Pshigoda v. Texaco, Inc.

• Decision Date: 29 January 1986
• Docket Number: No. 07-84-0229-CV,07-84-0229-CV
• Citation: 703 S.W.2d 416
• Parties: Fred PSHIGODA, et al., Appellants, v. TEXACO, INC., Appellee.
• Court: Texas Court of Appeals

Page 416

703 S.W.2d 416

Fred PSHIGODA, et al., Appellants, v. TEXACO, INC., Appellee.

No. 07-84-0229-CV.

Court of Appeals of Texas Amarillo.

Jan. 29, 1986.

Rehearing Denied Feb. 19, 1986.

Mitchell Ehrlich, Lemon, Close, Shearer, Ehrlich & Brown, Perryton, for appellants.

Robert P. Thibault, Houston, for appellee.

Before DODSON, COUNTISS and BOYD, JJ.

COUNTISS, Justice.

This is a suit to cancel an oil and gas lease. The mineral owners and appellants, the Pshigoda family, sued the leaseholder and appellee, Texaco, Inc., contending Texaco was holding the lease by two oil wells that were not producing in paying quantities. Appealing from a take-nothing judgment rendered after the jury failed to find facts essential to their recovery, the Pshigodas advance four points of error that present two determinative issues: ¹ (1) did the trial court err by telling the jury to exclude reworking costs when determining operating and marketing costs, and (2) did the trial court err by submitting two time periods for jury consideration, one before and one after suit was filed, instead of one time period? We affirm.

In 1946, the Pshigodas' predecessor in title leased a section of minerals to Texaco's predecessor in title, for ten years "and as long thereafter as oil, gas or other mineral is produced" from the land. Texaco has held the lease under the production clause since the expiration of the primary term, and presently has two oil wells on the leasehold, Pshigoda Number One completed in 1958 and Pshigoda Number Two completed in 1974. The wells are not major producers, but have had periods of profitability.

In 1981, Number One developed a casing leak that caused it to produce substantially more saltwater than oil. Texaco eventually repaired the leak by "squeeze cementing" the well, ² at a cost of approximately $89,000.00.

On December 13, 1982, while Texaco was contemplating the drilling of another well on the leasehold, the Pshigodas filed this suit. They alleged, and at the trial presented evidence, that the two wells were not producing enough oil and casinghead gas to be profitable after deduction of operating and marketing expenses and that a reasonably prudent operator would not continue to operate the lease. Texaco presented controverting evidence and the jury agreed with Texaco (or, at least, did not agree with the Pshigodas by a preponderance of the evidence).

One key item of evidence, and the heart of the first controversy here, is the treatment of the $89,000.00 expenditure to plug the leak in Number One's casing. If it is treated as an operating and marketing expense, the leasehold had a net loss in excess of $69,000.00 from January 1, 1981 through February 1984. (Trial was in May 1984.) If the expenditure is excluded from consideration as an operating and marketing expense, the leasehold had a net profit in excess of $20,000.00 for the same time period.

Witnesses who discussed the expenditure agreed that it was a capital expenditure. The Pshigodas' expert witness called it a "sunk cost" and a "capital investment for the repair of that well." Texaco witnesses characterized the expense as a "workover to repair a capital item" and "an extraordinary item which is not a normal operating expense." One witness also said the expense was "absolutely not" an operating cost or a cost directly attributable to the operation of a lease.

The trial court gave the jury the following instruction on reworking expenses:

In this connection, you are instructed that the words "at a profit" mean that the income to Texaco, Inc. must be sufficient to pay Texaco a profit, though small, over operating and marketing expenses.

In determining "operating and marketing expenses" as that term is used in this charge, if any there be, you may consider such expenses as taxes, overhead charges, labor, repairs, depreciation on salvable equipment, if any, and other such items of expense, if any. In this connection, you are instructed not to consider any costs or expenses in connection with the original drilling and equipping of the well or a reworking of the well. (Emphasis added.)

We will first resolve point one, by which the Pshigodas question the propriety of the foregoing instruction and point three, by which they contend the instruction was a comment on the weight of the evidence. They argue that the instruction was fatal to their case because it permitted the jury to exclude the $89,000.00 casing repair item when determining whether the leasehold was profitable. Thus, the basic inquiry is whether it was error to tell the jury it must exclude reworking expenses in deciding whether the wells operated at a profit, i.e., whether as a matter of law reworking expenses are excluded in deciding whether a well is profitable.

Although no Texas case is precisely in point, the controversy can be resolved within the framework of three cases: Garcia v. King, 139 Tex. 578, 164 S.W.2d 509 (1942); Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684 (1959); and Skelly Oil Company v. Archer, 163 Tex. 336, 356 S.W.2d 774 (1961). Garcia rejected the notion that production will keep a lease in force indefinitely under the habendum clause regardless of the profitability of the production. Instead, said the Court, production means production in paying quantities. Garcia was followed by Clifton v. Koontz, supra, which refined the profitability test of Garcia and enunciated what is now considered a two-step test for determining a well's profitability: (1) does the production yield a profit after deducting operating and marketing costs, 325 S.W.2d at 692 ³ and (2) would a prudent operator continue, for profit and not for speculation, to operate the well as it has been operated. 325 S.W.2d at 691. ⁴ Central to the Koontz decision is the philosophy that fixed or periodic cash expenditures incurred in the daily operation of a well (sometimes called out-of-pocket lifting expenses) are to be classified as operating expenses, while one time investment expenses, such as drilling and equipping costs are to be treated as capital expenditures.

After Koontz, the Supreme Court decided Skelly Oil Company v. Archer, supra. In Skelly, the trial court defined paying quantities by telling the jury "that the gas discovered must be sufficient to pay the lessee a profit, though small, over operating and marketing expenses, although it may never repay the cost of drilling the well." 356 S.W.2d at 780. The Court then illustrated by example the meaning of operating and marketing expenses by telling the jury that it could "consider such expenses as taxes, overhead charges, labor, repairs, depreciation on salvable equipment, if any, and...