Chevron Oil Company v. Barlow, 10147.

• Decision Date: 17 March 1969
• Docket Number: No. 10147.,10147.
• Citation: 406 F.2d 687
• Parties: CHEVRON OIL COMPANY, formerly California Oil Company, a California corporation, Appellant, v. Fred L. BARLOW, Helen M. Barlow, and the Anschutz Corporation, Inc., a Kansas corporation, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

406 F.2d 687 (1969)

CHEVRON OIL COMPANY, formerly California Oil Company, a California corporation, Appellant, v. Fred L. BARLOW, Helen M. Barlow, and the Anschutz Corporation, Inc., a Kansas corporation, Appellees.

No. 10147.

United States Court of Appeals Tenth Circuit.

February 6, 1969.

Rehearing Denied March 17, 1969.

Patrick M. Westfeldt, of Holland & Hart, Denver, Colo., (James A. Tilker, of Kline & Tilker, Cheyenne, Wyo., and William E. Barton, of Brown, Drew, Apostolos, Barton & Massey, Casper, Wyo., on the brief), for appellant.

Robert Martin, of Martin, Porter, Pringle, Schell & Fair, Wichita, Kan., (Thomas M. Burns, of Burns & Wall, Denver, Colo., on the brief), for appellee, The Anschutz Corp., Inc.

Wade Brorby, of Morgan & Brorby, Gillette, Wyo., on brief for appellees, Fred L. Barlow and Helen M. Barlow.

Before MURRAH, PICKETT and HOLLOWAY, Circuit Judges.

PICKETT, Circuit Judge.

Chevron Oil Company, formerly California Oil Company, holder of an oil and gas lease comprising approximately 2,000 acres on land in Campbell County, Wyoming owned by Fred L. and Helen M. Barlow, instituted this action seeking a determination and declaration that its lease is valid and the subsequent lease to appellee, the Anschutz Corporation, Inc., is invalid, and other relief. From a judgment for the Barlows and their co-defendant, the Anschutz Corporation, Chevron has taken this appeal.

On September 18, 1962 Chevron and the Barlows executed the lease in question on a form provided by Chevron. The form was peculiar to Chevron and not in general commercial use. The lease provided for a primary term of five years and was subject to extension thereafter not only by production, but also by drilling or reworking operations.¹ In addition, the lease contained the following complementary provision, paragraph 5, upon which the rights of the parties in this dispute depend:

"If at any time or times after the primary term or within three (3) months before expiration of the primary term, all operations and all production hereunder shall cease for any cause, this lease shall not terminate if Lessee shall commence or resume drilling or reworking operations or the production of oil or gas within three (3) months after such cessation."²

For the first four years of the lease period Chevron chose to pay delay rentals of $1,632.30 per year in lieu of drilling. During this period Chevron also held a lease on approximately 2,000 acres adjoining property referred to as the Simpson land.

Prior to the last year of the primary term of the Barlow lease, Chevron's development activity in the area had consisted of agreeing to support an independent operator's well offsetting a portion of the Simpson lease with a dry hole contribution of $1.50 per foot and of a farm out agreement of 320 acres with another independent operator who agreed to drill a test well on the Simpson lease for the same contribution in dry hole money. Both of these wells were completed as small producers, the latter in January 1967, and consequently Chevron made no monetary contribution toward the drilling of either well. On July 12, 1967, sixty-seven days before the expiration of the primary period of its lease, Chevron initiated activity on the Barlow land by executing a farm out agreement with the Ozark Corporation. The agreement provided for the drilling of a well on an 80-acre tract of the Barlow property which was assigned to Ozark. Chevron also agreed to contribute $2.50 per foot in bottom hole money, the total amount of which was not to exceed $23,500.00. Within a month, August 8, 1967, a similar transaction occurred with respect to the Simpson lease. In separate instruments, Ozark entered into contracts with Anschutz Corporation for the drilling of these wells and assigned to Anschutz a fraction of its interest in each lease. Drilling commenced on the Barlow tract on August 15, 1967, and the well was completed as a dry hole on September 8, 1967. Assuming that Chevron's lease would expire with the end of the primary term in ten days, Anschutz immediately negotiated with Barlow in an effort to obtain a lease on his property.

Shortly after completion of the Ozark No. 1 Barlow well as a dry hole, Anschutz commenced drilling on the Simpson acreage according to the terms of its contract with Ozark. All interested parties knew that the proposed Simpson well was not to be started until after the completion of the Barlow well. Chevron officials then instructed their land agent to notify the Barlows that Chevron's position was that under the provisions of paragraph 5, the drilling of the dry hole within three months of the expiration of the primary term extended the lease for three months after the drilling ceased. On September 12, 1967 the agent so informed the Barlows and also inquired about the possibility of obtaining an extension of the lease. Barlow replied that he would consider an extension if a sizeable bonus offer was forthcoming. On September 18 the Barlows again met with Chevron's land man and advised him that they had been offered $6,000 for a lease. The representative reiterated Chevron's position and made no offer. Barlow termed paragraph 5 a "shyster clause", and generally made it clear that he didn't agree with Chevron's interpretation. Chevron's representative testified that he may have admitted to the Barlows that they "might be right" in their contention that the lease expired at the end of the primary term. The testimony of Chevron officials, together with inter-office communications, discloses that they were aware that their interpretation of paragraph 5 was not free from doubt and that they were willing to risk the possibility of losing the lease rather than invest additional money in an area which at the time did not appear to be promising.³ Later, Chevron advised Barlow that the company planned to move onto his property without his consent and resume drilling. Barlow replied that if such action were taken, "he would consider it a free well to him."

The Simpson test well blew out under great pressure on October 8, indicating the presence of significant quantities of oil and gas. Anschutz concluded its negotiations with Barlow the following day, and on October 10 Chevron made a sizeable offer of $10 per acre for an extension beyond December 8, the last day, according to its interpretation, that its lease would be in effect under the paragraph 5 extension. Barlow refused the offer and subsequently informed Chevron that he had given Anschutz a lease. After learning of this, Chevron again attempted to negotiate a lease with Barlow and again stated that in the alternative it intended to move in and resume drilling on his property.

Chevron instituted this action on October 30, 1967 and without consent of either Barlow or Anschutz, entered the Barlow property and commenced drilling on November 16. A dry hole was completed on December 10, 1967, and it is now contended that another 90-day period began to run from that date. On February 21, 1968 a third well was started and completed as a producer on March 15, 1968.

The parties stipulated that none of the events which would preserve the lease under paragraph 2 were in progress at the end of the primary term. The decisive issue, then, is whether under the provisions of paragraph 5 the completion of the Ozark No. 1 Barlow well as a dry hole on September 8, 1967 extended the lease an additional three months from that date. Chevron contends that it did and that the resumption of drilling operations within that three months and further drilling within a subsequent three-month period continued the lease in force.

The trial court construed the clause "all operations and all production shall cease for any cause" of paragraph 5 to mean that both operations and production must have occurred and ceased as a condition precedent to the extension of the lease. Moreover, the trial court reasoned that production had not taken place during the primary term and consequently could not have ceased. The trial court also concluded that the word "operations" in the pertinent clause refers to operations related to production, rather than the drilling and abandoning of a dry hole. Stated briefly, it was the trial court's view that paragraph 5 was without significance if there had been no production.

Appellees argue that Chevron's construction of the lease results in substituting the disjunctive "either/or" for the conjunctive "and" in the clause "all operations and all production". Chevron replies that "and" was used purposefully to refer to all of the events enumerated in paragraph 2 which would extend the lease; that when the lease is read as a whole, the use of "either/or" in place of "and" would be grammatically incorrect.⁴

The fallacy of Chevron's argument lies in its assumption that if either production or operations ceased, then the other would be occurring and hold the lease under paragraph 2 thereof. Obviously underlying paragraph 5 is the assumption that all activity on the leased tract will cease, not continue. When the potential situations surrounding a cessation are considered, it becomes apparent that in certain of these situations the insertion of "either/or" would make the better grammatical sense. Chevron's position is that paragraph 5 becomes operative when everything then taking place on the leased tract stops, whether it is drilling, reworking operations or production, or all of them. In the situation where all are taking place, and all cease, the clause as written might be the preferable method of stating the conditions. In Texas Co. v. Maloney, 48 Wyo. 280, 44 P.2d 903, the Wyoming Supreme Court said: "The conjunction `and' is a co-ordinate conjunction. It is not explanatory, but signifies and expresses the relation of addition." The disjunctive "or", on the other hand, is used to indicate an alternative, not both. Webster's New International Dictionary (1950 — G. & C. Merriam Co.) at 1712....