Phillips Petroleum Co. v. Millette

• Decision Date: 03 May 1954
• Docket Number: No. 38942,38942
• Citation: 221 Miss. 1,72 So.2d 176
• Parties: PHILLIPS PETROLEUM CO. v. MILLETTE et al.
• Court: Mississippi Supreme Court

Page 176

72 So.2d 176

221 Miss. 1

PHILLIPS PETROLEUM CO. v. MILLETTE et al.

No. 38942.

Supreme Court of Mississippi.

May 3, 1954.

Laub, Adams, Forman & Truly, Natchez, for appellant.

Berger & Callon, Robt. L. Netterville, Luther A. Whittington, Natchez, for appellees.

HALL, Justice.

This is the second appearance of this case in this Court. On the original appeal we had for consideration the sufficiency of the bill of complaint as stating a cause of action as against a demurrer, and we reversed the action of the chancellor in sustaining a demurrer to the bill and remanded the case for trial on one issue, viz., the liability of appellant for drainage of oil underlying appellees' land through wells owned and operated by it on adjoining land. See Millette v. Phillips Petroleum Co., 209 Miss. 687, 48 So.2d 344, 346. On that appeal we settled the law governing the trial upon remand. On the trial the chancellor awarded a judgment for drainage from appellees' land in the amount of $12,500 from which this appeal is prosecuted.

The principal point now argued by appellant, and the only point as to which there is any disagreement among us, is that the trial court erred in awarding any damages to appellees because of a finding by him that there was not a sufficient quantity of oil underlying the Millette land to justify the drilling of an offset well thereon. Specifically it is argued that Phillips would not be liable for drainage from appellees' land unless there was a sufficient quantity of oil thereunder to require a prudent operator to drill an offset well. We think this question was settled on the former appeal and we adhere to what was there said and to make our position clear we shall quote excerpts therefrom and summarize some portions thereof. It must be borne in mind that we are here dealing with a case where the oil company holds a lease on the Millette land and has failed and refused to develop the same by drilling but is draining the oil from its subsurface through a well or wells owned and operated by the company on adjoining land.

In the former opinion we held (1) that the Millettes are not entitled to a cancellation of the lease on their land for failure to drill an offset well because 'The subject of offset wells is expressly provided for in the lease' which of course supersedes any implied covenant as to offset drilling, and (2) that nevertheless 'The equitable duty, existing as well under implication, to conserve the mineral resources of lessors or to refrain from depletory acts survives unimpaired. * * * Such an obligation gains equitable recognition when substantial drainage is caused by the lessee himself. This responsibility is separable from a duty to drill offset wells, and an express covenant which absolves the lessee from this method of development does not relieve the lessee of liability for substantial drainage by him.' Numerous authorities were cited and a quotation given from one of them to support the above pronouncement, after which we said 'We hold therefore that the bill states a cause for equitable relief by way of compensation for oil drained by lessee from lands leased to it by appellants.' It seems crystal clear that we have already held as the law of this case that appellant is liable by way of compensation for oil drained by it from the land of appellees, at least where such drainage is substantial. And we may divert at this point to say that the lowest estimate of the value of the oil so drained, according to the witnesses for appellees, was $105,000. According to the lease the appellees were entitled to a royalty of one-eighth of the oil 'produced and saved from said land'. It does not limit their royalty to one-eighth of the oil produced and saved from said land through wells drilled on said land, but obligates appellant to pay them the royalty on the oil produced and saved from said land regardless of how it may be produced or where it may be drawn to the surface. The chancellor, in fixing the amount of royalty to which appellees are entitled, evidently scaled down the value of the drainage to $100,000 since he allowed recovery at one-eighth of that amount. It could hardly be seriously contended that this amount of drainage was not substantial.

Reverting to appellant's principal contention as hereinabove stated, the former opinion did not state and did not hold that to authorize a recovery of compensation for drainage there must be a showing that the amount of oil underlying appellees' land must be of such quantity that a prudent operator would drill a well thereon. On the contrary, it pointed out that the duty to drill offset wells, as expressly stipulated and limited in the lease, is separable from the implied covenant to compensate for drainage and that the latter survives unimpaired. Cases were cited in the opinion which hold that the so-called 'prudent operator' rule has no application to a state of facts such as here presented, and we shall presently refer to some of them. The 'prudent operator' rule has its place in those cases involving the duty to drill an offset well under an implied covenant where not expressly provided for in an oil and gas lease, and it is usually inserted in leases where the duty to drill offset wells is spelled out in the lease, such as the lease in the present case. But notwithstanding the fact that the rule has no place in a suit for recovery of compensation for drainage by a common lessee from one tract of land through a well drilled on an adjoining tract, the duty to drill offset wells and the duty to compensate for drainage being entirely separate, some courts have extended the rule to apply to suits for drainage. We decline to follow the rule as laid down by such courts. It is contrary to every concept of equity and justice to hold that a lessee may drill on adjoining land and through such a well drain dry the land on which it refuses to drill and thereby deplete the resources of its lessor and enrich itself to that extent without the expenditure of one dime in developing the lessor's land and then refuse to pay the lessor the royalty for his oil which it has taken from him. It is not only contrary to equity and justice but is contrary to the express royalty provision in the lease here involved that appellant would pay the one-eighth royalty on the oil 'produced and saved from said land.' It is wholly beside the point to argue that appellant might have to pay to the lessor of the adjoining land a one-eighth royalty on all the oil which is produced from the well located on his land. Assuming, but without deciding such to be true, and assuming, but without deciding, that appellant might thereby have to pay a double royalty on a part of the oil produced from the well located on the adjoining land, the appellant is certainly in no position to complain of our holding, since it has saved unto itself the cost of drilling on appellees' land, and that saving is considerably more than the additional royalty which it might be required to pay.

Appellant's position is entitled to scant consideration in a court of equity. It refused to drill a well on appellees' land, contending that no oil could be produced from it. Thereupon appellees requested a cancellation of the lease so that it might undertake to induce some other operator to drill. This request was refused. Then appellees offered appellant a substantial consideration for cancellation of the lease, which it refused. Its position was and is that it had the right to prevent drilling on appellees' land and at the same time drain the oil underlying it without expense to itself and without compensation by way of royalty for the oil so drained. The obligation was upon appellant as lessee not to deplete the resources of its lessor. It violated that obligation and duty and claims that it is entitled to do so with impunity. Appellees were the owners in place of the oil beneath their land and were entitled to have it remain in place and not drained away by their lessee without compensation. Our conservation law, Chapter 117, Laws of 1932, abolished at least in part the rule of capture which existed in this State under the common law. Griffith v. Gulf Refining Co., 215 Miss. 15, 25, 60 So.2d 518 and 61 So.2d 306. By amendment to the conservation law, Chapter 256, Laws of 1948, the public policy of the State was declared to be, among other things, 'to safeguard, protect and enforce the co-equal and correlative rights of owners in a common source or pool of oil and gas to the end that each such owner in a common pool or source of supply of oil and gas may obtain his just and equitable share of production therefrom' [215 Miss. 15, 60 So.2d 521]. Appellant's position is contrary to this declared public policy of Mississippi. It contends that appellees have no rights in this common pool under their land. What we said in Griffith v. Gulf Refining Co., supra, is particularly applicable here: 'To all intents and purposes, they have built a fence around the lands in which appellants are interested. Neither production nor utilization of gas in which they have an interest can be had by the appellants. On the contrary, appellees have taken it for their own use and have paid nothing therefor. It is unthinkable that the 90 acres can be utilized, as alleged by the complainants in this case, and its royalty owners receive nothing while the owners of the 160 acres receive all the benefits. On account of the fact that the well is evidently draining the 90 acre tract and that the owners of such acreage are thereby contributing to the production, actually the owners of the 160 acres must be getting more than they are entitled to, and this at a time, when those on the 90 acre part of the unit are receiving nothing.'

We turn now to some of the authorities from other jurisdictions which sustain our view on the point under consideration. In Blair v. Clear Creek Oil & Gas Co., 148 Ark. 301, 230 S.W. 286, 289,...