True Oil Co. v. Gibson

• Decision Date: 09 June 1964
• Docket Number: No. 3210,3210
• Citation: 392 P.2d 795
• Parties: TRUE OIL COMPANY, a co-partnership, Sinclair Oil & Gas Company, a corporation, and Shell Oil Company, a corporation, Appellants (Plaintiffs below), v. W. R. GIBSON, Jr., Rex H. Baker, Thomas G. Dorough, H. P. Macauley, W. James Saul, Floyd E. Cook, and Myrtle Cook, Appellees (Defendants below).
• Court: Wyoming Supreme Court

Page 795

392 P.2d 795

TRUE OIL COMPANY, a co-partnership, Sinclair Oil & Gas Company, a corporation, and Shell Oil Company, a corporation, Appellants (Plaintiffs below), v. W. R. GIBSON, Jr., Rex H. Baker, Thomas G. Dorough, H. P. Macauley, W. James Saul, Floyd E. Cook, and Myrtle Cook, Appellees (Defendants below).

No. 3210.

Supreme Court of Wyoming.

June 9, 1964.

W. J. Wehrli and Houston G. Williams, Casper, for appellants.

William H. Brown and Morris R. Massey, of Brown, Healy, Drew Apostolos & Barton Casper, for appellees.

Before PARKER, C. J., and HARNSBERGER, GRAY, and McINTYRE, JJ.

Mr. Justice McINTYRE delivered the opinion of the court.

Suit was filed in the District Court of Campbell County by True Oil Company for a declaratory judgment determining whether a certain oil and gas lease was valid and subsisting and whether the complainant was entitled to proceed, as a lessee, with drilling and development operations. The defendants were owners of the mineral rights in the land involved. Sinclair Oil & Gas Company and Shell Oil Company claimed rights under the lease. They were brought in as parties plaintiff on a counterclaim of the defendants.

The lease under consideration was originally given by Floyd E. Cook and Myrtle Cook, owners of the land, to C. A. Fleetwood. It covered 320 acres in Campbell County, being E 1/2 E 1/2 of Section 7 and W 1/2 W 1/2 of Section 8, Township 49 North, Range 70 West. The lease was dated September 15, 1952 and was for a primary term of ten years.

Subsequent to the giving of the lease defendants W. R. Gibson, Jr., Rex H. Baker, Thomas G. Dorough, H. P. Macauley and W. James Saul, through mesne conveyances, acquired interests in half of the mineral rights, the other half being retained by the Cooks. Also Sinclair succeeded to the rights of Fleetwood as lessee. Thereafter all rights under the lease, insofar as it pertained to the W 1/2 SW 1/4 of Section 8, passed to True and Shell, subject to certain outstanding royalty interests.

Following trial to the court without a jury, the district court found the lease terminated and entered judgment for defendants--the lessors and their successors in interest. The plaintiffs, as successors of the lessee, have appealed.

We are concerned with the question as to whether the lease is still in force and effect, or whether it has terminated by reason of the expiration of its term. Opposing parties have stipulated that midnight at the close of September 14, 1962 was the expiration time of the lease as far as its primary term is concerned.

Thus, it is agreed the lease is terminated, unless 'the lessee' had commenced and was prosecuting drilling operations at the expiration of the primary term. Even if it be found that True had commenced and was prosecuting drilling operations, the defendants still question (1) whether True was actually a 'lessee' under the lease at expiration time, as to the portion of the lease on which its well was being located; and (2) whether True had commenced drilling operations with a good-faith intention to complete the well.

The pertinent provisions of the lease for a determination of the issues involved are these:

'2. It is agreed that this lease shall remain in force for a term of ten (10) years from this date and as long thereafter as oil, gas, casinghead gas, casinghead gasoline or any of them is produced from said leased premises, or operations for drilling are continued, as hereinafter provided * * *.'

'15. Notwithstanding anything in this lease contained to the contrary, it is expressly agreed that if during the primary term of this lease or at any time thereafter that this lease is in force by the production of oil, gas, or casinghead gas or casinghead gasoline after such primary term, if the lessee shall commence drilling operations during either of said periods, it shall remain in full force and effect and its term shall continue as long as such operations are prosecuted and if production results therefrom, then as long thereafter as such production continues.'

True's Interest

The activities of True in connection with the commencement of a well on Cooks' land were performed pursuant to a farmout agreement being obtained from Sinclair and covering the remaining 240 acres held by it in the Fleetwood lease. The execution of instruments pertaining to this farmout were not completed until after the primary term of such lease had expired. In view of this situation, appellees contend True had no leasehold interest in the land being obtained from Sinclair, during the primary term.

Exhibits and undisputed testimony are in evidence which show that Sinclair's farmout agreement was executed by Sinclair as of September 10, 1962 and received by True on September 12. It is claimed by True that the proffered agreement contained 'discrepancies,' and amendments were required by True's letter dated September 13, 1962.

We consider these amendments substantial and material. They included among other things the following:

1. Sinclair was to waive the requirement for (actual) drilling to be commenced on or before September 14, 1962, and in lieu thereof agree that the staking of location on September 13 was sufficient.

2. Instead of the well being located in the center of the SE 1/4 SE 1/4 of Section 7, Township 49 North, Range 70 West, it was to be at any location of True's choice in that forty-acre tract.

3. Instead of the requirement for an initial test well to test 200 feet into the Minnelusa formation or to a depth of 9,800 feet, whichever is less, True was to be entitled to complete the initial test well in any producing formation and defer the commencement of a subsequent well for 60 days after completion of the initial test well.

4. The proffered agreement reserved to Sinclair an overriding royalty of one-eighth except this was reduced to one-sixteenth as to production from the initial test well, until all costs on such well were recovered. One of True's amendments changed this so that the one-sixteenth applied to all production from the entire lease until all costs on the initial test well were recovered. Additionally, the amendment provided for a royalty thereafter of one-eighth 'of the overriding royalty.'

While the language in the last of these amendments is somewhat ambiguous insofar as it provides for a royalty of one-eighth of the overriding royalty, after costs on the test well were recovered, the assignment of lease which was executed by Sinclair and accepted by True provided for a royalty of one-sixteenth only on each well until the costs of that particular well were recovered, after which the royalty would be one-eighth for such well. This was indeed a material and substantial change from the agreement offered by Sinclair on September 10.

All of the amendments demanded by True were accepted and agreed to in writing by Sinclair September 18, 1962, the fourth day after the primary term of the Fleetwood lease had terminated. Plaintiffs (True, Sinclair and Shell) contend nevertheless that an oral agreement between True and Sinclair was reached prior to the expiration of the lease on September 14.

Without deciding whether, in view of our statute of frauds, such an oral agreement would be valid, we can say, if there was any evidence of an oral agreement having been reached, such evidence was effectively nullified by Sinclair's transmittal of its written acceptance. By separate letter, also dated September 18, 1962, Sinclair said it was returning a copy of True's letter dated September 13, 1962 covering amendments to the farmout agreement, which had been approved by Sinclair.

The letter then stated these changes are 'being approved' in this particular agreement because of the limited time in which to commence operations for the test well. In the future, Sinclair warned, it would not change certain of the provisions which were being changed in that instance. This statement can only mean that the amendments were 'being approved' on September 18 and that they had not been approved previously. Or at least, the trier would have been warranted in arriving at such a finding of fact.

The evidence and all reasonable inferences therefrom must be construed by us in the light most favorable to appellees. However, even if such evidence were construed in a light favorable to appellants, it would still be inadequate to establish the consummation of a farmout agreement (either written or oral) between Sinclair and True, prior to expiration of the primary term of the lease in question.

It is true John E. Dobos, an attorney and landman for True, testified he called Larkin O'Hern, District Landman for Sinclair at Casper, on September 13, 1962 regarding the so-called discrepancies noted by True. He claimed that he and O'Hern 'agreed' the modifications proposed by True 'were in order.' Not only was his testimony self-serving and hearsay in nature, but it constituted nothing more than the witness' conclusion as to what was agreed.

O'Hern's testimony concerning the conversation clearly negatived the idea that he committed Sinclair to any agreement. At first he claimed he called Sinclair's office in Denver and got approval for the modifications, 'so then it was a matter of the paper work catching up with the activity.' This was then qualified by his admission that he could only recommend; that such matters had to be reviewed in Denver; and that all he did was to transmit his recommendation to Denver.

Being more specific, O'Hern explained that the man he talked to in Denver on September 13 was C. S. Tinkler, Division Exploration Manager of Sinclair. He then testified Tinkler himself was not the man who made ultimate decisions, but Tinkler assured O'Hern the changes 'would be' approved and that Tinkler 'would discuss it with Mr. Wright and get his approval.' Thus, O'Hern's testimony fell far short of showing an immediate approval by R. A. Wright, who was Vice-President and Division Manager for Sinclair and...