Tidelands Royalty B Corp. v. Gulf Oil Corp., CA 3-79-0244-R.
| Decision Date | 18 June 1985 |
| Docket Number | No. CA 3-79-0244-R.,CA 3-79-0244-R. |
| Citation | 611 F. Supp. 795 |
| Parties | TIDELANDS ROYALTY "B" CORPORATION, Plaintiff, v. GULF OIL CORPORATION, Defendant. |
| Court | U.S. District Court — Northern District of Texas |
Kenneth S. Beat and Leo J. Hoffman, Strausberger & Price, Dallas, Tex., for plaintiff.
D.L. Case and A.W. Walker, Jackson, Walker, Winstead, Cantwell & Miller, Dallas, Tex., for defendant.
This oil and gas case involves a question of first impression.
It concerns production payments and overriding royalties in gas production from 4,062 acres of submerged land off the coast of Louisiana on the Outer Continental Shelf. These interests, which pertain to most of Block 332 of the West Cameron Area, were assigned to the plaintiff, Tidelands Royalty "B" Corporation ("Tidelands"), by the defendant, Gulf Oil Corporation ("Gulf"). Gulf's operations on adjoining property (Block 333) are, admittedly, draining gas from several of the producing sands under Block 332.
However, this is not a typical drainage controversy: the basic agreement between the parties is not an oil and gas lease; and, Gulf's promise to pay the overriding royalties and production payments was made 24 years before it even acquired a federal lease on Block 332. Nevertheless, despite the fact that the issue is a novel one, this opinion holds (i) that there is an implied covenant obligating Gulf to protect Tidelands' interests from drainage by Gulf's own operations on property adjacent to Block 332; but (ii) that, under the basic agreement, there is no implied covenant to protect Tidelands from drainage caused by offshore wells operated by third parties on adjoining lands.
In 1948 and 1949, Tidelands' predecessor — Pan American Exploration Company — conducted 16 geophysical reconnaissance surveys covering 2,700,000 acres of submerged lands off the coasts of southwest Louisiana and southeast Texas in the Gulf of Mexico. Later, Pan American was dissolved, and its assets — including the primary one, this geophysical data — were distributed to its shareholders.
On April 30, 1951, the Pan American shareholders sold this geophysical data to Gulf.1 Under this agreement — which is the basic contract that controls in this case ("the 1951 Agreement") — Gulf (i) paid $2,000,000 in cash, and (ii) agreed to the future assignment of production payments and overriding royalty interests for a period of 50 years from April 30, 1951. These assignments were to be made whenever Gulf, during this 50-year period, acquired federal offshore oil and gas leases on certain designated portions of the 2,700,000 acres covered by the geophysical data.2
In 1954, Tidelands Royalty "B" Corporation ("Tidelands") was formed to receive and disburse the production payments and overriding royalties to be paid to the Pan American shareholders under the 1951 Agreement. All of the shareholders transferred their interests to Tidelands in exchange for stock in the corporation.3
Subsequently, Gulf acquired numerous offshore leases from the federal government covering areas subject to the 1951 Agreement. One occasion was September 1, 1955, when Gulf was the successful bidder at public auction for leases on Blocks 332 and 333 in the West Cameron Area off the coast of Louisiana. Both of these blocks contained 5000 acres; Block 333 was not one of the "designated tracts" in the 1951 Agreement, but 4,062 acres in Block 332 had been specified as a tract subject to the production payments and overriding royalties due to Tidelands.
Accordingly, on October 30, 1975, Gulf executed an "Assignment of Overriding Royalty" to Tidelands covering the 4,062 acres in Block 332.4 This assignment transferred to Tidelands, free and clear of all costs of development and operation, "a production payment and overriding royalty, to be calculated and determined in accordance with Paragraph II(b)" of the 1951 Agreement. It also provided:
"This instrument has been executed and delivered pursuant to the terms of that certain Agreement dated April 30, 1951, made and entered into by and between W.L. Moody, III, et al and Gulf Oil Corporation and Gulf Refining Company, and this instrument is subject to all of the terms, conditions, provisions and limitations thereof." (emphasis added.)
Later, Gulf began drilling operations under the two federal offshore leases it had obtained on September 1, 1955. The first well was drilled on Block 332; it was a dry hole. The second well was drilled on Block 333; it was successful, producing gas in commercial quantities, and was the "discovery well" for the field. An offshore drilling platform was then constructed on Block 333, from which wells could be directionally drilled. The third well was drilled on Block 332 and the fourth well on Block 333. The fifth well was drilled on Block 332 and the sixth and seventh wells were drilled on Blocks 333.
However, there are at least five producing sands underlying the Block 332-333 gas field. And, it is undisputed that the wells on Block 333 are draining gas from Block 332 in several of these productive sands. For example, two of Gulf's wells on Block 333 are producing gas from the "C-13" sand, but neither of the wells on Block 332 produces from this sand. There is also drainage of gas from Block 332 in the "C-5" and "C-7" sands.5
Accordingly, Tidelands claims that this drainage of gas from Block 332 — by Gulf's operations on the adjoining land — is damaging or destroying its production payments and overriding royalties under the 1951 Agreement. It argues that, under this agreement, there is an implied covenant obligating Gulf to prevent this drainage — either by drilling protection wells in these sands on Block 332, or by pooling the two blocks, or by the payment of "compensatory royalties."6 In return, Gulf argues that the 1951 Agreement is "merely" a sales contract, not an oil and gas lease; that it specifically provides that Gulf "shall never be under any duty to drill for or produce" gas from Block 332; that, therefore, there is no implied covenant to protect Tidelands against drainage of Block 332; and that any contrary decision "would amount simply to a conveyance by Gulf to Tidelands of an overriding royalty interest and production payment in Block 333."
Tidelands has moved for a partial summary judgment on the question of whether or not there is an implied covenant obligating Gulf to protect against the drainage of Block 332. As to this issue, there are no genuine issues of any material fact7 — and, as a matter of law, there is an implied covenant under the 1951 Agreement which requires Gulf to protect Tidelands' interests from drainage by Gulf's own operations. This conclusion requires analysis of (i) the question of jurisdiction, (ii) the choice of law issue, and (iii) the law of both Louisiana and Texas concerning implied covenants to protect against drainage.
This Court has jurisdiction under the Outer Continental Shelf Lands Act ("the Lands Act"), 43 U.S.C. § 1331 et seq. Specifically, § 1349(b)(1) provides that:
"... the district courts of the United States shall have jurisdiction of cases and controversies arising out of or in connection with (A) any operation conducted on the outer Continental Shelf which involves exploration, development or production of the minerals, of the subsoil and seabed of the outer Continental Shelf, or which involves rights to such minerals ..."8
Here, Tidelands claims that Gulf's operations on Block 333 are draining gas from Block 332. Both blocks are located on the outer Continental Shelf. Therefore, this controversy arises "out of or in connection with" Gulf's "development or production" operations conducted on the outer Continental Shelf, and there is jurisdiction under § 1349(b)(1). Laredo Offshore Constructors, Inc. v. Hunt Oil Co., 754 F.2d 1223 (5th Cir.1985) (); Fluor Ocean Services, Inc. v. Rucker Co., 341 F.Supp. 757 (D.C.La.1972) ().
Accordingly, since jurisdiction exists under the Lands Act, this Court must proceed under the provisions of that Act; it does not sit as a diversity court, even though diversity jurisdiction also exists.9 Aymond v. Texaco, Inc., 554 F.2d 206 (5th Cir.1977); Chevron Oil Co. v. Huson, 404 U.S. 97, 103 n. 5, 92 S.Ct. 349, 353 n. 5, 30 L.Ed.2d 296 (1971); Ellis v. Chevron U.S.A., Inc., 650 F.2d 94, 96 (5th Cir.1981).
However, Tidelands contends that § 1333(a)(2)(A) has not been implemented because the President has never designated the projected boundary lines contemplated by this section10 — and that, since § 1333(a)(2)(A) does not apply, this Court must apply the conflicts rules of Texas, the forum state, in determining what law is applicable. In this manner, Tidelands reasons that Texas law controls.
This argument is rejected. Tidelands has not cited a single case in support of its theory that the Presidential designation of projected boundaries is an absolute, statutory prerequisite to the operation of § 1333(a)(2)(A). Although there appears to be no case which directly addressed this issue, the Tidelands argument is refuted by numerous cases in which the courts have applied this section and have followed the laws of the "adjacent state" in suits brought under the Lands Act.11 For example, in Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473, 101 S.Ct. 2870, 69 L.Ed.2d 784 (1981), the Supreme Court stated:
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