Raw Hide Oil & Gas, Inc. v. Maxus Exploration Co.

• Citation: 766 S.W.2d 264
• Decision Date: 31 December 1988
• Docket Number: No. 07-88-0011-CV,07-88-0011-CV
• Parties: RAW HIDE OIL & GAS, INC., Raw Hide Production Company, Inc., & J.C. McCollough, Appellants, v. MAXUS EXPLORATION COMPANY. Amarillo
• Court: Court of Appeals of Texas

Page 264

766 S.W.2d 264

RAW HIDE OIL & GAS, INC., Raw Hide Production Company, Inc., & J.C. McCollough, Appellants, v. MAXUS EXPLORATION COMPANY.

No. 07-88-0011-CV.

Court of Appeals of Texas,

Amarillo.

Dec. 31, 1988.

Rehearing Denied Feb. 15, 1989.

J.R. Lovell, Cynthia A. Quetsch, Lovell & Lyle, Dumas, Parker McCollough, Georgetown, for appellants.

Frank Douglass, Tom W. Reavley, Ray Donley, Scott, Douglas & Luton, Harlow Sprouse, Underwood, Wilson, Berry, Stein & Johnson, Austin, for appellee.

Before REYNOLDS, C.J., and DODSON and PIRTLE, JJ.

PIRTLE, Justice.

This action involves a title and ownership dispute between the gas rights owner and the oil and casinghead gas rights owner, under two separate mineral leases on a tract of land situated in Moore County, Texas. Throughout this opinion, gas belonging to the owner of the gas rights will be referred to as "gas rights gas," whereas gas belonging to the owner of the oil and casinghead gas rights will be referred to simply as "casinghead gas."

Diamond Shamrock Exploration Company, now known as Maxus Exploration Company (both generally referred to as Maxus), the gas rights owner, brought suit against Raw Hide Oil & Gas, Inc. (Raw Hide Oil) and J.C. McCollough (McCollough), the oil and casinghead gas rights owner, seeking damages for conversion of gas belonging to Maxus and declaratory relief to determine its ownership rights in future production from certain formations under that tract of land. Raw Hide Production Company, Inc. (Raw Hide Production) intervened in the suit, alleging that it owned an interest in the oil and casinghead gas rights. Raw Hide Oil, Raw Hide Production and McCollough (collectively referred to as Raw Hide) counterclaimed, seeking a declaratory judgment that Maxus had converted oil and casinghead gas, alleging that Maxus had failed to case off, save and protect their oil and casinghead gas rights. A pretrial court order provided for supervised testing of the wells at issue. Proceeds from the sale of gas produced during the test period were deposited into the registry of the court pending determination of ownership.

Raw Hide appeals from an adverse judgment, rendered upon a jury verdict favorable to Maxus. The judgment provides, inter alia, that Maxus owns the exclusive right to complete and produce wells in certain formations, productive of gas rights gas only, and that certain Raw Hide wells were producing gas which belonged to Maxus. The judgment permanently enjoined Raw Hide from producing gas from certain formations under the lease and awarded Maxus damages and attorney's fees.

By eleven points of error, with corresponding numbers, Raw Hide contends that the trial court erred in (1) awarding attorney's fees to Maxus; (2) submitting an

improper definition of the term "oil" following special issue number seven; (3) placing the burden of proof in special issue number three on Raw Hide; (4) rendering judgment, claiming that there is no evidence to support the answer to special issue number three or, in the alternative, that said answer is against the great weight and preponderance of the evidence; (5) awarding the funds in the court's registry to Maxus; (6) refusing to submit Raw Hide's requested special issue numbers one and two, claiming that there was sufficient evidence to support their submission; (7) refusing to submit Raw Hide's requested special issue numbers three, four, five, and six, claiming that there was sufficient evidence to support their submission; (8) excluding evidence pertaining to the Powell "C" lease; (9) rendering judgment, claiming that there is no evidence to support the answer to special issue number seven or, in the alternative, that said answer is against the great weight and preponderance of the evidence; (10) excluding defense exhibit number seventy-two; and (11) declaring that certain formations under Section 237 are gas zones and not productive of oil. We affirm the judgment of the trial court for the reasons now to be stated.

Overview of the Facts

A brief review of the facts is essential. In 1938, The Shamrock Oil and Gas Corporation (Shamrock) and W. Coffee entered into a gas mining lease (the 1938 Coffee lease). This lease conveyed to Shamrock the exclusive right to prospect for, drill, and produce "gas" on Section 237, Block 3-T, T & NO Ry. Co. Survey, Moore County, Texas. The 1938 Coffee lease specifically excluded "all of the oil and casinghead gas (as casinghead gas is defined by existing law)." Paragraph 12 of the 1938 Coffee lease provides:

12. If at any time the holder and owner of the gas and gas rights granted under the terms of this lease shall, in the drilling on said premises for gas, encounter oil in any well to be drilled under the terms hereof, then the lessee herein shall use reasonable care and caution to case off any such oil and/or casinghead gas that may be encountered therein, and likewise if at any time hereafter during the existence of this lease the holder and owner of the oil and oil rights in and to said premises shall, in the drilling for and the production of oil and casinghead gas thereon, encounter gas in any well or wells being so drilled, then such person shall use reasonable care and caution to case off, save and protect any such gas so encountered, it being the intention hereof that the holder and owner of the gas and gas rights, and the holder and owner of the oil and casinghead gas and rights therein in and to said premises, shall each use reasonable care and caution in the production of such respective products as will save and protect the product of the other from waste.

By assignment, Maxus holds current title to the gas rights originally conveyed to Shamrock under the 1938 Coffee lease.

There are five geological formations, relevant to this dispute, located under the tract covered by the 1938 Coffee lease. From top to bottom, they are the Red Cave, Brown Dolomite, White Dolomite, Moore County Lime, and Arkosic Dolomite formations. ¹

In 1938, Shamrock drilled the Coffee H-1 well on the lease. This well was completed throughout the Brown Dolomite and Moore County Lime formations. Since completed, the Coffee H-1 well has continuously produced gas, except during times when it was shutin or being reworked. The Coffee H-1 produced approximately 23.1 BCF (billion cubic feet) of gas and no oil from 1938 to June 1987, the latest reporting period prior to trial.

On May 25, 1981, Wayne Jones obtained an oil and casinghead gas lease from several parties covering all but 80 acres of section 237 (the Fate lease). Jones subsequently assigned the Fate lease to Flatiron Corporation. On November 25, 1983, Raw Hide Oil entered into a farmout agreement Raw Hide Production drilled the Raw Hide Fate well Nos. 9, 10, 11, and 12 on the lease in June and July 1984. Richard Strickland, a petroleum engineer, reported that many of the perforations in these wells were completed in the Brown Dolomite and Moore County Lime formations, the same formations from which the Coffee H-1 well has produced gas since 1938.

with Flatiron in which Raw Hide Oil agreed to drill two wells, with the option of drilling ten additional wells, on the E/2 of Section 237, in exchange for an assignment of Flatiron's oil and casinghead gas rights on 20 acres surrounding each well drilled. Flatiron retained an overriding royalty and an optional participating working interest in the wells drilled. Raw Hide Oil subsequently became the owner of all oil and casinghead gas rights under the Fate lease, and on March 21, 1984, Raw Hide assigned an overriding royalty to McCollough.

In April 1985, after the instant lawsuit was commenced, Raw Hide Production completed the Raw Hide Fate well Nos. 3, 7, and 8. The Raw Hide Fate well No. 3 also has perforations within the same formation from which the Coffee H-1 well is producing. Strickland reported that the Raw Hide Fate well No. 8 has no perforations in the Moore County Lime, but has some perforations in the Arkosic Dolomite. The top perforations in the Arkosic Dolomite are only a few feet from the bottom of the Moore County Lime. There was evidence that the Fate well No. 8 was completed and fracture treated in a manner that would indicate a possibility that the well was capable of producing gas from the Moore County Lime as well as the Arkosic Dolomite. The Fate well No. 7 was drilled through the Moore County Lime and a few feet into the Arkosic Dolomite; however, it was filled with cement up to a point in the Red Cave formation.

In May 1985, Raw Hide Production completed the Raw Hide Fate well Nos. 4, 5, and 6. Although these wells were perforated only in the Arkosic Dolomite, the top perforations were only a few feet from the bottom of the Moore County Lime. Strickland stated that these wells were also fracture treated in a way that could result in gas being produced from the Moore County Lime.

On November 14, 1985, the parties entered into an agreed testing order. The order provided that Raw Hide would operate the wells during the testing period. Maxus was permitted to run logs, conduct bottom hole pressure and temperature surveys, and install temporary gas flow lines from the wells to transport the gas produced. Proceeds from the sale of gas produced during the test period were to be deposited into the registry of the court, pending distribution upon determination of the merits of the case.

The initial phase of agreed testing commenced on January 2, 1986, but was prematurely terminated by Raw Hide on January 28, 1986. The second five day preflow testing phase never started because Raw Hide shut in all of its wells. From January 3rd to the 24th, all ten Raw Hide Fate wells were in operation. On the 25th and 26th only four wells were producing. On the 27th and 28th, only two wells were producing. The average barrels of oil produced per well per day during the test period was 0.049, with an average daily value of $0.93. The wells produced an...