True Oil Co. v. Sinclair Oil Corp.

• Decision Date: 24 March 1989
• Docket Number: 86-187,Nos. 86-151,s. 86-151
• Citation: True Oil Co. v. Sinclair Oil Corp., 771 P.2d 781 (Wyo. 1989)
• Parties: TRUE OIL COMPANY, a Wyoming partnership, Appellant (Plaintiff), v. SINCLAIR OIL CORPORATION, a Wyoming corporation, Appellee (Defendant). SINCLAIR OIL CORPORATION, a Wyoming corporation, Appellant (Defendant), v. TRUE OIL COMPANY, a Wyoming partnership, Appellee (Plaintiff).
• Court: Wyoming Supreme Court

Page 781

771 P.2d 781

TRUE OIL COMPANY, a Wyoming partnership, Appellant (Plaintiff), v.SINCLAIR OIL CORPORATION, a Wyoming corporation, Appellee (Defendant).

SINCLAIR OIL CORPORATION, a Wyoming corporation, Appellant (Defendant), v.TRUE OIL COMPANY, a Wyoming partnership, Appellee (Plaintiff).

Nos. 86-151, 86-187.

Supreme Court of Wyoming.

March 24, 1989.

Rehearing Denied May 8, 1989.

Richard E. Day and Houston G. Williams of Williams, Porter, Day & Neville, P.C., Casper and R. Stanley Lowe and John J. Blomstrom of True Oil Co., Casper, for True Oil Co.

V. Anthony Vehar and Roy A. Jacobson of Vehar, Beppler, Jacobson, Lavery & Rose, Kemmerer, Rene P. Lavenant, Jr. and M.W. Parse, Jr. of Fulbright & Jaworski, Houston, Tex., and Peter M. Johnson of Sinclair Oil Corp., Salt Lake City, Utah, for Sinclair Oil Corp.

Before CARDINE, C.J., and THOMAS, URBIGKIT, and MACY, JJ., and BROWN, J., Retired.^*

URBIGKIT, Justice.

We consider an appeal and cross-appeal from the trial court determination of rights, interests, and obligations arising from an agreement to drill an expensive and unsuccessful exploratory wildcat oil well in the northern overthrust belt of western Wyoming.

The agreement, initially orally and later reduced to writing, was negotiated between the two individuals--H.A. (Dave) True, Jr. for True Oil Company(True Oil), appellant/cross-appellee, plaintiff below, and Robert Earl Holding for Sinclair Oil Corporation(Sinclair Oil), appellee/cross-appellant, defendant below.In the course of lengthy and very costly drilling efforts, Sinclair Oil became disenchanted with the project and terminated its participation in the contribution to well costs.Litigation ensued, the well was abandoned and acreage interests earned by the unsuccessful drilling were resold to Exxon Corporation, Atlantic Richfield Company and Shell Oil Company(Telephone Pass Group) for a modest cash payment and a five percent overriding royalty.Upon appeal, we are asked to review the trial court's determination of the parties' respective rights and obligations under the terms of their agreement for contribution to drilling cost and division of the cash payment and royalty upon sale of acreage interests earned by well drilling.We analyze the effect of going non-consent during the drilling operation.

I.ISSUES

Appellant, True Oil, phrases the issues as:

I.Did Sinclair have the right to abandon the Deadman well on September 10, 1982?

A.What was the effect of Sinclair's abandonment of the Deadman well on September 10, 1982?

II.The trial court erred as a matter of law in construing the agreement between the parties to find a verbal agreement that the Deadman well was to be drilled at "Dave True's Cost."

A.There is insufficient evidence to support the trial court's finding of a verbal agreement between the parties that the Deadman well would be drilled at "Dave True's Cost."

B. Sinclair is estopped from claiming a cost basis other than competitive prices.Sinclair, by its actions, has waived its claimed right under the agreement to have costs based upon anything but competitive prices.

III.The court erred in disallowing rig and camp costs and fuel cost without profit.

A.There was nothing improper in True Oil contracting with its affiliates to furnish a part of the equipment and services for the Deadman well at competitive prices.

B.The trial court, by the trial and post-trial procedures adopted by it, denied True Oil a fair trial.

C.There is sufficient evidence in the record to permit the court to determine cost without profit of rigs 17 and 24.

IV.The court erred as a matter of law in finding that Sinclair had earned full rights under the terms of the Deadman/Telephone Pass Exchange agreement and agreement.[¹

Cross-appellant, Sinclair Oil, questions:

1.Is Sinclair entitled to recover back from True $720,173 in monies advanced by Sinclair to True as Sinclair's share of the costs of the joint venture for which True has failed to properly account[?]

2.Is Sinclair entitled to recover back from True the sum of $65,758.50 being the twenty-five percent charged to Sinclair of profit margins of $69,256 enjoyed by Black Hills Trucking Company and $193,778 enjoyed by Tool Pushers Supply Company, because Mr. True agreed to operate at his own cost and without profit and because by reason of his ownership of these corporations those profit margins were of personal benefit to him and his family?[²

Our resolution of the issues raised initially by True Oil effectively disposes of the issues raised in the cross-appeal; therefore, they will not be addressed separately.We affirm in part, reverse in part, and remand.

II.FACTS

In the midst of the oil and gas exploration boom of the late 1970's and early 1980's, considerable interest arose in the geological area in western Wyoming described as an extension of the Overthrust Belt, within which major discoveries of oil and gas producing fields had been made.True Oil and its managing partner, H.A. "Dave" True, Jr. (Dave True), had for some time been interested in the oil and gas potential of this hot area because seismographic studies indicated a significant deflection in the area of the Basal Plate (sub-thrust) of the Madison Formation, estimated to be located at a depth of 15,000 to 18,000 feet.The deflection was believed to indicate a geological formation capable of containing a huge deposit of hydrocarbons similar to other earlier discoveries further south in Wyoming and Utah.

True Oil obtained exploration rights to a large block of federal land in the area by acquiring farmout and acreage contribution agreements from third party oil companies holding the federal leases.True Oil formed the land into a 24,714.87 acre federal unit (known as the Deadman Unit) in the fall of 1978, receiving approval of the federal unit agreement and unit operating agreement.Under these agreements, True Oil was the designated operator, and provision was made for an initial test well.In 1979, True Oil built a road, prepared a location, spudded a well, and set conductor pipe.

Seeking additional participants in the project, Dave True approached Sinclair Oil.True Oil, for tax purposes, desired to establish a kitty for drilling costs with cash advances made by the participating parties before the end of 1979.Sinclair Oil, through Robert Earl Holding(Earl Holding), expressed an interest and further discussions and meeting occurred between the principals and representatives of the two companies.During the negotiations, Earl Holding stressed that he was interested only if the project were done "at cost."Dave True indicated that this was agreeable, that there would be no "front-end loading" or "promotion" charged to Sinclair Oil.The meaning of the phrase "at cost" as understood and communicated between the parties was a primary issue at trial and is a central issue for appeal.

Although much of the testimony conflicted as to what was discussed during these negotiations, it is reasonably clear that the parties understood that the primary objective of the well was the sub-thrust of the Madison Formation, with the opportunity to test intermediate horizons at lesser depths.It was also understood that it would be a two drilling season project, and that the well would be an expensive rank wildcat, but that the reservoir potential was high and the participants would earn leasehold interests under the constituent farmout acreage to depths reached by the test well.

In late December 1979, True Oil and Sinclair Oil reached an oral agreement for mutual participation in this Deadman Unit oil play, with Sinclair Oil advancing $2.5 million to True Oil as one-half of the joint $5 million kitty.Drilling commenced in June 1980 and the oral agreement was later reduced to writing in a draft prepared by True Oil in the spring of 1980 and, after modification, executed by the parties in August 1980.This "Deadman Agreement" provided generally that in return for Sinclair Oil's fifty percent cost participation in the drilling costs, Sinclair Oil would receive a fifty percent interest in the well production and share equally in the acreage earned under the farmout agreements.

True Oil, as operator responsible for drilling operations, engaged the services and equipment of various affiliated companies.True Drilling Company was the drilling contractor, True Leasing Company provided a rig camp, Eighty-Eight Oil Company supplied the fuel, Toolpushers Supply Company furnished various equipment including tubular goods, and Black Hills Trucking did the hauling to and from the location.True Drilling Company, True Leasing Company, and Eighty-Eight Oil Company are all partnerships comprised of the same partners as True Oil.Black Hills Trucking and Toolpushers Supply Company are Wyoming corporations whose stock is principally held by True family members.Dave True is the chief executive of each entity, although each has separate management, employees, business dealings and fiscal years.

The initial drilling phase was accomplished in 1980 by True Drilling Company, reaching a depth of 10,286 feet at which point operations were suspended for the winter.For the second drilling season, a larger rig capable of deeper drilling was needed to satisfy the farmout and contribution agreements.True Drilling Company ultimately purchased the required rig.True Oil paid True Drilling Company $2.5 million for its share of the advance day work payments to secure this new rig, and Sinclair Oil was asked to pay another $2.5 million for its share.Although Sinclair Oil responded that it "would certainly consider the necessity of paying this invoice very promptly," the billing was never paid.Nevertheless, True Drilling Company purchased the larger rig and moved it onto the location at the Deadman well in August 1981.

During the fall of 1981, drilling difficulties were encountered as the second rig attempted to deepen and then ream the hole...