Chevron U.S.A., Inc. v. State

• Decision Date: 03 April 1991
• Docket Number: No. 07-CA-58036,07-CA-58036
• Citation: 578 So.2d 644
• Parties: 67 Ed. Law Rep. 844 CHEVRON U.S.A., INC., et al., v. STATE of Mississippi, et al.
• Court: Mississippi Supreme Court

Page 644

578 So.2d 644

67 Ed. Law Rep. 844

CHEVRON U.S.A., INC., et al., v. STATE of Mississippi, et al.

No. 07-CA-58036.

Supreme Court of Mississippi.

April 3, 1991.

Martha W. Gerald, Walker L. Watters, Gerald & Brand, Jackson, C. Denton Gibbes Jr., Gibbes Graves Mullins Bullock & Ferris, Laurel, for appellant.

Edwin Lloyd Pittman, Atty. Gen., elected Supreme Court Justice January 3, 1989; Mike C. Moore, Atty. Gen., W.O. Dillard, Robert E. Sanders, Asst. Attys. Gen., Jackson, Terry L. Caves, Leonard B. Caves, Caves & Caves, Laurel, for appellee.

Otis Johnson, Jr., Heidelberg & Woodliff, Jackson, for amicus curiae.

En Banc.

ON PETITION FOR REHEARING

SULLIVAN, Justice, for the Court:

On Petition for Rehearing the original opinions are withdrawn and these opinions substituted therefor.

Chevron U.S.A., Inc., et al, have appealed from a decree of the Chancery Court of the Second Judicial District of Jones County finding Chevron had no right under a 1957 oil and gas lease to explore, over 25 years later, for oil and gas in other areas and horizons of the leased property than the producing reservoir on the sixteenth section land under the lease. The State and county school board have cross-appealed, contending that the entire oil and gas lease was ineffective and void after 25 years from the date of execution, under Sec. 211 of our Constitution.

FACTS

In January, 1957, the Board of Supervisors of Jones County advertised for bids to lease Section 16, Township 9 North, Range 11 West for oil, gas and mineral development. After compliance with Section 6600, Code 1942, the Board, with the approval of the County Superintendent of Education,

executed an oil and gas lease to W.H. Potts on February 4, 1957. The county received a bonus of slightly more than $22,500 for executing the lease

Potts assigned the lease to the predecessor corporation of Chevron U.S.A., which in turn assigned a portion of its interest to other parties, all hereinafter designated as "Chevron."

In accordance with the terms of the lease and Section 6600 of the 1942 Mississippi Code, annual delay rentals of $643.00 were paid to the Jones County Superintendent of Education for the years 1958, 1959 and 1960. On or about December 12, 1960, Chevron commenced drilling the Board of Supervisors No. 2, Well No. 1 (2-1 Well) on the NW 1/4 of Section 16. The Board of Supervisors 2-1 Well was completed in February, 1961, as a producing oil well. Since the completion of the Board of Supervisors 2-1 Well, Chevron, or its co-owners, have drilled eight other wells on the leasehold, including one "dry hole." There has been continuous operation or production from at least one of the wells on the property since the completion of the 2-1 Well. Cumulative production from the eight producing wells on the property approximated 1.5 million barrels of oil and 400,000 million cubic feet (mcf) of gas at the time of the trial, and there were seven producing oil wells on this section.

Miss.Code Ann. Sec. 11-17-29 (1972), authorizes suits in chancery court to confirm and quiet title. Miss.Code Ann. Sec. 29-3-103 (Supp.1984), authorizes lessees to confirm and quiet sixteenth section leases, or extensions thereof, naming the superintendent of education of the district where the lease is created as defendant. Under the authority of these sections, Chevron, on July 30, 1984, filed a bill of complaint in the Chancery Court of the Second Judicial District of Jones County to confirm and quiet the interest conveyed to Potts under the 1957 oil and gas lease, and naming the State of Mississippi and the Jones County Superintendent of Education as defendants.

In response to this action, the defendants answered and counter-claimed, pleading that the lease, under the provisions of Sec. 211 of the Mississippi Constitution, expired on February 4, 1982, and asked for an accounting.

At trial in February, 1985, Chevron offered evidence that their development had been prudent, and that their manner of extraction was best suited for obtaining a maximum recovery of the oil and gas reserves from the discovered reservoir. They also presented evidence of their plan, if their leasehold interest should be confirmed, to drill new, deeper wells to another formation several thousand feet lower than the 12,000 feet reservoir supplying the producing wells. These were called the "Smackover" and "Lower Cotton Valley" formations.

In a well-reasoned and thoroughly-researched opinion, the chancellor recited the history and developments of the law as pertaining to leases of sixteenth section lands. He held that the 25-year limitation of Sec. 211 of our Constitution had no application to an oil or gas lease.

He confirmed Chevron's right to continue its operations to extract oil and gas from the producing reservoir. He held that, "[S]uch an interpretation provides for the orderly development of oil, gas and mineral leases which development inures directly to the benefit of the schools of the state." He also held that the state was estopped from contesting the validity of the lease as to Chevron's right to continue its operations to recover the maximum amount of oil and gas from the producing reservoir. Finally, he held that Chevron could not retain indefinitely all undeveloped areas of the lease and thereby cancelled the oil, gas and mineral lease as to all non-producing areas and horizons.

From this judgment, Chevron has appealed the chancellor's cancellation of the lease as to all non-producing horizons and areas; the State has cross-appealed, contending that Sec. 211 applies to all leases and did not authorize the extension of the lease beyond 25 years, and that the chancellor erred in holding that Sec. 211 had no application to an oil and gas lease.

In attempting to resolve a conflict between the Constitution and the general

practice of oil, gas and mineral leasing, the chancellor resorted to equity. In so doing he has given priority to economic possibilities over constitutional reality. The ruling of the chancery court should be affirmed on appeal and reversed on cross-appeal

Sec. 211 OF THE CONSTITUTION OF MISSISSIPPI

The crux of this conflict is positioned between the economic realities of modern oil and gas leasing and the constitutional realities of Sec. 211 of the Mississippi Constitution. At the time that the subject lease was entered on February 4, 1957, Art. 8, Sec. 211 of the Constitution of the State of Mississippi, in pertinent part, provided:

The Legislature shall enact such laws as may be necessary to ascertain the true condition of the title to the sixteenth section lands in this state ... and shall provide that the sixteenth section lands reserved for the support of township schools, except as hereinafter provided, shall not be sold nor shall they be leased for a longer term than ten (10) years for lands situated outside municipalities ... for a gross sum; ... but the Legislature may provide for the lease of any said lands for a term not exceeding twenty-five (25) years for a ground rental, payable annually. (Emphasis supplied).

In 1961, Sec. 211 was amended to authorize the Legislature to sell sixteenth section lands for industrial development thereon. Subsequently, in 1986, this section was amended to provide that sixteenth section lands could be leased for a period not to exceed ninety-nine years. The Legislature was also authorized to provide that "forest and agricultural lands" could be leased for a term not exceeding twenty-five years, and "all other classifications of such lands" could be leased for a period not exceeding forty years, for a "ground rental, payable annually."

A review of our jurisprudence indicates that this Court has viewed Sec. 211 as a constitutional limitation on the length of sixteenth section land leases. In Smith v. McCullen, 195 Miss. 34, 80, 13 So.2d 319, 324 (1943), this Court said:

Section 211 of the Mississippi Constitution of 1890 requires, in effect, that the legislature shall enact such laws as may be necessary to obtain revenues from the sixteenth section lands, or lands granted in lieu thereof, reserved for the support of the township schools, by leasing the same under certain limitations therein prescribed. (Emphasis supplied).

In Pace v. State ex rel. Rice, 191 Miss. 780, 800, 4 So.2d 270, 275 (1941), this Court observed:

the previous decisions of this court, holding that the title of the timber on these sixteenth sections of land did not pass to the ninety-nine year lessee (although not reserved by the terms of the lease) should be sufficient authority to sustain the view that the state still owns the minerals to be found beneath the surface.

We continued:

At most the lessee could only be prevented from asserting rights under such a lease after the expiration of the constitutional limitation of twenty-five years.

191 Miss. at 809, 4 So.2d at 279.

Section 211 provides parameters which clearly limit the term of a sixteenth section land lease and indicates that the State is committed to limiting the length of a sixteenth section lease. "[I]t is not for the courts to question the wisdom of any constitutional declaration of public policy by the legislative body." Durham v. Durham, 227 Miss. 76, 84-85, 85 So.2d 807, 809 (1956).

CONSTITUTIONAL REALITIES VS. ECONOMIC REALITIES

The constitutional limitations of Sec. 211 conflict with the established practice in oil, gas and mineral leasing. In the normal scheme of oil and gas leasing, the mineral lessee will negotiate for a primary term. (In the subject lease, this term was for six years.) During the primary term, the lessee has the right to explore and develop the leased land. After the expiration of the primary term, oil, gas and mineral leases commonly provide that the lease shall remain

in force as long as oil, gas or minerals are produced or so long as the lessee is engaged in actual drilling operations. Should the production of oil or gas be obtained, this "secondary term"...