Sun Exploration and Production Co. v. Jackson, C-6000

• Decision Date: 25 October 1989
• Docket Number: No. C-6000,C-6000
• Parties: SUN EXPLORATION AND PRODUCTION COMPANY, et al., Petitioners, v. Ocie R. JACKSON, et al., Respondents.
• Court: Texas Supreme Court

Page 202

783 S.W.2d 202

SUN EXPLORATION AND PRODUCTION COMPANY, et al., Petitioners, v. Ocie R. JACKSON, et al., Respondents.

No. C-6000.

Supreme Court of Texas.

Oct. 25, 1989.

Rehearing Overruled Feb. 21, 1990.

Leo J. Hoffman, Stuart C. Hollimon, Dallas, James W. McCartney, Thad T. Dameris, N. Fred Crowder, Houston, for petitioners.

Dick Watt, John White, Houston, Ernest E. Smith, III, Austin, for respondents.

OPINION ON MOTION FOR REHEARING

RAY, Justice.

After reargument, our prior judgment and opinions dated July 13, 1988 are withdrawn, and the following opinion is substituted.

The issue in this cause is whether there exists in Texas oil and gas leases an implied covenant to explore, independent of the implied covenant of reasonable development. Sun Exploration and Production Company (the successor in interest to Sun Oil Company) and Amoco Production Company (together referred to as Sun) brought an action for declaratory judgment and an injunction against the Jacksons. Sun sought to establish the validity of an oil, gas, and mineral lease covering a 10,000 acre tract in Chambers County, known as the Jackson Brothers Ranch. Sun also sought a permanent injunction enjoining the Jacksons from denying Sun Oil entrance onto the leased property. The Jacksons counterclaimed alleging breach of implied covenants to reasonably develop and explore the entire lease, and seeking cancellation of the lease. Based on the jury's findings, the trial court rendered judgment for the Jacksons, unconditionally cancelled that portion of the lease on which Sun had not drilled extensively and conditionally cancelled the lease below the depth to which Sun had drilled (8480 feet) in a developed area. The court of appeals affirmed the unconditional cancellation and reversed and remanded as to the conditional cancellation. 715 S.W.2d 199, rehearing overruled, 729 S.W.2d 310. We reverse the judgment of the court of appeals and remand for the trial court to determine attorney's fees and whether Sun and Amoco may be entitled to any injunctive relief.

In March of 1938, Ocie R. Jackson and other interested members of the Jackson family executed an oil, gas, and mineral lease to Sun covering the 10,000 acres of the Jackson Brothers Ranch. Sun owns a majority of the working interest under the lease. Amoco owns a small minority of the working interest, which it acquired many years ago. The Jacksons own the entire surface and retain a majority of the outstanding nonparticipating royalty interest. In 1941, Sun drilled its third well on the Jackson Brothers Ranch, resulting in the discovery of a reservoir commonly known as the Oyster Bayou Field. Production from that reservoir continues to this date. The Oyster Bayou Field produces from a small part of the 10,000 acre tract. The Jacksons complain that only the Oyster Bayou Field on the Jackson lease has been developed by Sun. The Jacksons assert that Sun has neglected to explore and develop the larger remaining part of the lease.

Sun and Amoco sued to enjoin the Jacksons from interfering with their right to enter the lease and the Jacksons counterclaimed against Sun and Amoco for breach of implied covenants. The jury found that Sun had not failed to reasonably develop the Jackson lease, but that Sun had failed to reasonably explore the portions of the lease that were outside the Oyster Bayou Field. Based on the jury's verdict, the trial court rendered judgment for the Jacksons. The judge determined the remedy: unconditional cancellation of one portion of the lease and conditional cancellation of another portion of the lease.

There are three generally recognized implied covenants in Texas: "(1.) to develop the premises, (2.) to protect the leased premises, and (3.) to manage and administer the lease." Amoco Product Co. v. Alexander, 622 S.W.2d 563, 567 (Tex.1981). The Jacksons would like us to recognize an implied covenant of further exploration.

This court has held that no implied covenant of further exploration exists independent of the implied covenant of reasonable development. Clifton v. Koontz, 160 Tex. 82, 98, 325 S.W.2d 684, 696 (1959). In Clifton, the court held that the covenant of reasonable development encompassed the drilling of all additional wells after production on the lease is achieved. 160 Tex. at 96-97, 325 S.W.2d at 695-96. By "additional wells" the court meant both additional wells in an already producing formation or stratum, or additional wells in "that strata different from that from which production is being obtained." 160 Tex. at 96, 325 S.W.2d at 695. The critical question was whether the lessor could prove a reasonable expectation of profit to lessor and lessee. See, e.g., Atlantic Richfield Co. v. Gruy, 720 S.W.2d 121, 122 (Tex.App.--San Antonio 1986, writ ref'd n.r.e.) (no reasonable expectation of profit in development, i.e. exploration, below 3,750 feet); Felmont Oil Co. v. Pan Am. Petroleum Corp., 334 S.W.2d 449, 455 (Tex.Civ.App.--El Paso 1960, writ ref'd n.r.e.) (no evidence of a reasonable expectation of profit to drill exploratory wells). Therefore, under Clifton if a party could prove that a reasonably prudent operator would have drilled the well, that well fell within the implied covenant of reasonable development, without regard to whether the well was classified as exploratory or developmental.

In answer to question one, the jury found that Sun did not fail to reasonably develop the Jackson lease. This finding is dispositive of the case. The law of Texas does not impose a separate implied duty upon a lessee to further explore the leasehold premises; the law recognizes only an implied obligation to reasonably develop the leasehold. Because the jury determined that Sun has not failed to reasonably develop the Jackson lease, the court of appeals should have rendered judgment for Sun. In failing to do this, the court erred.

In analyzing the issues and instructions submitted to the jury, the court of appeals found:

(1) The terms "explore" and "develop" as they appear in the trial court's questions and instructions were used interchangeably;

(2) Question one refers only to the drilling of additional wells to test the formation situated inside the Oyster Bayou Field; and

(3) Question two refers to the drilling of additional wells to test potentially productive formations situated outside the Oyster Bayou Field.

715 S.W.2d at 203.

This analysis distorts the meaning of the questions and instructions which were submitted to the jury. The court of appeals found that question one and the instruction that accompanied it, limited the jury's attention to the matter of drilling additional development wells to test the formation situated inside the Oyster Bayou Field. In this, the court was mistaken. The language of question one is in no way limited to activity within the confines of the Oyster Bayou Field. Instead, the issue inquires whether Sun "failed to reasonably develop the Jackson lease," not merely the Oyster Bayou Field.

Likewise, the language of the instruction which accompanied question one does not limit the jury's attention to the Oyster Bayou Field. The relevant language of the instruction advises the jury that:

the term 'to reasonably develop' means the development which a prudent operator would do with respect to any known producing formation of the lease.

Contrary to the finding of the court of appeals and the position advanced by the Jacksons, the quoted language of the instruction does not limit the jury's attention to the Oyster Bayou Field; it asks the jury to focus upon any known producing formation of the lease. The analysis offered by the court of appeals and the Jacksons suggests that the language of this instruction asked the jury to focus only upon formations which are currently producing hydrocarbons on the Jackson lease, but this is not what the language of this instruction does.

The instruction is worded broadly and allows the jury to include in its deliberations actions taken with regard to any formation on the lease that is currently producing or that has been determined to be productive of hydrocarbons but is not producing now. In addition, the wording of this instruction allowed the jury to consider Sun's actions over the years in discovering, producing and depleting several one-well reservoirs located outside the Oyster Bayou Field. Indeed, it was essential to word the instruction so as to permit such matters to be considered by the jury because the language of question one required the jury to determine whether Sun had reasonably developed the entire lease. Thus, in connection with question one, the jury was instructed to consider all activities undertaken by Sun with regard to the development of any formation capable of producing hydrocarbons, situated anywhere on the lease, and not simply those activities conducted by Sun inside the Oyster Bayou Field.

For these same reasons, the construction of question two proposed by the court of appeals as focusing the jury's attention on the reasonableness of Sun's drilling activities outside the Oyster Bayou Field is likewise erroneous. In reality, these two questions, when considered together, first asked the jury to determine whether Sun had reasonably developed the entire Jackson lease. In answering this question, the jury was required to consider activities affecting any formation on the Jackson lease known to be capable of producing hydrocarbons, whether such formations were currently producing or not. These issues then asked the jury to determine whether Sun had reasonably explored all of those portions of the Jackson lease not known to be capable of producing hydrocarbons. The construction of the jury's answers to these two questions advanced by the court of appeals has created an ambiguity in the jury's verdict when, in fact, none exists. The clear and unambiguous finding of the jury is that Sun has reasonably developed the entire Jackson lease.

Having...