Westland Oil Development Corp. v. Gulf Oil Corp.

• Decision Date: 09 June 1982
• Docket Number: No. C-743,C-743
• Parties: WESTLAND OIL DEVELOPMENT CORPORATION et al., Petitioners, v. GULF OIL CORPORATION et al., Respondents.
• Court: Texas Supreme Court

Page 903

637 S.W.2d 903

WESTLAND OIL DEVELOPMENT CORPORATION et al., Petitioners, v. GULF OIL CORPORATION et al., Respondents.

No. C-743.

Supreme Court of Texas.

June 9, 1982.

Rehearing Denied Sept. 22, 1982.

Bullock, Scott & Nesig, Maurice N. Bullock, Midland, Reynolds, Allen, Cook, Pannill & Hooper, William Pannill, Houston, Jack N. Price, Austin, for petitioners.

Stubbeman, McRae, Sealy, Laughlin & Browder, Tom Sealy, W. B. Browder, Jr. and Marc Skeen, Midland, Morgan L. Copeland and Susan R. Sewell, Houston, for respondents.

McGEE, Justice.

This case involves the adjudication of the parties' interests in certain oil and gas leases located on six sections of land in Pecos County, Texas. We must determine the effect that a letter agreement, dated November 15, 1966 (hereinafter referred to as "the November 15, 1966, letter agreement"), had upon the respective interests in those leases. The trial court granted summary judgment in favor of Westland Oil Development Corporation and L. C. Kung (hereinafter referred to as "Westland"), petitioners herein and plaintiffs in the trial court, holding that Gulf Oil Corporation and the Superior Oil Company (hereinafter referred to as "Gulf and Superior"), respondents herein and defendants in the trial court, were on notice as a matter of law of the November 15, 1966, letter agreement, and that said agreement was enforceable as to all six sections. The court of appeals reversed the judgment of the trial court and remanded the cause for a determination of the notice issue. 620 S.W.2d 765. We reverse the judgment of the court of appeals and render judgment that Gulf and Superior were on notice of the November 15, 1966, letter agreement as a matter of law, and that the statute of frauds does not prohibit enforcement of said agreement as to three of the six sections under dispute.

Prior to August 4, 1966, Mobil Oil Corporation (hereinafter referred to as "Mobil") owned oil and gas leases covering twenty-nine sections in the Rojo Caballos Field in Pecos County, Texas. The six sections comprising the subject matter of this suit were a part of those twenty-nine sections, and are identified as sections 23, 24, 25 and 26, Block 49, and sections 19 and 30, Block 48. From this point forward, we will refer to the sections by number only and eliminate any corresponding reference to the block number.

On August 4, 1966, Mobil and Westland entered into a farmout agreement (hereinafter referred to as the Mobil/Westland farmout agreement). The leases which were the subject matter of the farmout agreement covered, among others, sections 19, 23 and 24. The agreement provided that at such time as Westland complied with its drilling obligations and completed a producing well, it would be entitled to receive an assignment of one-half of Mobil's interest in those sections. The Mobil farmout obligated Westland to commence a wildcat well by September 1, 1966. Westland sought more time, and Mobil granted an extension of time to December 1, 1966, in a letter dated August 29, 1966.

A Midland partnership, Chambers & Kennedy (hereinafter referred to as "C & K"), became interested in taking over Westland's obligations under the Mobil/Westland farmout agreement. The agreement made to accomplish this was the November 15, 1966, letter agreement. This agreement contains a provision which is the center of the controversy in this case. Under the terms of this agreement, C & K assumed all of the obligations imposed by the Mobil/Westland farmout agreement, agreed to pay Westland $50,000.00 in cash, and assigned to Westland a 1/16 of 8/8 overriding royalty interest on any acreage earned from Mobil, 1/32 of the working interest obtained from Mobil under the farmout agreement, and a production payment of $150,000.00 payable out of the production from the test well.

The November 15, 1966, letter agreement also contained what shall be referred to as an area of mutual interest agreement. This is the controversial provision referred to above. In an area of mutual interest agreement, the parties attempt to describe a geographic area within which they agree to share certain additional leases acquired by any of them in the future. This necessarily contemplates that oil and gas leasehold interests will be conveyed. Therefore, the agreement is in the nature of a contract to convey interests in oil and gas leases.

The area of mutual interest agreement was contained in paragraph 5 of the November 15, 1966, letter agreement and reads as follows:

5. If any of the parties hereto, their representatives or assigns, acquire any additional leasehold interests affecting any of the lands covered by said farmout agreement, or any additional interest from Mobil Oil Corporation under lands in the area of the farmout acreage, such shall be subject to the terms and provisions of this agreement; provided, however that in no event shall the owners of the working interest under any portion of such acreage be entitled to less than 75% working interest leases.

(emphasis added). It is this covenant or obligation which Westland seeks to enforce against Gulf and Superior.

C & K included several other investors in the farmout well, including Union Texas Petroleum, a division of Allied Chemical Corporation (hereinafter "Union Texas"). The farmout well was spudded on December 1, 1966, and completed on January 23, 1968. The well was marginal but earned the acreage. By assignment dated March 7, 1968, Mobil conveyed to C & K, Union Texas as operator, and the other investors in the well, one-half of its leasehold interests in the farmout block, which included the leases covering sections 19, 23 and 24. This assignment provided that as to all the lands and depths assigned, with one exception, the assignment would be subject to all the provisions of a certain operating agreement dated March 1, 1968. The precise language of that assignment was as follows:

This Assignment is made without warranty to title, either express or implied. In addition, as to all the lands and depths herein assigned (except as to said Section 18), this Assignment shall be subject to all the provisions of that certain Operating Agreement dated March 1, 1968, by and between Assignor and Assignee.

The provisions hereof shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs devisees, legal representatives, successors and assigns.

(emphasis added). The March 7, 1968, assignment is the only instrument mentioned thus far which was recorded. It was filed for record May 16, 1968, in the lease records of Pecos County, Texas.

The March 1, 1968, operating agreement was executed by Mobil, C & K, Union Texas, and the other owners of the interests in the six sections of land described in the Mobil/Westland farmout agreement. This operating agreement is critical to an understanding of the case because of the provisions contained within paragraph 31, the last clause of the agreement. Captioned above paragraph 31 was the heading, "OTHER CONDITIONS, IF ANY, ARE:."

Subparagraphs B and C referred to the Mobil/Westland farmout agreement and the November 15, 1966, letter agreement as follows:

B. This Agreement shall supersede and replace that certain Operating Agreement attached as Exhibit "A" to the said Farmout Letter Agreement dated August 4, 1966 between Mobil Oil Corporation and Westland Oil Development Corporation. In the event of any conflict between this Contract and the Farmout Letter Agreement dated August 4, 1966, between Mobil Oil Corporation and Westland Oil Development Corporation as amended by letter dated August 29, 1966, and November 11, 1966, and a Letter Agreement between Chambers and Kennedy and Westland Oil Development Corporation and L. C. Kung dated November 15, 1966, then such prior agreements shall prevail over this Agreement.

(emphasis added).

The court of appeals quoted the last sentence of paragraph 31.B. but did not quote the next paragraph:

C. Exhibit "A" lists all of the parties, and their respective percentage or fractional interests under this Agreement. Such interests are specifically subject to all terms, conditions and reservations set forth in that Farmout Agreement Letter dated August 4, 1966 between Mobil Oil Corporation and Westland Development Corporation, as amended, and that certain Assignment dated March 7, 1968 from Mobil Oil Corporation to C. Fred Chambers and W. D. Kennedy and Union Texas Petroleum.

(emphasis added).

Gulf and Superior obtained their interests in the leases covering sections 19, 23 and 24 through dealings with one Bernard Hanson. By letter dated April 18, 1972, Mobil entered into a farmout agreement with Hanson wherein Mobil agreed that if Hanson commenced a test well on Section 25, Block 49, to a depth sufficient to test the Ellenberger formation and completed it as a producer, Mobil would assign all of its leasehold rights below a depth of 15,000 feet in section 25, and an undivided 60% of its leasehold rights in sections 19 and 30, Block 48, and Sections 23, 24 and 26, Block 49. Sections 19, 23 and 24 were the three southernmost sections involved in the Mobil/Westland farmout agreement. Sections 25, 26 and 30 abut those three sections to the south. The farmout agreement with Hanson stated that the lands and leases covering sections 19, 23 and 24 were covered by the March 1, 1968, operating agreement between Mobil, C & K and Union Texas, and that any interest earned by Hanson from Mobil would be subject to that agreement. Hanson then assigned this farmout agreement to Gulf and Superior.

Hanson also approached C & K, Union Texas and their other partners, and obtained from them farmouts similar to the one received from Mobil. These farmouts covered part of their interests in leases covering sections 19, 23 and 24 which were earned pursuant to the Mobil/Westland farmout agreement and the November 15, 1966, letter agreement. Most of these farmout agreements refer to...