Sun Exploration & Production Co. v. Jackson

• Decision Date: 14 August 1986
• Docket Number: No. 01-85-0240-CV,01-85-0240-CV
• Citation: 715 S.W.2d 199
• Court: Texas Court of Appeals
• Parties: SUN EXPLORATION & PRODUCTION COMPANY and Amoco Production Company, Appellants, v. Ocie R. JACKSON, et al., Appellees. (1st Dist.)

Page 199

715 S.W.2d 199

SUN EXPLORATION & PRODUCTION COMPANY and Amoco Production Company, Appellants, v. Ocie R. JACKSON, et al., Appellees.

No. 01-85-0240-CV.

Court of Appeals of Texas Houston (1st Dist.).

Aug. 14, 1986.

Rehearing Denied Nov. 20, 1986.

Leo J. Hoffman, Stuart C. Holliman, Strasburger & Price, Dallas, for appellants.

Dick Watt, John D. White, Watt & White, Houston, Ernest E. Smith, Austin, for appellees.

EVANS, C.J., and WARREN and SMITH, JJ.

EVANS, Chief Judge.

The appellants, Sun Exploration and Production Company and Amoco Production Company, brought this action for a declaratory judgment and an injunction against the appellees, the Jacksons. By their suit, Sun and Amoco sought to establish the validity of a 1938 oil, gas, and mineral lease covering the Jackson Brothers' 10,000-acre Ranch in Chambers County. The Jacksons, by counterclaim, sought cancellation of the lease, claiming that Sun and Amoco had failed to reasonably explore and develop the leased premises. Based on the jury's verdict, the trial court entered judgment for the Jacksons, unconditionally canceling the lease as to a portion of the leased premises and conditionally canceling other portions subject to Sun's and Amoco's right to earn back such portions by drilling additional wells.

In their first point of error, Sun and Amoco ("Sun") contend that the trial court erred in canceling the lease, arguing that Sun had no duty to "explore" (as distinguished from "develop") the leased premises. By their second and third points of error, Sun challenges the legal and factual sufficiency of the evidence supporting the jury's finding that it failed to reasonably "explore" the leased premises.

The Jackson ranch, located between Anahuac and Winnie in Chambers County, is divided, north and south, by a farm-to-market road that crosses through the center of the property. Most of Sun's producing wells have been located north of this road, within a 1,123-acre tract known as the Oyster Bayou Field.

The lease in question was executed by Ocie Jackson and other members of the Jackson family, as lessors, and by Sun Oil Company, as lessee, on March 9, 1938. In 1941, Sun drilled and completed its Jackson No. 3 oil well, the discovery well for the Oyster Bayou Field. Since that time, Sun has drilled 64 additional wells on the 10,000-acre leased premises, four of which resulted in the discovery of new deposits of hydrocarbons. At the time of trial, 37 wells were producing hydrocarbons, all producing from the Seabreeze Sands (found at depths below 8120 feet) in the Oyster Bayou Field.

Over the term of the lease, more than 110,600,000 barrels of oil, 110.3 billion cubic feet of gas, and 53,500 barrels of condensate have been produced from the field. The royalty on the total production has averaged more than $10,000 per day.

During the lease term, Sun has generated some 13 seismic surveys covering the leased premises. In 1979, Sun planned to conduct another seismic survey, on both the north and south portions of the lease, but was unable to negotiate a seismic agreement with the Jacksons. The Jacksons later denied Sun access to the leased premises, which resulted in the filing of this lawsuit. After obtaining a temporary restraining order, Sun completed its seismic program on the north part of the lease. When the restraining order expired, Sun did not seek an extension but left this action pending on the court's docket.

In 1981, while this action was pending, Sun drilled a new well north of the road and attempted to obtain production in the Vicksburg Sands at a depth of 14,500 feet. That effort was unsuccessful so Sun eventually completed the well in the Seabreeze Sands. In 1982, Sun started another well south of the road to penetrate the Vicksburg Sands. But on the second day of the work, Sun's crew was evicted by the Jacksons, and Sun again sought and obtained temporary injunctive relief. Sun thereafter drilled that well to a depth of 12,000 feet and completed the well as a gas well in the Hackberry Sands. However, the well was soon depleted and was later abandoned.

In 1984, this suit was tried on its merits. The court submitted two special issues to the jury regarding the Jacksons' contentions that Sun had failed to "explore and develop" the leased premises. The jury answered the first in favor of Sun, and the second in favor of the Jacksons. On the basis of the jury's verdict, the trial court entered judgment for the Jacksons.

Unless an oil, gas, and mineral lease contains a stipulation to the contrary, the lessee usually assumes a number of implied covenants in favor of the lessor with reference to the development and operation of the leased premises. Amoco Production Co. v. Alexander, 622 S.W.2d 563 (Tex.1981). The standard for testing the lessee's performance of such implied covenants is that of a reasonably prudent operator under the same or similar facts and circumstances. Id. at 567-68.

One of the generally recognized implied covenants is the duty to reasonably develop the leased premises after production is obtained. Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684 (1959). Thus, even though a lease may be held by production, the lessee is usually obligated to conduct further development operations on the leased premises if such operations would result in a benefit or profit for both the lessor and the lessee. Id. 325 S.W.2d at 693. But this obligation is measured by the standard of reasonable diligence, and unless there is a reasonable expectation of profit to both the lessee and lessor, the lessee is not required to act. Id. at 695; Labbe v. Magnolia Petroleum Co., 350 S.W.2d 873, 878 (Tex.Civ.App.--San Antonio 1961, writ ref'd n.r.e.).

In this case, both sides agree that the Jackson lease carried with it the implied covenant of reasonable development after production. The disputed issue is whether Sun's duty to "develop" included the obligation to drill "exploratory" wells to test other than "known producing" formations of the lease.

In support of its position that it had no such obligation, Sun relies principally on the holding of the Texas Supreme Court in Clifton v. Koontz, 325 S.W.2d 684. There, the court said "there is no implied covenant to explore as distinguished from the implied covenant to conduct additional development after production in paying quantities has been obtained." Id. at 696. This declaration of the law was repeated in Shell Oil Co. v. Stansbury, 401 S.W.2d 623 (Tex.Civ.App.--Beaumont), writ ref'd n.r.e., 410 S.W.2d 187 (Tex.1966), and in Felmont Oil Corp. v. Pan American Petroleum Corp., 334 S.W.2d 449 (Tex.Civ.App.--El Paso 1960, writ ref'd n.r.e.). But compare--Sinclair Oil & Gas Co. v. Masterson, 271 F.2d 310 (5th Cir.1959), cert. denied, 362 U.S. 952, 80 S.Ct. 864, 4 L.Ed.2d 870 (1960).

In the instant case, the evidence shows three types of wells being drilled on the Jackson lease. Initially, there are the speculative "wildcat" wells, drilled to test unproven sands in a "new field." (The lessee's decision to drill a "wildcat" well is not necessarily based on a "prudent operator's reasonable expectation of profit.") Next, after the discovery of production in paying quantities, are the "additional development" wells, drilled to tap into and further develop the producing formation found in the Oyster Bayou Field. Finally, there are "exploratory" development wells, drilled to test potentially producing formations, outside the Oyster Bayou Field, based on data obtained during earlier drilling and seismic operations. (The decisions to drill both categories of development wells would necessarily be based on a "reasonable expectation of profit to the lessor and the lessee.")

We agree with Sun that it was not required to drill exploratory "wildcat" wells, i.e., speculative wells, that did not offer a reasonable expectation of profit to a reasonably prudent operator under the same or similar facts and circumstances. But we do not agree that Sun necessarily met its obligation of continued development by merely drilling additional wells into the one "known producing" formation in the Oyster Bayou Field.

The two issues submitted to the jury were as follows:

Special Issue No. 1:

Do you find from a preponderance of the evidence that Sun has failed to reasonably develop the Jackson Lease?

Answer "Sun has failed" or "Sun has not failed" in the space provided.

Answer: Sun has not failed.

In answering Special Issue No. 1, you are instructed 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. In this context, reasonable development may include the drilling of additional wells into any such producing formation. A prudent operator will undertake to drill additional wells into such producing formation only if there is a reasonable expectation that the proceeds, if any, from the production obtained, if any, as a result of such drilling will exceed the cost of drilling and operating the well and still produce a reasonable profit for the operator, bearing in mind the interests of both the Lessors and Lessee.

Special Issue No. 2:

Do you find from a preponderance of the evidence that Sun has failed to reasonably explore the portions of the Jackson Lease which lie outside the Oyster Bayou Field?

Answer "Sun has failed" or "Sun has not failed."

Answer: Sun has failed.

In answering Special Issue No. 2, you are instructed that Sun must conduct itself as a reasonable and prudent operator would while exercising due diligence under the same or similar circumstances, with a reasonable expectation of profit, considering the interests of both the Lessors and the Lessee.

There is no complaint before us with respect to the form of the issues submitted. Therefore, any such complaint has been waived. Tex. R. Civ. P. 414; American General Fire & Casualty Co. v. Weinberg, 639 S.W.2d 688 (Tex.1982). In construing the jury's...