Mound Company v. Texas Company

• Decision Date: 27 March 1962
• Docket Number: No. 18910.,18910.
• Parties: MOUND COMPANY, Appellant, v. The TEXAS COMPANY, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

298 F.2d 905 (1962)

MOUND COMPANY, Appellant, v. The TEXAS COMPANY, Appellee.

No. 18910.

United States Court of Appeals Fifth Circuit.

February 1, 1962.

Rehearing Denied March 27, 1962.

Leroy Jeffers, Lester Settegast, I. M. Wilford, Ross N. Sterling, Houston, Tex., Vinson, Elkins, Weems & Searls, Houston, Tex., of counsel, for appellant.

M. W. Parse, Jr., Leon Jaworski, William S. Clarke, Houston, Tex., Fulbright, Crooker, Freeman, Bates & Jaworski, Houston, Tex., of counsel, for appellee.

Before TUTTLE, Chief Judge, and HUTCHESON and RIVES, Circuit Judges.

TUTTLE, Chief Judge.

This is an action seeking to cause the termination of an oil and gas lease on 3,000 acres of Texas land. The lease was executed in 1915 and covered oil, gas and sulphur. The lease was amended in 1921 so as to provide for payment to Mound of "advance sulphur royalties" which escalated to $15,000 per month from and after July 1, 1924. The lessee, Texaco, Inc., in 1922 entered into a contract with Freeport Sulphur Company under which the latter would produce sulphur on a profit-sharing agreement. Under this agreement Freeport engaged in an active program of development and mining of sulphur at Hoskin's Mound, a salt dome located on the leased tract. In the course of this development it drilled some 1,000 sulphur wells and by 1955 it had exhausted the sulphur deposits. By this time Texaco had paid from its share of the sulphur production approximately $11,500,000.00 of sulphur royalties to appellant.

In 1942, in order to make provision for ending these obligations of Texaco to continue to pay the $15,000 monthly payments after the sulphur would be exhausted, an amendment to the lease was executed. It is conceded by both parties here that at this time Texaco had fully paid its advance royalties for some 40 years in the future — until 1985. This amendment is the document that must be interpreted to determine whether the appellant is entitled to a cancellation of the oil and gas rights in the lease. The only pertinent language is:

"ARTICLE II

"It is agreed that ARTICLE SECOND of said oil, gas and mineral lease from Mound Company to * * Texaco dated May 22, 1915, shall be amended to read hereafter as follows:

"`(a) On a date not later than that on which the lessee surrenders its right to mine sulphur from the Mound Company 3,000 acres and thereby is released from the obligation to make any further advance sulphur royalty payments, the lessee shall begin prospecting operations hereunder with respect to oil by putting at least one suitable drilling rig to work and shall continue such work with due diligence, in a bona fide effort to discover oil, until oil or gas is discovered in paying quantities on the Mound Company 3,000 acres or until the lessee shall have drilled to the depth herein stipulated. * * * At any time after drilling for oil has been started and before oil or gas is discovered in paying quantities on the Mound Company 3,000 acres, should the lessee permit more than thirty (30) days to elapse between the abandonment of one well and the commencement of operations for the drilling of another well, the lessor may at its option, unless such delay beyond thirty (30) days is caused by act of God or conditions wholly beyond the control of the lessee, terminate this lease, as to oil and gas, as to the Mound Company 3,000 acres.\'"

Conceding that Texaco would not be required, under the terms of this amendment, to do anything in relation to prospecting for oil and gas until about 1986, and then only if it elected not to commence paying advance sulphur rentals again, Mound filed this suit claiming that it had elected to terminate the lease because Texaco had started "drilling for oil" and had thereafter (no production having been achieved) permitted more than 30 days to elapse without commencing "operations for the drilling of another well."

The conduct of the lessee, which Mound contends constituted "drilling for oil," and thus hastened by nearly 40 years the time when it must satisfy the 30-day clause, was the following:

By the latter part of 1949 the known sulphur deposits were being rapidly depleted.¹ Freeport determined to attempt a refraction survey to ascertain, if possible, the shape and extent of the salt dome. As testified to by the Freeport Sulphur official whose responsibility it was, the following decision was made:

"Q. Would you tell the Court the story with respect to that particular well, how it came about that the well was located and who determined where it was to be located?

"A. At the time we drilled this well the mine was quite old. Most of the sulphur had been produced. We were very interested in continuing at Hoskins Mound and not overlooking some sulphur ore bodies. We hoped to find more sulphur on the edges of the dome where we hadn\'t previously drilled, or which were not completely explored.

"Since the dome sloped very steeply on the edges we were reluctant to drill in unknown areas for fear of missing the dome completely or being too high on the dome and not finding what we were looking for. So we decided to find out all we could about the shape of the dome by geophysical methods before we undertook to drill these edge wells, you might call them. So we conceived the idea of having a geophysical firm run a refraction seismograph test or tests on the dome and to do that we needed a well down into the salt, nearly in the center of the dome.

"So, with the advance of the geophysicists and our group, we chose this well location in the middle of the dome and arranged to drill into the salt and conduct our seismic program.

"Q. You said you together with a geophysicist determined the location?

"A. Yes.

"Q. Did the Texas Company have anything to do with determining the location of this Well No. 983?

"A. No."

When this decision was made, the appellee decided that it would be valuable for it to have this survey well drilled to about 7500 feet rather than stopping at 3500 feet, which would satisfy Freeport's needs. Thereupon, an agreement was made by the two companies by which Texaco was to receive all the data uncovered by the drilling to a depth of 3,500 feet, for which it would reimburse Freeport for one-half the cost and it would pay Freeport for the entire cost of drilling below the 3,500-foot level. It was not disputed that Texaco's objective in participating in this venture was to obtain information that might enable it to determine whether oil was present on the lease.²

As a result of the drilling of this well, Freeport determined to drill several wells on the flank of the salt dome as now outlined by the refraction survey. These were located and drilled by Freeport to see if it could locate additional sulphur deposits. Discussions with Texaco resulted in Texaco requesting and obtaining permission to "acquire information from electrically logging and sidewall coring certain sulphur exploratory wells," which Freeport contemplated drilling. Texaco agreed to pay the cost of its logging and coring work and to reimburse Freeport for "delay rig time" caused by this work. Otherwise Freeport did the drilling at its expense. Nine of these wells were drilled by Freeport and they were electrically logged and corings were taken for the account of Texaco. This work was completed in November, 1950. Thereafter no drilling for oil or gas has been undertaken and there has been no production of oil or gas.

Mound contends that in two of the nine wells oil was discovered in paying quantities and that the failure of Texaco to produce worked a termination of the lease; in the alternative, Mound contends that the foregoing activities of Texaco amounted to "drilling for oil" within the language of the amendment which required that thereafter such drilling must continue with due diligence until discovery of oil or gas in paying quantities and without more than 30 days delay from abandonment of one dry hole until commencement of operations for the drilling of a new well.

The trial court held against the appellant on both issues. We affirm the judgment of the trial court.

The appellant's principal argument here is that on the uncontroverted facts, set out in skeleton form above, the trial court could not find either as a fact or as a conclusion from the facts that the appellee did not "start drilling for oil." It takes the position that the participation of Texaco in drilling the initial well in the center of the salt mound to attempt to ascertain its exact shape and extent, followed by the participation of Texaco in what was carried on by way of logging and core testing the nine peripheral wells, indisputably an aid to determining the likely presence of oil and gas, constituted "drilling for oil" in the sense that when this was done this triggered the drilling clause of the lease, and Texaco must thereafter drill continuously until production was achieved.

We think, as did the trial court, that the lease can not be given such a construction.

In construing the lease, we must bear in mind that what we are to do is to determine from its language what was the intention of the parties. We must also bear in mind that if its language is reasonably susceptible of a construction, argued for by one of the parties, that prevents a forfeiture, such construction is to be preferred to one resulting in a forfeiture. Ryan v. Kent, 36 S. W.2d 1007 (Tex.Com.App.). See also Decker v. Kirlicks, 110 Tex. 90, 216 S.W. 385 (Tex.Sup.Ct.), and West v. Continental Oil Co., D.C., 91 F.Supp. 505, aff'd. (5 Cir.) 194 F.2d 869.

Here we start with the highly significant fact that for some 37 years the lessee would not be...