Superior Oil Co. v. Cox

• Decision Date: 20 January 1975
• Docket Number: No. 54734,54734
• Citation: 307 So.2d 350
• Parties: SUPERIOR OIL COMPANY v. Edwin L. COX et al.
• Court: Louisiana Supreme Court

Page 350

307 So.2d 350

SUPERIOR OIL COMPANY v. Edwin L. COX et al.

No. 54734.

Supreme Court of Louisiana.

Jan. 20, 1975.

Rehearing Denied Feb. 21, 1975.

George J. Bailey, Bailey & Hollier, Lafayette, for defendants-applicants.

Gene W. Lafitte, Liskow & Lewis, New Orleans, Lawrence E. Donohoe, Jr., Davidson, Meaux, Onebane, Donohoe, Bernard, Torian & Diaz, Lafayette, for plaintiffs-respondents.

James D. Rives, Jr., New Orleans, for defendant-respondent.

DIXON, Justice.

Plaintiff, Superior Oil Company, and third party plaintiffs, Midwest Oil Corporation and Belco Petroleum Corporation, claim an interest in certain oil and gas leases which Midwest and Belco assigned to defendants, Edwin L. Cox and others. The case involves the interpretation of the 'acreage or cash contributions' clause in a joint operating agreement.

From an adverse judgment in the district court, Cox appealed. Plaintiffs answered the appeal, seeking a modification so that the interest of Cox would bear the overriding royalty interest which he assigned to other parties. ¹ The Court of Appeal affirmed, but amended in accordance with the answer to the appeal. ² Upon the application of Cox, we granted certiorari.

The facts were stipulated and are not in dispute. They are generally as follows. Superior, Midwest and Belco owned certain oil, gas and mineral leases shaded yellow on Exhibit 40. Midwest and Belco, but not Superior, owned other mineral leases on adjoining land shaded blue on the exhibit.

By agreement dated February 10, 1967 (hereinafter referred to as the yellow farmout), Superior Midwest and Belco, owners of the yellow leases, contracted with defendant Cox that if Cox, at his sole expense, drilled and successfully completed a well at a certain specified location on one of the yellow leases (hereinafter referred to as the test well or Broussard No. 1), they would transfer a one-half interest in the yellow leases to him. The yellow farmout agreement also provided that, if the well was successful, the parties would then enter into a joint operating agreement, a copy of which was attached to the yellow farmout and which would govern the drilling of future wells or other operations on the yellow leases.

On March 8, 1967 (about a month after the yellow farmout was executed), Midwest and Belco owners of the blue leases, entered into a separate agreement with Cox (hereinafter referred to as the blue farmout) with regard to the blue leases. In this instrument, Cox obligated himself to drill (as distinguished from the mere option to drill under the yellow farmout), at his own expense, the same test well provided for in the yellow farmout. Cox also obligated himself to reimburse Midwest and Belco 100% Of all rentals falling due under the blue leases while he was engaged in drilling operations under this agreement.

Under the blue farmout, Midwest and Belco agreed that, if the test well was productive and if any portion of the blue leases was unitized with said well by the Louisiana Department of Conservation, they would assign to Cox certain interests in those portions of the blue leases included in said unit. In this regard, the blue farmout agreement provides, in essence, that Midwest and Belco would assign to Cox all of their rights in and to the farmout acreage included in said production unit, subject to the condition and reservation that Cox would receive 100% Of the production from the test well attributable to the farmout acreage and the full working interest therein, subject to a total lease burden of 25%. The difference between the 25% And the present lease burdens represented the overriding royalty reserved by Midwest and Belco. This would continue until such time as Cox had recovered out of production the cost to drill, complete, equip and operate said test well. At the time of payout, Midwest and Belco had the option of converting their overriding royalty to a one-third working interest in all rights above 16,000 feet, and a one-fourth working interest in all rights below 16,000 feet. They further agreed that whether or not the test well would be completed as a producer, Cox was granted the right, within a period of six months after completion of the test well, to drill an additional well or wells under the same terms and conditions as set forth for the initial test well.

On or about May 14, 1967 Cox commenced drilling the test well (Broussard No. 1) at the location on the yellow leases specified in both the yellow and blue farmouts and completed it as a producer on or about August 4, 1967. The entire cost of approximately $718,722.00 was paid by Cox, as well as the rentals on the blue leases in the aggregate of $27,672.50. It is acknowledged by Superior, Midwest and Belco that the Broussard well fulfilled all of the requirements of both the yellow and blue farmouts.

Upon completion of the test well, and pursuant to the yellow farmout, Superior, Midwest and Belco, by instrument dated October 1, 1967, assigned to Cox one-half of their interest in the yellow leases to a depth of 16,000 feet. On the same day, Superior, Midwest and Belco and Cox executed a second joint operating agreement, using the form attached to the yellow farmout. This joint operating agreement provided that, in the event any party desired to drill an additional well on the yellow acreage, such party was required to notify the other parties and afford them an opportunity to join in the operation. If all parties elected to participate, the cost would be borne in proportion to their respective interests.

After completion of the Broussard well, Cox proposed the drilling of another well, known as Pellerin No. 1, on the yellow leases. Under the joint operating agreement, Superior, Midwest and Belco elected to participate. Cox commenced drilling the Pellerin well on October 6, 1967 and completed it as a producer on February 6, 1968. As drilling progressed, Superior, Midwest and Belco, in accordance with the operating agreement, paid to Cox their proportionate share of the costs as they accrued.

Subsequently, the Louisiana Department of Conservation by Order No. 800, dated May 13, 1968, effective May 1, 1968, created separate units for the Broussard (Mary Tex Sand Unit B) and Pellerin (Mary Gex Sand Unit A) wells. Included in each unit was certain acreage covered by the blue leases. Under the provisions of the blue farmout, Midwest and Belco assigned to Cox interests in the mineral leases covering the blue acreage insofar as those leases were included in the units for the Broussard well (Unit B) and the Pellerin well (Unit A).

No claims are asserted by Superior, Midwest and Belco to any interests in the mineral leases covering the blue acreage included in the Broussard unit. The question to be decided in this case is: were the blue leases in the Pellerin unit governed by the contribution clause in the joint operating agreement of October 1? That clause is as follows:

'ACREAGE OR CASH CONTRIBUTIONS

'If any party receives, while this agreement is in force, a contribution of cash toward the drilling of a well or any other operation on the subject leases such contribution shall be paid to the party or parties who conducted the drilling or other operation and same shall be applied against the cost of drilling or other operation. If the contribution be in form of acreage, the party to whom the contribution is made shall promptly execute an assignment of the acreage, without warranty of title, to the other parties who participated in such operation for which the acreage contribution was made to support in the proportion of their interest therein. Each party shall promptly notify the other parties of all acreage and money contributions it may obtain in support of any well or other operation on the Joint Area.'

No jurisprudence clarifying the 'contributions' clause has been cited to the court. Cox argues that the blue leases under the Pellerin unit were in no sense a 'contribution;' that, in fact, they were earned by him in performing the obligation to drill the Broussard well under the blue farmout, and completing the Pellerin well under the blue farmout and the joint operating agreement of October 1.

The Contentions

Cox further argues that the 'contributions' clause has been misconstrued by the courts below, in spite of the fact that the parties themselves properly interpreted the agreement after the formation of the conservation units.

Superior, Midwest and Belco, on the other hand, contend that the 'contributions' clause is clear and unambiguous, lending itself to no interpretation other than that required by the plain words of the agreement.

The purpose of the 'contributions' clause, argues Superior, Midwest and Belco, is that 'if any party to the operating agreement receives a contribution, in cash or acreage, made toward the drilling of a joint well, it is to inure to the benefit of all parties to the operating agreement who participated in the drilling of the well. If by cash, the contribution is applied toward the total well cost, with the result that the total well cost is reduced and each party participating in the joint well pays less. If the contribution is paid by acreage, that contribution is to be distributed to all parties who participated in drilling the joint well.'

The Acquisition by Cox (the 'Contribution')

The Pellerin well was a joint operation, and was drilled on yellow leases. The Cox interests owned about half the yellow leases, Cox having received an assignment of a half interest in the yellow leases from Superior, Midwest and Belco as a result of drilling the Broussard well under the yellow and blue farmouts. As to Midwest and Belco, owners of the blue leases, under the blue farmout, Cox had earned the right to drill another well after the completion of the Broussard well. The blue farmout also gave Cox the right to receive certain interests in the blue leases if they were included in conservation units with producing wells. ...