Hondo Oil & Gas Co. v. Pan Am. Petroleum Corp.
| Decision Date | 25 November 1963 |
| Docket Number | No. 7241,7241 |
| Citation | 15 A.L.R.3d 437,73 N.M. 241,1963 NMSC 204,387 P.2d 342 |
| Parties | , 15 A.L.R.3d 437 HONDO OIL & GAS COMPANY, Western Development Company of Delaware, Yates Brothers and Yates Petroleum Corporation, Plaintiffs-Appellants, v. PAN AMERICAN PETROLEUM CORPORATION, Defendant-Appellee. |
| Court | New Mexico Supreme Court |
Losee & Stewart, Artesia, James T. Jennings, Roger L. Copple, Roswell, for appellants.
Atwood & Malone, Roswell, for appellee.
On May 22, 1952, the parties hereto entered into a master agreement whereby defendant-appellee was granted the exclusive right for a period of six months to conduct geophysical explorations on some 20,000 acres of leases owned by plaintiffs-appellants. The master agreement provided that within 60 days after the expiration of the 6-month exploration period, the defendant had a right to select 3 blocks of acreage of 2560 acres each, and that plaintiffs would convey an undivided one-half working interest therein below a certain depth.
The exploratory work was done, the selections made, the conveyances executed, and on February 21, 1953, operating agreements were entered into by the parties. The operating agreement covering Block I, here involved, (hereinafter referred to as the 'agreement') provided for the drilling by defendant of a test well at its own expense at a location to be selected by it on the acreage. The agreement further provided that within 90 days after completion of the test well, defendant should drill a development well, and thereafter additional development wells should be commenced within 60 days after the completion of each well. The defendant had the right to recover its costs of the development wells out of 75% of plaintiffs' share of production. Defendant had the right to abandon the drilling program at any time without liability, but, subject to certain exceptions, upon doing so was required to reconvey the interests in the leases which had been transferred to it. Differences between the parties as to the proper interpretation of Article 6 of the agreement gives rise to the present litigation. This article is entitled, 'Drilling of Development Wells.' We set it out in full for a better understanding of the problem:
We continue with the facts about which there is no controversy. The test well was completed as a gas well on Block I, whereupon the New Mexico Oil Conservation Commission, on November 25, 1953, entered its order No. R-391 establishing the Empire-Pennsylvanian Gas Pool and providing for 320 acre spacing.
Thereafter, the parties agreed that the first development well should be drilled on the N 1/2 of Section 32, Township 17 South, Range 28 East, N.M.P.M., the NE 1/4 being included in Block I selected by defendant, and assigned by plaintiff, and further agreed that if it was drilled on the NW 1/4 of that section it would be considered as a development well under the agreement. Defendants were granted an extension of time for commencing the well since the NW 1/4 was not included in the blocks in which an interest had been assigned to defendant, and was not owned by plaintiffs. However, a unitization agreement between the owners of the leases on the NW 1/4 and NE 1/4 was entered into on December 29, 1953 and a well designated as a gas well projected to the Empire-Pennsylvanian pool was commenced by defendant on January 8, 1954. The well was non-productive at this depth, but was thereafter completed as an oil well in the Wolfcamp formation, this being a shallower depth, but within the horizons in which defendant had an interest under the assignments from plaintiffs. However, the Wolfcamp formation was not covered by the unitization agreement, and plaintiffs had no interest in the production therefrom.
The defendant did no more drilling on Block I, and under date of April 1, 1955, a 'conveyance of operating rights' was executed by the parties, with a reservation in defendant of an undivided 1/2 interest in an area surrounding the test well, and in the NE 1/4 of Section 32, Township 17 South, Range 28 East, N.M.P.M. 'from a depth of 3500 feet below the top of the San Andres formation down to the base of the Pennsylvanian formation.'
Nothing further occurred until August 25, 1959, when plaintiffs requested that defendant assign the interest reserved in the NE 1/4 of Section 32. Plaintiffs assert it was then that they first realized that defendant still claimed an interest therein. Plaintiffs also point out that on April 1, 1955, when the conveyance of operating rights was made, the property was bound by the unitization agreement with the NW 1/4, and that by its terms the unitization agreement remained in effect until April 14, 1956. For this reason the plaintiffs claim the original reservation was proper, and after April 14, 1956, their right to a reconveyance was overlooked.
On the other hand, defendant points out that the correspondence between the parties at the time the conveyance was made on April 1, 1955 described the same as including 'all unearned rights in Block I,' thereby clearly indicating the reserved interest was understood to have been 'earned' when the reconveyance was made. Also, attention is called to the fact that in 1959 the property had suddenly acquired an increased value by virtue of a 1957 oil discovery in the Abo Reef, and that in 1959 and 1960 the field was moving in the direction of the NE 1/4 of Section 32.
After answer in which four defenses were raised, all parties filed motions for summary judgment, and defendant's motion was sustained by the trial court. Evidence was taken only on the defense of laches, and on this issue the court also found in favor of defendant.
By its ruling sustaining the motion for summary judgment, the trial court determined that Article 6 of the operating agreement quoted above did not require the defendant to reconvey to plaintiffs the NE 1/4 of Section 32, Township 17 South, Range 28 East, N.M.P.M. This is asserted to have been error in plaintiffs' first point on this appeal.
All parties, while putting different constructions on Article 6, maintain that it is unambiguous. It is well settled in New Mexico that where the language of a contract is clear and unambiguous, the intent of the parties must be ascertained from the language and terms of the agreement, Fuller v. Crocker, 44 N.M. 499, 105 P.2d 472; Hoge v. Farmers Market and Supply Company of Las Cruces, 61 N.M. 138, 296 P.2d 476; Ashley v. Fearn, 64 N.M. 51, 323 P.2d 1093, and in this connection all parts of the instrument shall be given effect so as to make all provisions of the document reasonable and harmonious. Maffett v. Emmons, 52 N.M. 115, 192 P.2d 557.
Specifically, the issue which we are called upon to determine is the meaning of the word 'well' as that word is used in Article 6. It is plaintiffs' position that the word means only 'producing wells,' whereas, defendant contends that a 'completed dry hole' was also intended by the parties to be included in the term.
Plaintiffs direct our attention to other language of the agreement which they assert throws light on the intention of the parties. Article 2 provides, 'All costs and expenses incurred in connection with the drilling, completing, testing, equipping and, if a dry hole, the plugging and abandoning of said test well * * *.' Article 7 provides 'Operator initially shall advance and pay all costs and expenses for the drilling, completing, equipping and, with...
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