Startex Drilling Co., Inc. v. Sohio Petroleum Co.

• Decision Date: 16 July 1982
• Docket Number: No. 81-1416,81-1416
• Parties: STARTEX DRILLING COMPANY, INC., Plaintiff-Appellee, v. SOHIO PETROLEUM COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 412

680 F.2d 412

STARTEX DRILLING COMPANY, INC., Plaintiff-Appellee, v. SOHIO PETROLEUM COMPANY, Defendant-Appellant.

No. 81-1416.

United States Court of Appeals Fifth Circuit.

July 16, 1982.

W. B. Browder, Jr., Andrew L. Kerr, Midland, Tex., Richard F. Remmers, Oklahoma City, Okl., for defendant-appellant.

Rassman, Gunter & Boldrick, James P. Boldrick, Midland, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before CLARK, Chief Judge, POLITZ and RANDALL, Circuit Judges.

CLARK, Chief Judge:

This contract dispute was filed under this court's diversity jurisdiction by an independent drilling contractor, Startex Drilling Company (Startex) against an operator of oil wells, Sohio Petroleum Company (Sohio). Based on the jury's answers to special interrogatories, the district court entered judgment for Startex. We affirm.

Startex agreed to drill two wells for Sohio in Midland County, Texas, in an area known as the Sprayberry Trend. Startex submitted a standard drilling contract to Sohio, which Sohio declined. Instead, Sohio sent back to Startex an API (American Petroleum Institute) Master Rotary Drilling Contract as modified by the Sohio Company. Startex's president, R. Frank Swinehart, executed the contract. Thereafter he executed the more particularized API Bid Sheet and Drilling Order. This describes the name and location of the wells to be drilled, the commencement date, and the specifications for drilling each well. Among these specifications are the subject well's proposed depth (8800 ft.), casing, mud program and rate of compensation.

What occurred in the drilling of this well is essentially undisputed. Rather, it is the meaning and legal effect of those events as defined by the contract which sparks the differences here. Therefore, before detailing the facts concerning the actual drilling operation, it is appropriate to outline the parties' differences with regard to the meaning of certain technical contractual terms.

The drilling order provides that Startex will be paid for drilling these wells (the Ernest Braden No. 1 and the David Braden No. 1) either at a rate of $17.58 per linear foot drilled, or at a rate of $4,750.00 per day. The provisions of the master contract control whether the footage or day rate is collected. The contract anticipates that the driller will, under normal conditions, be paid on a footage basis. The day rate will be collected only under certain circumstances. This dispute centers almost entirely on paragraph 8.6 of the contract, which pertains to one of those circumstances-loss of circulation. This paragraph recites:

8.6: If loss of circulation occurs while normal drilling operations are in progress on a footage rate basis, Contractor (Startex) shall notify Operator (Sohio) of such loss and shall use all reasonable means to restore the same, without compensation for the first eight hours after the loss. If Operator concurs that such conditions exist, operations to restore circulation after said eight hour period shall be performed on a day work basis until normal circulation is restored; provided, however, that Operator shall not be responsible for any fishing job or sticking of drill pipe, or other difficulty, which occurs during or prior to the said eight hour period and Contractor shall bear all expenses in connection therewith without compensation until said difficulty is overcome.

The parties agree that circulation in its most general meaning refers to that feature of drilling an oil well, whereby some type of drilling fluid or mud is pumped down the drill pipe. This is done to lubricate the drill bit, and to remove the earthen cuttings from the hole as the fluid recirculates to the surface. It also provides weight to the drilling column thus decreasing the danger of a gas pressure "blow out". Another term used by the parties to describe circulation is "returns," i.e., the return of the drilling fluid to the surface.

Occasionally, because of gaps or porosity in the formation, some or all of the drilling fluid will escape from the drilling column rather than returning to the surface. The parties agree that the term "loss of circulation" certainly applies in describing a situation where none of the drilling fluid returns to the surface. On the other hand, they also agree that the definition of the term "normal circulation" encompasses the situation where 100% of the regular, scheduled drilling fluid comes back. Their dispute arises in applying the terms loss of circulation and normal circulation, when the contractor is experiencing partial returns (as, for example, when only 80% of the drilling fluid returns) and is forced to use a special mud program not contemplated by the drilling order. Under the contract the immediate consequence of applying these terms to the partial return situation is, of course, to determine whether the contractor experiencing partial returns should be paid by the foot or by the day. But, as the last clause in paragraph 8.6 makes clear, an additional consequence of defining these terms is that of determining who, as between the contractor and operator, will bear any ensuing expense such as that which arises if the drill pipe becomes stuck or breaks during this period of abnormal operation. Under paragraph 8.6, the operator bears the expense of overcoming a stuck pipe only if the pipe becomes stuck after an eight hour period of loss of circulation.

With this basic framework of the pertinent contractual terms in mind, we turn to the facts. Startex completed the first of the two wells in the drilling order, the Ernest Braden No. 1 well. It then moved its rig to the site of the David Braden No. 1 well. Because of problems it experienced with partial returns on the first well, Startex employees suggested that additional casing be set. (Casing is piping or cement which lines the outside of the hole through which the drill pipe turns. Obviously, this lining keeps drilling fluid from escaping into the formation.) Sohio declined this additional expense.

On July 15, 1981, Startex began drilling operations on the David Braden No. 1 well. Drilling proceeded normally on a footage basis until July 25, at 6:30 p. m. At that time the tour reports reflected no returns. ¹ Both parties agree this event produced a loss of circulation. This loss of circulation continued through 2:30 a. m. July 26, or in other words, the requisite eight hours under paragraph 8.6. Therefore a representative of Sohio, Lee Crawford, came out to the rig and took over its control. Normal circulation was restored, in Crawford's opinion, some four or five hours later, and so he left the rig.

Startex continued drilling with returns of as much as 80% until July 29th, when the drill pipe stuck. At approximately 1 a. m. that morning, Swinehart, the president of Startex, called J. H. Walters, the District Superintendent for Sohio, to notify him that the pipe was stuck. Swinehart told Walters that in his opinion Startex would be on day rate during the ensuing fishing job. ² During this middle-of-the-night phone call, Sohio's Walters disagreed that Startex would be on day work. Swinehart replied that he would make sure about his analysis of the situation in the morning. Swinehart discussed the situation once more with his people that morning. He reaffirmed his position to Walters that Startex was on day work. Walters again rejected it.

Swinehart testified that he believed he had reached an impasse with Sohio in his efforts to have them bear the expense of the fishing job. He concluded that if he didn't arrange to fish the pipe, his rig would be idled indefinitely. Accordingly, without further notification to, or consent of Sohio, Swinehart ordered in third parties to perform the fishing job. The fishing job lasted until August 28, nearly a month. The cost was $142,630.00. After it was completed Startex resumed drilling with partial returns for a few days. On September 3, Sohio took over the well due to lost circulation. Sohio remained in control until the well's completion on September 12.

Startex billed Sohio on a footage basis for the progress made from July 15 until circulation was lost on July 25 at 6:30 p. m. It billed on a day work basis from July 26 at 2:30 a. m. until the completion of the job. Thereafter, Startex submitted a bill seeking reimbursement for the third party services.

The portion of the charges disputed by Sohio is the billing on a day work basis after July 26 at approximately 7:30 a. m. That is the time at which Sohio maintains normal circulation was regained. Concomitantly, Sohio has refused to bear the expense of the third party charges for fishing the drill pipe. Sohio maintains that the pipe got stuck...