Skelly Oil Company v. Harris

• Decision Date: 03 January 1962
• Docket Number: No. A-8224,A-8224
• Citation: 163 Tex. 92,352 S.W.2d 950
• Parties: SKELLY OIL COMPANY, Petitioner, v. Matthew HARRIS et ux., Respondents.
• Court: Texas Supreme Court

Page 950

352 S.W.2d 950

163 Tex. 92

SKELLY OIL COMPANY, Petitioner, v. Matthew HARRIS et ux., Respondents.

No. A-8224.

Supreme Court of Texas.

Jan. 3, 1962.

Rehearing Denied Feb. 14, 1962.

C. E. Blodget, Tulsa, Okl., Ramey, Brelsford, Hull & Flock, Tyler, for petitioner.

LeRoy LaSalle and Crawford Parker, Jr., Carthage, for respondents.

WALKER, Justice.

(1) In Gulf Oil Corp. v. Reid, 161 Tex. 51, 337 S.W.2d 267, it was held that an oil and gas lease had terminated where there was no production or tender of shut-in royalty for a period of thirty-two days following the capping of a well begun before and completed after the end of the primary term. Under somewhat similar facts but different lease provisions, we hold that the lease in the present case was kept in force by production which began forty-one days after completion of a well beyond the primary term on land with which part of the leased premises was pooled.

The cause was submitted to the trial court on an agreed statement of facts. On October 21, 1943, Matthew Harris and wife, respondents, executed and delivered to W. H. Obertheir an oil and gas lease covering nine tracts, aggregating 550.52 acres, in Panola County. A few months later the lease was assigned to Skelly Oil Company, petitioner. The instrument provides for a primary term of ten years and authorizes the lessee to pool the land described therein or any part thereof with other lands or leases in the immediate vicinity. All provisions necessary to an understanding of the contentions made by the parties are quoted in the margin with the third sentence of Paragraph 6, hereinafter referred to as the 60-day clause, set out in italics. ¹ The emphasis there and elsewhere in this opinion is supplied.

A written declaration pooling 59.59 acres covered by the lease with other land in the vicinity to constitute a 640-acre unit, designated as the Shivers-Hamilton Unit, for the production of gas, distillate and condensate was filed for record on October 5, 1953. On that date petitioner also commenced operations for drilling a well at a location in the Shivers-Hamilton Unit but not on any of the land described in the Harris lease. After clearing the drilling site, erecting a derrick, and setting up a drilling rig, petitioner began actual drilling of the well on October 17, 1953. All of the foregoing events occurred during the primary term, which expired on October 21, 1953.

The drilling operations were prosecuted continuously until November 24, 1953, when the well was completed and capped. It was then capable of producing gas and condensate in paying quantities, but no shut-in gas royalty was ever paid or tendered. Petitioner requested and obtained an allowable from the Railroad Commission, arranged for Carthage Corporation to extend its gas gathering lines to the well, installed the necessary meters and meter stations, and negotiated a contract with Arkansas-Louisiana Gas Company for sale of the gas from this and other wells in the area. Production of gas from the well began on January 4, 1954, and has continued without interruption from that date to the present time. Sundry additional wells which were later drilled on other units that included different parts of the land covered by the lease have no bearing on the question presented for decision.

(2) The trial court concluded that the lease had terminated on November 24, 1953, by reason of petitioner's failure to pay shutin royalties or otherwise maintain the lease in force on or after that date. Judgment was accordingly entered in favor of respondents, and the Court of Civil Appeals affirmed on the authority of the Reid case. 341 S.W.2d 693. As indicated above, the facts of the Reid case are similar in many respects to those here involved, but the provisions of the two leases are materially different. One of the clauses which Gulf there sought to invoke became operative upon cessation of production after expiration of the primary term. The other provided that in the event no mineral was being produced but the lessee was engaged in drilling or reworking operations at the end of the primary term, the lease would not terminate if the lessee did not allow more than the sixty days to elapse between abandonment of one well and the commencement of drilling or reworking operations on another until production was obtained. We pointed out that neither of such clauses could extend the term of the lease, because there had been no cessation of production and the well was never abandoned.

Paragraph 6 of the lease in the present case does not deal merely with cessation of production or the completion of a dry hole after expiration of the primary term. The third sentence comes into play when there is no production at the end of the primary term but drilling or reworking operations are then in progress. It stipulates that in such event the lease shall remain in force if the operations are prosecuted and result in production as therein provided. The purpose of this provision is to enable the lessee to maintain the lease by obtaining production as a result of diligent prosecution of the very operations which were in progress at the expiration of the primary term, and a precise yet quite liberal standard of diligence is prescribed. See Rogers v. Osborn, 152 Tex. 540, 261 S.W.2d 311; Stanolind Oil & Gas Co. v. Newman Bros. Drilling Co., 157 Tex. 489, 305 S.W.2d 169.

Respondents contend that the 60-day clause has no further application after the lessee has completed a well capable of producing in commercial quantities. They insist that its only purpose is to prevent termination of the lease during any brief periods that may be required by the lessee to make tests, decisions and alterations in equipment in an attempt to complete the well as a producer. We are urged to say that when the operations in progress at the end of the primary term have resulted in the discovery of oil or gas in paying quantities and a well capable of commercial production has been completed, the lease can thereafter be kept in force only by actual or constructive production. Respondents recognize that the clause will maintain the lease during temporary periods of inactivity to enable the lessee to continue good faith efforts to complete either a producer or a dry hole, but they argue that when the same is read in connection with the shut-in royalty clause, it does not allow a period of sixty days after final completion of drilling operations within which to pay shut-in royalty or begin production from the well.

We do not think the lease provisions are subject to the construction urged by respondents. Under the terms of the shut-in royalty clause, the lessee...