Carter Oil Co. v. Mitchell

• Decision Date: 04 February 1939
• Docket Number: No. 1740,1741.,1740
• Citation: 100 F.2d 945
• Parties: CARTER OIL CO. v. MITCHELL et al. SAME v. HALES et al.
• Court: U.S. Court of Appeals — Tenth Circuit

100 F.2d 945 (1939)

CARTER OIL CO. v. MITCHELL et al. SAME v. HALES et al.

Nos. 1740, 1741.

Circuit Court of Appeals, Tenth Circuit.

January 5, 1939.

Rehearing Denied February 4, 1939.

L. G. Owen and Forrest M. Darrough, both of Tulsa, Okl. (Jas. A. Veasey and Joseph L. Seger, both of Tulsa, Okl., on the brief), for appellant.

Johnson, McGill & Johnson and J. B. Moore, all of Ardmore, Okl., for appellees.

Villard Martin and Conard E. Cooper, both of Tulsa, Okl., amici curiæ.

Before LEWIS, PHILLIPS, and BRATTON, Circuit Judges.

PHILLIPS, Circuit Judge.

On October 4, 1916, A. Mitchell and Dora Mitchell, his wife, executed and delivered to B. T. Head an oil and gas lease upon 200 acres of land in Carter County, Oklahoma.¹ The lease in part read as follows:

"It is agreed that this lease shall remain in force for a term of Five years from this date, and as long thereafter as oil and gas, or either of them, is produced from said land by the lessee."

Head duly assigned the lease to the Carter Oil Company.

On April 27, 1935, the original lessors conveyed a portion of the leased premises to Oscar L. Mitchell.

On March 7, 1936, Oscar L. Mitchell made written demand on the Carter Company either to commence the drilling of a well on certain portions of the lease described in the notice by April 1, 1936, or execute a release to him of the lease as to those portions, and stated if the demand was not complied with he would immediately commence a suit to cancel the lease.

The Carter Company refused to cancel the lease on the ground it had developed and operated the lease as would a reasonably prudent operator.

On July 8, 1936, Oscar L. Mitchell, W. B. Johnson, and H. W. McGill instituted cause No. 1740 against the Carter Company to cancel the lease as to certain lands embraced therein; and W. T. Hales, Oscar L. Mitchell, H. B. Fell, Mrs. B. A. Simpson, B. A. Simpson, Jr., Elizabeth Gregg, Georgia Fell, and W. E. Simpson, trustee of the estate of A. O. Simpson, deceased, instituted cause No. 1741 against the Carter Company to cancel the lease as to certain other lands embraced therein. The two cases were consolidated for trial.

At the trial the Carter Company offered to cancel the lease as to the Hewitt sand.

In the following map the boundaries of the lease are shown in yellow, the portion sought to be cancelled in No. 1740 in red, and the portion sought to be cancelled in No. 1741 in blue, and the wells drilled on the lease and adjoining lands are indicated:

The plaintiffs are the owners of the oil and gas rights in the lands as to which cancellation is sought.

During 1920, 1921, and 1922, the Carter Company drilled seven wells on the lease. Six produced oil. Five are still producing. Well No. 17 and well No. 21 on adjoining land were dry holes. Wells numbered 4 and 5 in the northwest corner of the lease are locations where drilling rigs were erected and tools moved in preparatory to drilling. These locations were abandoned when wells numbered 1, 2, and 3 on adjoining land to the northwest thereof resulted in dry holes. Well No. 16 is a water well.

In the early part of 1934 production from well No. 7 had substantially declined. In an effort to increase production through cleaning out of the well the tubing and rods were lost in the hole. Efforts to recover the tubing and rods, extending over 40 to 45 days, were unsuccessful. After expending approximately $2,000 in an effort to recondition this well it was abandoned. It would have cost approximately $20,000 to drill and equip a new well at this location and a greater amount to drill the tubing out of the old well. The probable production of a new well would have been about 3 barrels per day. Such a well would not have been profitable. Well No. 6 immediately west of No. 7 is still producing at the rate of about 2½ barrels per day.

In February and March, 1936, the wells on the lease were producing 35 to 40 barrels per day. The production per well ranged from 8 to 9 barrels per day down to 2 to 3 barrels per day.

The lease is what is known as an "edge"² lease. The present production is from the Hewitt sand which is located at a depth of about 2200 feet. There is a fault or dip extending from the northwest corner of the lease toward the southeast. It is indicated on the map by a black diagonal line. The production from the Hewitt sand is all west of the fault. The portions of the lease sought to be cancelled are to the east of the fault and are definitely off the structure in the Hewitt sand.

The cost of drilling to the Hewitt sand is approximately $20,000 per well.

For several years prior to 1934 the Carter Company had given consideration to the drilling of a deep test well in the general area of the lease to the Ordovician formation. Negotiations looking to the drilling of the first test well were carried on in 1934, and in the latter part of that year the Carter Company, in conjunction with three other oil companies, commenced the drilling of what is known as the Ruth Williams well. It was completed to the Ordovician formation on October 24, 1935. Its initial production was 3000 barrels per day. It was drilled to a depth of approximately 8000 feet and cost approximately $260,000. It is located approximately 13 miles north and west of the lease.

The Carter Company had made geological investigations in the Hewitt field and discovered a structure in the Ordovician formation underlying the lease comparable to the one on which the Ruth Williams well was drilled. It believes commercial production will be found on the lease in that structure. It had planned to drill a test well on such structure at the time the demand for cancellation was received. Prior to October, 1936, it had acquired necessary adjacent acreage, and commenced negotiations with other oil companies for the drilling of the test well. In 1937 it included the cost of such a well in its 1938 budget. At the time of the trial, October, 1937, it was arranging for the drilling of the test well at the top of the structure, located about one mile west of the west boundary of the lease. It is prudent to drill the first test well at the top of the structure. The Carter Company estimates that the test well will cost $250,000. This well when completed will afford valuable geological information respecting the portion of the structure underlying the lease. The available geological information indicates oil in commercial quantities will be found therein. Unless the test well indicates the contrary, the Carter Company intends to proceed with the orderly development of the Ordovician formation under the lease.

Caution must be exercised in drilling deep test wells. Structural information must be carefully worked out. Since the cost is very great wider spacing of wells must be provided for and each well must be protected with ample acreage; in other words, an orderly development program must be worked out in advance with the lessors and other operators. This takes time and much effort.

The Carter Company has completed a second deep well to the Ordovician formation and is drilling a third in the vicinity of the Ruth Williams well. Development of the structure on which the Ruth Williams well was drilled has greatly increased the value of leases in Carter County, including the area in which the lease is located.

The Carter Company is not engaged in speculative enterprises. For many years it has been actively engaged in the development and operation of oil and gas leases and the production of oil and gas therefrom. It is one of the larger American producing companies. Its position in the oil industry is so prominent that these are facts of common knowledge. There is no suggestion that it is lacking in ability, financial or otherwise, to fully develop the lease to the Ordovician formation.

The trial court found that well No. 7 was lost through no fault of the Carter Company; that under the existing facts and circumstances it was not required to drill a new well to offset well No. 6; that there was a fault in the Hewitt sand under the leased premises; that all of the producing wells are west of the fault; that the portions of the lease sought to be cancelled are east of the fault; that exploration and geological information showed there was no reasonable expectation of finding production in the Hewitt sand east of the fault. It further found that geological information disclosed likelihood of production in the Ordovician formation under the lease; that the Carter Company expected to drill to that formation near the lease; and intends to carry out further development on the lease in that formation, conditioned, however, on the results obtained by the test well. On authority of Sauder v. Mid-Continent Petroleum Corp., 292 U.S. 272, 54 S.Ct. 671, 78 L.Ed. 1255, 93 A.L.R. 454, it decreed cancellation of the lease as prayed for in the complaints. The Carter Company has appealed.

We are of the opinion that the instant cases are clearly distinguishable from the Sauder Case. Two wells were drilled on the Sauder lease covering 360 acres. Cancellation was sought as to 320 acres which were entirely undeveloped. In the immediate vicinity thereof a number of wells were producing from the Bartlesville sand and the Mississippi lime. The trend of the Mississippi lime was toward and under the portion sought to be cancelled. The lessee's geological information was unfavorable to but did not definitely condemn the portion sought to be cancelled. Many of the producing wells in the area were from the Mississippi lime, found at a depth approximately the same as the lessee's geologist believed the Mississippi lime would be found under the southerly half of the portion sought to be cancelled. The lessee, though unwilling to further develop to the known producing horizons, insisted on holding the lease. The lessee had done nothing in the way of developing on or near the portion sought to be cancelled, and more than 16 years had...