Carter Oil Co. v. McCasland

• Citation: 190 F.2d 887
• Decision Date: 17 August 1951
• Docket Number: No. 4210.,4210.
• Parties: CARTER OIL CO. v. McCASLAND et al.
• Court: U.S. Court of Appeals — Tenth Circuit

190 F.2d 887 (1951)

CARTER OIL CO. v. McCASLAND et al.

No. 4210.

United States Court of Appeals Tenth Circuit.

July 10, 1951.

Rehearing Denied August 17, 1951.

COPYRIGHT MATERIAL OMITTED

Alfred Stevenson, Holdenville, Okl. (Forrest M. Darrough and Walter Davison, Tulsa, Okl., on the brief), for appellant.

C. D. Cund, Duncan, Okl., and Clarence McElroy, Chickasha, Okl., for appellees.

Before PHILLIPS, Chief Judge, and BRATTON and HUXMAN, Circuit Judges.

HUXMAN, Circuit Judge.

This was an action for a declaratory judgment, in which appellees sought a declaration of rights between them and appellants under a contract and an assignment, assigning to appellees certain rights in and to oil and gas producing horizons encountered at a depth of less than 4,000 feet. The acreage covered by the contract and assignment was classified, in the contract and is so designated in the pleadings, into four Tracts numbered 1 to 4, respectively. By stipulation of the parties, it was agreed that the law suit would be confined to the leases covering only Tracts 2 and 3. Pertinent portions of the contract and assignment are set out in footnote 1.¹ So far as material, the contract in substance provided that Carter Oil Company, herein referred to as Carter, would assign to McCasland its rights in the leases "insofar as they covered producing horizons above a depth of 4,000 feet, subject to the terms and provisions of this agreement." It provided that upon demand and after the commencement of a well by McCasland, Carter would execute assignments in writing on Carter's usual forms "assigning to McCasland the oil and gas leasehold estates on the properties heretofore described above the depth of four thousand (4,000) feet, such assignments to be made specifically subject to the terms and conditions of this agreement." The contract contained other provisions, giving Carter an overriding royalty in producing wells drilled by McCasland and protecting it in the production it already had on the acreage as well as other provisions not involved in this litigation.

The written assignment, executed and delivered pursuant to the contract, assigned all of Carter's rights, title and interest in and to the leases "insofar as said leases cover producing horizons above the depth of 4,000 feet." The assignment reserved to Carter all interest in the tracts "insofar as they cover producing horizons below the depth of 4,000 feet * * *." The leases described in the contract and assignment covered land in the Carter-Knox field. While many wells had been drilled in the field, the Woods Sand Zone Producing Formation, the one in question here, was unknown at the time of the execution of these instruments. It was first discovered in February, 1947, in a well drilled by McCasland. This well was a gas well and never produced oil. A number of wells were drilled into the formation by McCasland and Carter as well as others. These wells demonstrated that the formation was an unorthodox one. While the other formations in the field were comparatively level, this was a slanting formation, dipping from 58 to 60 degrees and having an average width of from 1,000 to 1,200 feet. In some places, it is encountered above 4,000 feet, while in others it is found at a considerable depth below that point. In some places on these two tracts, it was encountered above 4,000 feet, while at other points it was found below that depth. In wells which McCasland drilled on the lands covered by the assigned leases, the Woods Sand Horizon was encountered above 4,000 feet, while in two wells drilled by Carter on the same acreage, the sand was encountered below 4,000 feet. One of the wells drilled by Carter to a depth of 4,487 feet failed to find the sand. Carter obtained permission of the Oklahoma Corporation Commission to whipstock this well to the East so as to drill into the Woods Sand Formation below 4,000 feet. Permission having been obtained, the well was whipstocked 220 feet East to a depth of 4,312 feet, where the sand was encountered.

The controversy centers around Carter's claim that it had the right to drill into the Woods Sand Formation on the assigned acreage, where it is encountered at a depth of more than 4,000 feet and produce oil therefrom, when it takes that oil from a producing horizon, which had been penetrated by McCasland's wells at a depth of less than 4,000 feet and where all the oil in the formation can and will be produced without economic loss from McCasland wells.

The trial court made exhaustive findings of fact and conclusions of law. It found as a fact that the reservoir content of the Woods Sand Zone Producing Horizon was held under pressure; that it had a gas cap at the top with oil immediately below; that the oil contained some gas in solution; that in the lower part of the structure below the oil, water was found in great quantities; that there was and would continue to be an active water drive and that all the recoverable oil and gas contained in the common reservoir, from which all wells involved in this action were producing, could under normal operating methods and conditions be recovered through the McCasland wells. The trial court also found that it was never contemplated by the parties that Carter and McCasland would produce oil or gas from the same common pool. The court concluded as a matter of law that the phrase "insofar as they cover producing horizons above the depth of four thousand (4,000) feet" as used in the contract and assignment in this action means "insofar as they cover, embrace and include producing horizons encountered above four thousand (4,000) feet." Based upon its findings and conclusions of law, the court entered judgment that McCasland was entitled to produce all the oil and gas contained in the Woods Sand Zone Producing Horizon underlying the lands in question from wells drilled or to be drilled by McCasland to a depth of not more than 4,000 feet, subject only to Carter's overriding royalty; that Carter was guilty of conversion in producing oil and gas from that sand on the tracts in question and that McCasland was entitled to an accounting from Carter.

While numerous assignments of error are urged, the crux of the controversy is whether Carter, having assigned the right to drill for and produce oil and gas from a producing horizon, encountered above 4,000 feet, may nonetheless drill into and produce from this common source of supply, where the pool dips below the 4,000 foot mark, and when it is established that all the oil in the pool, whether lying above or below the 4,000 foot mark, can be produced from wells entering the pool above the 4,000 foot level. The answer turns upon the construction of the contract and assignment.

The rules of construction relating to written contracts are well established and need no extended discussion. Extrinsic evidence may be received only when there is ambiguity in the language used which makes uncertain the meaning or intent of the parties. That is the mandate of the Oklahoma Statutes relating to the construction of contracts as well as the general law. So also contracts are not necessarily rendered ambiguous by the mere fact that parties thereto disagree as to their meaning.

In what sense did the parties employ the phrase "producing horizon"? The trial court concluded as a matter of law that the term "producing horizon" as used in the oil industry and as used in the contract and assignment in this case was a technical term and meant "A bed of some material, lime, sand or conglomorate, containing or holding petroleum, oil or gas, and has some thickness in order to hold fluid or gas." "Producing horizon" as used by the oil fraternity has a technical meaning. A number of witnesses engaged in the oil industry testified as to the meaning ascribed to the term by the oil fraternity. Their testimony was properly received and supports the construction placed upon this phrase by the trial court.

It is a matter of common knowledge that oil is found in pools or reservoirs below the earth's surface and that these pools lie one upon the other and are found at various depths below the earth's surface and are separated by intervening masses of earth and rock formation. It is also, we think, a matter of common knowledge that, while a pool or lake of oil will have high or low spots, generally in its contour, it is comparatively level and is encountered throughout the field at approximately the same depth below the earth's surface and without any pronounced or marked degree of variation.

These facts, as well as the expert testimony, supports the court's construction placed upon the term "producing horizon." In fine, the term "producing horizon" means the point at which a pool, reservoir or common source of supply of oil or gas is encountered and from which the oil therein may be extracted.

The Woods Sand Formation, which dipped at an average of from 58 to 60 degrees, was an unorthodox one. Its existence was unknown and uncontemplated by the parties at the time of the execution of the contract and assignment. Its later discovery did not change the meaning of the phrase "producing horizon" or the sense in which the term was used by the parties at the time they entered into these contracts. The subsequent discovery of its characteristics could not increase or diminish the rights of either party under the agreements. The exclusive right granted by the contract and assignment to drill wells into all producing horizons found above 4,000 feet carried with it the exclusive right to produce therefrom all the recoverable oil and gas.

We concur in the court's finding that it was never contemplated that Carter and McCasland would produce oil from the same pool or common source of supply. The late case of Palmer Oil Corp. v. Phillips Petroleum Co., Okl.Sup., 231 P.2d 997, is distinguishable upon the facts. It was a proration case and did not involve the right of more than one person or company to drill...