Toomey v. State Bd. of Land Com'Rs

• Decision Date: 23 July 1938
• Docket Number: No. 7809.,7809.
• Citation: 106 Mont. 547
• Parties: TOOMEY v. STATE BOARD OF LAND COM'RS et al.
• Court: Montana Supreme Court

106 Mont. 547

TOOMEY

v.STATE BOARD OF LAND COM'RS et al.

No. 7809.

Supreme Court of Montana.

May 7, 1938.

Rehearing Denied June 2, 1938.

As Corrected July 23, 1938.

Original proceeding by E. G. Toomey against the State Board of Land Commissioners, the members thereof, and another to enjoin defendants from entering into a consolidated lease and operating agreement pooling state school lands with privately owned lands for production of natural gas by unit operations.

Writ denied, and proceeding dismissed.

SANDS, C. J., dissenting.

E. G. Toomey, of Helena, pro se.

H. C. Hall, of Great Falls, intervener, pro se and for Governor Ayers.

Lee Metcalf and W. W. Wertz, both of Helena, for defendants.

ANGSTMAN, Justice.

Plaintiff, a taxpayer, brought this proceeding originally in this court to enjoin the defendants from entering into an agreement designated as a “Consolidated Lease and Operating Agreement,” which purports to pool state school lands with others in private ownership for unit operations for the production of natural gas and the apportionment of gas royalties on an acreage basis. By appropriate pleadings these facts are admitted or otherwise made to appear:

On March 27, 1930, defendants executed and delivered an oil and gas lease to F. E. Benedict covering 80 acres of state school land. On March 20, 1930, defendants executed and delivered a lease to Adelaide Williams covering 320 acres of such lands, and on the same day gave to J. F. O'Day a lease on 320 acres. Each lease was identical in terms, and each was for a term of 5 years and as long thereafter as oil or gas in commercial quantities shall be produced, not exceeding the total of 15 years. Each required royalty payments to the state of 12 1/2 per cent. of the gas produced, “exclusive of gas used for light, fuel or operating purposes in connection with the work on the lands.” Other terms of the leases will be alluded to later herein.

Thereafter the leases were modified by changing the term from 5 years to 10, and the period within which the state could accept delay drilling penalties in lieu of drilling was changed from 5 years, as in the original lease, to 10 years.

The lessees assigned their interests in the leases to the Glacier Production Company, a New Jersey corporation admitted and qualified to do business in this state, which is now the holder thereof. No wells have been drilled on any of the lands covered by the leases, but delay penalties have been paid to the state extending the time for drilling on the lands covered by the O'Day and Williams leases until March 20, 1939, and by the Benedict lease until March 29, 1939. In the vicinity of these lands are lands in private ownership on which the Glacier Production Company holds oil and gas leases, each reserving to the landowner a 12 1/2 per cent. royalty of the oil and gas produced.

Defendants adopted a resolution approving a proposed consolidated lease and operating agreement whereby the 720 acres of state school lands in the above-mentioned leases were to be pooled with 1,200 acres of privately owned lands on which the Glacier Production Company held leases. The 1,920 acres embraced in the area constitute three contiguous sections of land lying in a direct line extending from north to south, being sections 24, 25, and 36, township 36 north, range 5 west. This proceeding is to enjoin the execution of that proposed agreement.

The land is situated in the Cut Bank oil and gas field. In this field the gas producing sands, where they have been tested by drilling, have not been uniform in thickness and porosity, nor has gas been found in commercial quantities in all of the tested land. None of the acreage sought to be pooled has been tested for gas by drilling wells to the gas producing horizon, and hence it is not known whether all or any part of the land is capable of producing gas in commercial quantities, or whether the thickness and porosity of the gas producing sands, if any, are uniform, or whether there will be uniformity in the quantity of gas recoverable therefrom.

Under the proposed consolidated lease and operating agreement the lessee agrees to pay as royalty one-eighth of the market price of all gas produced at the well. When gasoline is extracted, manufactured, or recovered by the lessee from natural gas or casing-head gas produced from land in the unit, the market value at the well of one-eighth of the gasoline content of the gas is also paid as royalty. It provides that each of the lessors shall have gas free of cost from any gas wells in the unit for his reasonable domestic use by making his own connections at the wells at his own risk and expense, and the lessee has the right to use, free of cost, gas produced on the lands in the unit for operations thereon, and on such gas used either by the lessors or lessee no royalty is paid. The one-eighth royalty is apportioned among the lessors in proportion to the acreage held by each. The state will receive 720/1920 thereof, and the other lessors collectively will receive the balance. The duration of the agreement is limited to 15 years from the date of the original leases. Under the proposed agreement the lessee is not obligated to protect the school lands by offset wells from drainage by wells drilled on other lands in the unit. Under the proposed agreement the lessee will not be required to pay delay drilling penalties until a well is drilled on the school lands, but will be released from so doing upon the drilling of two wells upon the unified area. Other features of the proposed consolidated lease and agreement will be discussed more at length in considering the several contentions urged in support of the claim that its execution should be enjoined.

The proposed agreement is attacked here as being unauthorized under section 1882.2, Revised Codes, for several reasons which we shall later discuss. The further contention is made that if section 1882.2 authorizes the proposed agreement and lease, then it is in conflict with constitutional provisions and the Enabling Act.

The first point raised is that the proposed agreement is not authorized by section 1882.2, for the reason that it embraces more than 640 acres. The section in part provides: “No oil or gas lease issued on state lands shall embrace more than six hundred forty (640) acres. ** Nothing herein contained, or in chapter 108 of the session laws of the state of Montana of 1927, (sections 1882.1 to 1882.24) or elsewhere, shall prevent or be so construed as to prevent the state board of land commissioners from entering into agreements for the pooling of acreage with others for unit operations for the production of gas and the apportionment of gas royalties on an acreage or other equitable basis, and from modifying existing leases and leases hereafter entered into with respect to delay rentals, delay drilling penalties and royalties in accordance with such pooling agreements and such unit plans of operation; provided however, that such agreements shall not change the percentages of royalties to be paid to the state from the percentages as fixed in its leases.”

The paragraph in the statute authorizing pooling of acreage by its very terms provides that pooling agreements are not to be prevented because of other provisions of sections 1882.1 to 1882.24. In effect, this is a declaration of the Legislature that pooling agreements are not to be restricted by the acreage limitation of 640 acres. The Legislature must have realized that such a restriction is inconsistent with the principles of a unit operation and, hence, excepted them from the operation of the restriction as to acreage.

Contention is made that section 1882.2 authorizes the pooling of acreage for gas production, only in case the entire geologic structure is included in such an agreement. This contention cannot be sustained. The purpose of pooling agreements is to conserve the natural resources of an area, to promote its development in an orderly and economical manner to meet market conditions, to avoid waste, and to insure a more equitable distribution of the proceeds of production. 1 Thornton on Oil & Gas, § 218, p. 380, and cases there cited, including Marrs v. City of Oxford, 8 Cir., 32 F.2d 134, 67 A.L.R. 1336;C. C. Julian Oil & Royalties Co. v. Capshaw, 145 Okl. 237, 292 P. 841;People v. Associated Oil Co., 211 Cal. 93, 294 P. 717, and see Patterson v. Stanolind Oil & Gas Co., Okl.Sup., 77 P.2d 83, and United States v. Standard Oil Company of California, D.C., 21 F.Supp. 645.

It is true that to accomplish the maximum beneficial results sought in a pooling agreement the entire structure should be included, but there are practical reasons why this cannot always be done. In the first place, it is impossible to know in advance of drilling the exact boundaries of a structure. In the second place, there is in most cases such a diversity of ownership in the lands and royalties that it is not always possible to secure the consent of all concerned were it known in advance just what acreage constituted the entire structure. The mere fact that a pooling of less than the total area of a structure does not secure all the benefits which would flow from an inclusion of the entire area is no reason why the Legislature may not authorize the acceptance of the partial benefits; in other words, part of the benefits is better than none at all.

The plan of unit operation is of comparatively recent origin. When section 1882.2 was amended in 1933 to authorize pooling agreements, it cannot be said that the Legislature had any particular pooling method in mind. At that time there were different conceptions of unit operations. Mr. Glassmire in his treatise on Oil and Gas Leases and Royalties, in section 6, page 31, published in 1935, said: “Three slightly different conceptions of ‘unit operation’ have been evolved. The first, or broad definition, contemplates the merging of individual lease ownership into a common property with...