Southwest Gas Producing Co. v. Seale

• Decision Date: 24 October 1966
• Docket Number: No. 43932,43932
• Citation: 191 So.2d 115
• Parties: SOUTHWEST GAS PRODUCING COMPANY, Inc., et al. v. A. D. SEALE et al.
• Court: Mississippi Supreme Court

Page 115

191 So.2d 115

SOUTHWEST GAS PRODUCING COMPANY, Inc., et al. v. A. D. SEALE et al.

No. 43932.

Supreme Court of Mississippi.

Oct. 24, 1966.

Thomas R. Crews, Thompson, Alexander & Crews, Kenneth I. Franks, Jackson, H. B. Mayes McGehee, Meadville, for appellants.

Louis Alford, McComb, B. D. Statham, Magnolia, Louis G. Baine, Jr., Baton Rouge, La., for appellees.

JONES, Justice.

Appellees, owing the minerals or royalty interests, and one of them, A. D. Seale, also being the owner of the surface with the right to execute leases for the drilling and mining of certain lands in Franklin County, Mississippi, sued Southwest Gas Producing Company, Inc. (called Southwest), Charles F. Hayes & Associates, Inc., and other interested parties not necessary to mention, in the Chancery Court of Franklin County, seeking cancellation of an oil, gas and mineral lease executed March 2, 1961, by A. D. Seale to Southwest, and also cancellation of all interests having the said lease as their source.

I.

The lease covered an estimated 615 acres situated in several sections of Franklin County. In April 1964, Southwest assigned the lease to Charles F. Hayes & Associates, Inc., insofar as it covered lands in Sections 36 and 39, Township 7 North, Range 2 East, reserving an overriding royalty of 1/8th of 8/8ths of the oil produced. The plat hereto attached shows the lands covered by the assignment (outlined in dark or heavy lines), together with adjacent land and various pooled units. Leases on the other lands shown on said plat were acquired by Hayes wither by assignment or directly. The pooling clause in the Seale lease provided:

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

'Lessee, at its option, is hereby given the right and power to pool or combine the acreage covered by this lease or any portion thereof with other land, lease or leases in the immediate vicinity thereof, when in lessee's judgment it is necessary or advisable to do so in order properly to develop lawful spacing rules which may be prescribed for the field in which this lease is situated by any duly authorized authority, or when to do so would, in the judgment of the lessee, promote the conservation of the oil and gas in and under and that may be produced from said premises. Lessee shall execute in writing an instrument identifying and describing the pooled acreage.'

The bill of complaint alleged that the defendant operators fraudulently, in bad faith, and in violation of the duty owed by a lessee to its lessor, had gerrymandered and so constituted its drilling units as to defraud appellants in the recovery of oil belonging to them. Seale also sought surface damages to his land, assertedly done when the wells designated on the exhibit as Seale No. 2 and Seale No. 3 were drilled. Such damages were sought not for alleged excessive use of land, but because it was claimed the lease had been terminated by acts of the lessee and by letter of appellant prior to the drilling of said wells.

The chancellor held for appellees. He cancelled the lease and interests derived therefrom insofar as that part of it assigned to Hayes was concerned, and also gave Seale a judgment for $1,000 for surface damages, allowed an appeal and provided on remand for an adjustment of equities. From this decree, appellants appeal to this Court.

We reverse the case, enter judgment here, and remand. Appellees were entitled to relief but not that allowed by the lower court.

There is no cross-appeal from the court's failure to cancel that part of the lease not assigned to Hayes. This appeal pertains to that portion of the lease which was cancelled, and the actions of Hayes relative therto.

Delay rentals under Seale's lease were payable to him. He accepted them for the years 1962, 1963 and 1964, the rentals for 1964 having been paid on or before their due date of March 2, 1964. It is therefore unnecessary to discuss the events preceding March 2, 1964.

At the time of the assignment by Southwest to Hayes, there were outstanding a number of royalty deeds by Seale of practically the same form and confusing nature as those described in Payne v. Campbell, 250 Miss. 227, 164 So.2d 780 (1964). The deeds were term instruments which provided if oil, etc., were not produced in paying quantities on or before January 26, 1966, reversion to Seale would occur. The total interest conveyed, if the proportion was 'of the whole' as stated in the deeds, would have amounted to more than fifty percent of the oil produced.

The farmout agreement from Southwest to Hayes contained a provision that Hayes would not drill on Seale land nor include any portion of it in a pooled unit before January 26, 1966, without written consent from Southwest.

Prior to assignment from Southwest, Hayes obtained a lease from John Chambers on 113 acres in Section 39, adjacent to Seale. This lease had a drilling obligation and provided for a one-fourth royalty. Chambers would not execute a lease which permitted his lands to be pooled with Seale's land. A side-letter so providing was given Chambers by Hayes. Southwest's lease from Seale provided for a one-eighth royalty, and their assignment reserved an overriding one-eighth royalty.

Bryan Johnson owned lands adjacent to Seale, but he would not sign a lease containing any pooling provision. He executed Hayes a one-year lease, containing a drilling obligation and providing for a one-fourth royalty.

The assignment from Southwest also included leases executed by the Hannons who owned land in Section 39. On the lease and assignment, production was also subject to a one-fourth royalty, including Southwest's override.

Apparently Hayes' interest in oil recovered was the same in the entire block. Having secured leases covering the block, Hayes soon began development. On May 27, 1964, having secured the necessary permit from the Oil and Gas Board, he spudded the Hannon No. 1 well, the drilling unit being the NW 1/4 of the NW 1/4 of Section 39. The site was 330 feet north of the south line and 330 feet west of the east line of the unit. This well was completed as a producer on June 7, 1964, and was the discovery well in what became known as the Morgan Creek Field.

The next well was Johnson No. 1, located 1330 feet north of Hannon No. 1 in the SW 1/4 of Section 36. This well was spudded July 20, 1964, and completed as a dry hole on July 26, 1964.

Chambers No. 1, located a little south of east of Hannon No. 1 and situated in the NE 1/4 of Section 39, was spudded August 21, 1964, and completed as a producer on September 3, 1964.

Chambers No. 2, slightly west of south of Chambers No. 1 and in the SE 1/4 of the NW 1/4 of Section 39, was spudded September 4, 1964, and completed September 23, 1964, as a producer.

Hannon No. 2, a little west of south of Hannon No. 1 and in SW 1/4 of NW 1/4 of Section 39 was spudded September 15, 1964, and completed as a producer September 29, 1964.

No part of Seale's land was pooled in any of the drilling units above mentioned. The production of all producers was from the Lehman Sand of the Wilcox formation.

In the summer of 1964, the decision in Payne v. Campbell, supra, became known, and it was considered as settling the amount of oil payable under the royalty deeds on the Seale tract aforesaid.

On August 3, 1964, Seale's attorney demanded development of Seale's land 'within' the time provided in the lease, thus recognizing the lease as in force. On September 3, 1964, he again wrote and demanded development through drilling. Within 58 days from the August 3 demand for development, Hayes had spudded in Seale No. 1 (October 1, 1964), and it was completed as a producer on October 12, 1964.

Seale complains, however, that in the Seale No. 1 unit was included a large part of Bryan Johnson's land, where a dry hole had been drilled, and a part of the Chambers' land not included in Chambers No. 1 unit. Seale No. 1 included 6.35 acres of Chambers' land, 13.36 acres of Seale's land, and 20.29 acres of Johnson's land.

At Hayes' request and on his promise to include his land in the Seale No. 1 unit, Johnson executed a new lease with pooling provisions after the drilling of the dry hole.

Seale No. 1 was located about the center of the NE 1/4 of the NW 1/4 of Section 39. Seale No. 2, northeast of Seale No. 1 in the same NE 1/4 of the NW 1/4, was spudded on October 14, 1964, and completed as a dry hole on October 19, 1964. This unit also included Johnson land. Seale No. 3, located in the same NE 1/4 of the NW 1/4 near the east boundary and southeast of Seale No. 1, was spudded on October 27, 1964, and completed as a dry hole November 1, 1964.

Complaint was made that Seale No. 1 was perforated lower than Chambers No. 1, these being the best two wells in the field. The lower perforation of Seale No. 1 was because of engineering difficulties, as explained by a petroleum engineer. The proof showed that the southwest wells in the field (Hannon Nos. 1 and 2 and Chambers No. 2) had from nine to twelve feet of sand. Chambers No. 1 and Seale No. 1 each had twenty-three feet of sand. After drilling Chambers No. 1 and No. 2, it was thought that the field would run in a northeasterly direction.

It will be noticed that the drilling units are not comprised of square units, such as quarter-quarter sections. However, all drilling permits were approved by the State Oil and Gas Board and are in accord with rules of the Board. After the discovery well, it was known that the sand involved was the Wilcox formation.

The proof showed that reservoirs in such formation were customarily small; that it was the general practice of operators, recognized as prudent action, to locate as many wells as reasonably possible close in and on the reservoir, so that as much oil as possible might be obtained for all interested parties. The desire to have as many wells on or near the 'high' of the reservoir prompted the requests for irregular units. It is seen from the exhibit...