Superior Oil Co. v. Humble Oil & Refining Co.

• Decision Date: 01 June 1964
• Docket Number: No. 1474,1474
• Citation: 165 So.2d 905
• Court: Court of Appeal of Louisiana — District of US
• Parties: The SUPERIOR OIL COMPANY v. HUMBLE OIL & REFINING COMPANY.

Page 905

165 So.2d 905

The SUPERIOR OIL COMPANY v. HUMBLE OIL & REFINING COMPANY.

No. 1474.

Court of Appeal of Louisiana, Fourth Circuit.

June 1, 1964.

Rehearing Denied July 15, 1964.

Chaffe, McCall, Phillips, Burke, Toler & Hopkins, Harry McCall, Jr., Gordon O. Ewin, New Orleans, Barham, Wright & Barham, F. W. Jones, Jr., Ruston, W. W. Bell, Jr., Lake Charles, for plaintiff and appellant.

Peter R. Monrose, Jr., and Donald E. Smiley, New Orleans, for defendant and appellee.

Before McBRIDE, YARRUT and SAMUEL, JJ.

YARRUT, Judge.

Plaintiff prosecutes this appeal from the judgment of the district court dismissing its suit upon maintaining defendant's exception of no cause of action. The issue on appeal is, therefore, one of law predicated upon the allegations of fact in plaintiff's petition which, at this time, must be taken as true.

Plaintiff seeks to recover $86,579.73, interest and costs, as defendant's proportionate part of the cost of drilling and completing The Superior Oil Company--Clovelly Corporation No. 7 Well in the Clovelly Field, Lafourche Parish, Louisiana. The well was drilled by plaintiff originally for its own account, but subsequent thereto, and upon application of defendant, the Commissioner of Conservation (Order No. 213--B, effective April 1, 1962) created a drilling and production unit for the M Sand in the Clovelly Field which, among other things, unitized an area around the Clovelly Corporation No. 7 Well, designated as the well for the unit. The working interest ownership, under Order No. 213--B, for the M Sand was: The Superior Oil Company--44.32838%; Humble Oil & Refining Company--27.83581%; and Shell Oil Company--27.83581%.

Plaintiff alleges the adjusted costs of $311,037.22 for the well were accepted and agreed to without protest by defendant, and that no dispute exists as to the amount of such adjusted well costs.

Plaintiff contends it is entitled to recover the proportionate part of the adjusted well costs from the defendant in cash. To the contrary, defendant contends there is no authority for plaintiff to recover in cash, but only from the proceeds of production from the well accruing to defendant.

The Commissioner of Conservation's authority to allocate well costs is derived from LSA-R.S. 30:10, subd. A(1)(c) which provides:

'A. When two or more separately owned tracts of land are embraced within a drilling unit which has been established by the commissioner as provided in R.S. 30:9B, the owners may validly agree to pool their interest and to develop their lands as a drilling unit.

'(1) Where the owners have not agreed to pool their interests, the commissioner shall require them to do so and to develop their lands as a drilling unit, if he finds it to be necessary to prevent waste or to avoid drilling unnecessary wells.

'(c) In the event pooling is required, the cost of development and operation of the pooled unit chargeable by the operator to the other interested owners shall be limited to the actual reasonable expenditures required for that purpose, including a charge for supervision. In the event of a dispute relative to these costs, the commissioner shall determine the proper costs, after notice to all interested persons and a hearing.'

Defendant contends: That, although the interested owners in a forced pooled unit are chargeable by the operator with their share of the reasonable costs of development and operation (Hunter Co., Inc. v. McHugh, 202 La. 97, 11 So.2d 495, aff'd 320 U.S. 222, 64 S.Ct. 19, 88 L.Ed. 5, cf. Huckabay v. The Texas Company, 227 La. 191, 78 So.2d 829), Louisiana courts have never required the non-driller to pay his proportionate part in cash unless he had agreed to do so; that the Revised Statutes, supra, do not impose such an obligation upon one whose interest was included in a unit established by the Commissioner of Conservation; that the courts have held this should not be done; that such party is not required to pay in cash, but that his proportionate part should be taken from his pro-rata of production from the well. In Hunter Co., Inc. v. McHugh, supra, the Court stated:

'In a supplemental brief filed for the Hunter Company after this case was reargued and resubmitted, complaint is made that, although provision is made in section 9(a) of the statute for the Hunter Company to be reimbursed the proportionate share of the cost of drilling and operating the Hunter well, chargeable to the other landowners or leaseholders in the drilling unit, there is no provision made for collecting or enforcing the reimbursement. The answer to this of course is that the Hunter Company has had and will have possession of all of the proceeds from the production of the well and may retain all of the proceeds until the drilling of the well and putting it on production is entirely paid for.'

The situation presented by this appeal is that appellant has been divested of sole and exclusive ownership and control of production from its well by operation of the unitization order initiated by appellee. Appellant alone paid the costs of this well. Appellee, while conceding its obligation to reimburse appellant to the extent of its proportionate share in the well as unitized, refuses to make payment In cash, and insists reimbursement must come from proceeds of the well. If appelle is correct, then a valuable property right, viz. the 27.83581% Interest in production from the well has been transferred from appellant, who acquired this right by the expenditure of cash, to appellee, who forthwith acquired the benefits of partial ownership of the well, yet declines cash payment therefor in the same manner that appellant paid, and which appellee would have had to pay had it, instead of appellant, drilled the well.

It is obvious that, if appellee's contention is maintained, it will have obtained a substantial advantage over appellant, in that the well satisfies its obligation to its lessor to develop and that it will ultimately receive its share of the proceeds thereof, all without the outlay of one penny. The suggestion that payment will ultimately be made from proceeds of production is not an answer to this situation, as appellant will then be required to finance appellee during the entire time required to obtain reimbursement from proceeds of production. In short, appellant alone will have been required to make the entire investment, whereas the return will accrue only partly to it, and partly to appellee.

Had appellant been designated the unit operator before the well was started, there would be no basis in law or equity for appellee to demand that drilling operations be undertaken without making a contribution thereto as drilling progressed. The requirement of contribution should not be affected by the fact that the well was already in existence. The operator should no more be required to finance the joint enterprise in the one case than in the other. In this respect, when defendant requested unitization of the well already successfully completed by plaintiff, in effect it became a joint adventurer.

Defendant contends the case of Hunter Co., Inc. v. McHugh, supra, establishes the rule that withholding the proceeds from the production of a well is the only method the driller of a unitized well may recover the proportionate cost of drilling from the owners included in the drilling unit.

A casual reading of the case of Hunter Co., Inc. v. McHugh clearly shows no issue was raised as to the operator's right to enforce contribution in cash from his co-owners of their share of development and operating costs. That case involved only an attack on the constitutionality of the Conservation Statute (presently codified as LSA-R.S. 30:1 et seq.) on two principal grounds, viz. (1) delegation of legislative authority without adequate standards and (2) deprivation of property without due process of law (11 So.2d at 498).

Reimbursement of the plaintiff, as operator of the drilling unit, for its co-owners' share of the cost of development was injected into the pleadings as a possible further ground of unconstitutionality, because of failure of the Commissioner's order to provide therefor, viz.:

'That Order No. 28 B is void in that * * * said Order in substance and effect provides * * * for taking of said property * * * without just compensation and without due process of law * * *; that said Order No. 28 B has as its object, purpose and effect the forced unitization of petitioners' oil and gas mining leases with leases owned and held by other parties, without making any provision for the payment to these petitioners of the reasonable value and worth of their said leases and for reimbursing petitioners with their costs of...