williams, Jr., Beeville, for appellees.

Before ESQUIVEL, TIJERINA and REEVES, JJ.

OPINION

REEVES, Justice.

This is an appeal from a jury trial resulting in a judgment cancelling the deep well drilling rights of a lessee oil company due to its failure to develop its leasehold below 3,750 feet.

Appellees, Joseph Gruy, Jr., Viggo Gruy, and Dagmar Gruy Cole (Gruys) are the beneficial owners of the original lessor's interest under two leases (hereinafter referred to as "C" and "D" leases). Atlantic Richfield Company (ARCO) is a successor to the original lessee of the lease from depths below 3,750 feet, it having assigned its interest in the lease above that depth.

The original parties executed the leases on June 26, 1944. In 1949, wells were drilled to depths between 2,000 and 3,750 feet and production was obtained. There are currently four wells producing in paying quantities on the "D" lease. The "C" lease has been pooled and is part of a unitization agreement. In 1959, a prior lessee released 640 acres of the "C" lease to the Gruys. Both "C" and "D" leases are for a primary term of ten years and "so long as oil, gas or any other hydrocarbons, or other minerals, is being produced from said field in paying quantities." There is no dispute that the leases are in effect by production in paying quantities from surface to 3,750 feet. ARCO assigned its interest in the leases from surface to the depth of 3,750 feet, thus leaving approximately 1,888 acres of deep well leasing rights to ARCO.

In December, 1981, the Gruys, through their attorney, informed ARCO that it had breached its implied and express obligation to fully develop the leased premises below 3,750 feet. They advised ARCO that if it did not commence drilling within 60 days, legal action would follow. ARCO did not drill within 60 days. In April 1982, the Gruys instituted suit for cancellation of both leases and for damages. The trial was to a jury which found that ARCO failed to develop the area below 3,740 feet with due diligence. It also found ARCO failed to develop the leased premises as a reasonably prudent operator would have developed the property under the same or similar circumstances. On February 7, 1985, the trial court entered judgment terminating both leases.

On appeal ARCO contends there was no evidence or, in the alternative, insufficient evidence, to support either finding. A "no evidence" assertion requires the court to consider only evidence tending to support the finding, viewing the evidence in the most favorable light in support of the finding, giving effect to all reasonable inferences that may properly be drawn therefrom and disregarding all conflicting evidence. Glover v. Texas General Indemnity Co., 619 S.W.2d 400, 401 (Tex.1981). After reviewing the record, we agree that there was no evidence to support either of the jury's findings.

After discovery of hydrocarbons, a lessee's obligation to develop is measured by the rule of reasonable diligence or that of a prudent and diligent operator. The lessee is not required to further develop the leasehold unless there is a reasonable expectation of profit not only to the lessor but to the lessee. Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684, 695 (1959); Felmont Oil Corp. v. Pan American Petroleum Corp., 334 S.W.2d 449, 455 (Tex.Civ.App.--El Paso 1960, writ ref'd n.r.e.).

The Gruys introduced no evidence that development below 3,750 feet would lead to any discovery of hydrocarbons. The only evidence introduced in the trial that would indicate lack of diligence on the part of ARCO was that there had been no drilling for new wells since 1952 or 1953, and that ARCO did not ask the Gruys for permission to conduct seismic testing until 1983.

A similar fact situation occurred in Clifton. In 1940, Clifton executed mineral leases on 350 acres. In time, 40 acres of the tract was in production. Lessor Clifton brought suit against lessee Koontz, alleging among other things, that Koontz had breached an implied covenant to develop the property for minerals at a different depth than that in production. Clifton failed to present evidence that production of oil or gas could be produced in paying quantities at the undeveloped depth. The Court stated:

While it is true that each separate stratum or horizon would be entitled to separate development, yet it is equally true that the burden rests upon the lessor to prove that the producing stratum required additional wells, or that strata different from that from which production is being obtained, in reasonable probability exist, and that by the drilling of additional wells there would be a reasonable expectation of profit to the lessee. Under such circumstances, the lessee's obligation was to development is measured by the rule of reasonable diligence or what an ordinarily prudent and diligent operator would do, and he is not required to continue in the performance of these duties or to engage in the performance of such implied duties unless there is a reasonable expectation of profit, not only to the lessor, but also to the lessee.

Clifton, 325 S.W.2d at 695. The Gruys contend that the implied covenant to develop enunciated in Clifton is not applicable since the leases in question contain a paragraph which provides, "After the discovery of oil, gas or other minerals on said land, the lessee shall develop said land with due diligence until said land shall have been fully developed." The court is not persuaded.

While the law recognizes an implied covenant out of necessity, Freeport Sulphur Co. v. American Sulphur Royalty Co., 117 Tex. 439, 6 S.W.2d 1039 (1928), the Gruys have not cited any authority that an express agreement to develop the land with "due diligence" calls for a different standard of conduct than that set forth in Clifton. While the Gruys' lease expressly states the lessee must develop the lease with "due diligence," it is silent as to what constitutes due diligence. We believe the case of Texas Pacific Coal & Oil Co. v. Barker, 117 Tex. 418, 6 S.W.2d 1031 (1928)...