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Stanolind Oil & Gas Co. v. Sellers

Rehearing Denied July 22 1949.: May 16, 1949.

STANOLIND OIL & GAS CO.
v.
SELLERS ET AL.



Huxman

Before PHILLIPS, Chief Judge, and HUXMAN and MURRAH, Circuit Judges.

HUXMAN, Circuit Judge.

C. H. Sellers and Clara H. Sellers, his wife, were the owners of the Southwest Quarter of Section 14, Township 14 North, Range 4 West, in Oklahoma County, Oklahoma. They had executed an oil and gas lease on this land. Owners of various royalty interests likewise had executed oil and gas leases covering their royalty interests. All of these oil and gas leases were ultimately assigned to the Stanolind Oil and Gas Company and it, as such owner, carried on all operations with respect to the leased premises out of which this controversy arose. Since the questions presented are common to all the leases, reference will be made only to the Sellers lease and the factual situation will be treated as though there were but one lease.

C.H. and Clara H. Sellers, his wife, instituted this action against the Stanolind Oil and Gas Company and other defendants. The interest of all defendants, other than the Stanolind Oil and Gas Company, as well as other parties who were subsequently interpleaded, are identical with that of C.H. and Clara H. Sellers, and all appear as appellees in this appeal.

Plaintiffs' complaint set out three causes of action. In the first cause of action, they sought the cancellation of the oil and gas lease, excepting from such action, however, the Southwest Quarter of the tract on which there was a producing oil and gas well at the time. In the second cause of action, they sought to recover damages caused by the alleged negligence on the part of Stanolind in failing to protect the tract from drainage from offsetting wells in the total sum of $30,000, and in the third cause of action they sought a judgment for $270,000 for the loss of the alleged oil still in place when the lease was released of record, resulting from plaintiffs' inability thereafter to obtain development of the premises because of Stanolind's alleged negligence in failing to either drill timely offset wells or promptly release their lease of record. The action was removed by Stanolind to the United States District Court for the Western District of Oklahoma on the grounds of diversity of citizenship and the presence of the required jurisdictional amount.

Since the oil and gas lease was released of record prior to the trial of the cause, the first cause of action was abandoned. The case was tried to the court and it found against Stanolind and in favor of the plaintiffs in all respects. The trial court found that Stanolind was negligent in failing to expeditiously drill Sellers Well Number 1, which was an offset well, and in failing to drill the three remaining locations on the Sellers tract, and that loss from drainage prior to January 17, 1947, when the lease was released, had occurred in the total sum of $16,022.13, and that Stanolind was liable for future damages after the lease was released in the total sum of $204,079.39 because of the failure and inability on the part of the plaintiffs to obtain development of the 120-acre tract thereafter on account of the negligent acts and conduct of Stanolind. Judgment was accordingly entered against Stanolind for such sums and this appeal followed.

The judgment of the court is based upon the general proposition that Stanolind had not acted as a prudent operator should have acted in developing this property and protecting it against damages, and that the damage for the sums found flowed from such negligent acts. Two questions present themselves for determination. They are, first, is the court's finding that Stanolind acted in bad faith and failed to discharge that high degree of responsibility required of a prudent operator to protect the premises from drainage from offsetting wells with resulting damage sustained by the record? And if this question is answered in the affirmative, did such negligence subject Stanolind to liability for the value of the oil which the court found was still under the 120-acre tract at the time the oil and gas lease thereto was released?

The duty of a lessee to protect a lease from drainage from offsetting wells is well established. The test is generally referred to as the "prudent operator test." The cases which have had this question before them are myriad and they are all in general accord. The rule has been recently stated by us in the case of Gerson v. Anderson-Prichard Production Corporation, 10 Cir., 149 F.2d 444, 446, as follows: "A lease of this kind contains an implied covenant that the lessee will exercise reasonable diligence in the development of the leasehold and in the protection of it from undue drainage through wells on adjacent lands. And reasonable diligence in the development and protection of the premises means the doing of that which an experienced operator of ordinary prudence would do in the premises, having due regard for the interests of both lessor and lessee. But in the absence of a controlling stipulation, neither the lessor nor the lessee is the sole arbiter of the extent to which or the diligence with which the operations shall proceed. The standard by which both are bound is what an experienced operator of ordinary prudence should do in the circumstances, bearing in mind that the purpose of the contract is the mutual benefit of the lessor and the lessee."

As a corollary to this principle, it was stated in the Gerson case, that, "But the lessee does not bear an implied obligation to drill an offset well to prevent drainage unless, taking into consideration all existing facts and circumstances, it would probably produce oil in sufficient quantity to repay the whole sum required to be expended, including the cost of drilling, equipping, and operating the well, and also pay a reasonable profit on the entire outlay. No obligation rests upon the lessee to carry the operations beyond the point where they are profitable to him, even if some benefit to the lessor would result from them."

And further, we stated that, "The burden rested on plaintiffs to prove the breach of the implied covenant to protect the leasehold from undue drainage. It was incumbent upon them to prove that had an offset well been drilled on the Roosevelt Place Addition, it probably would have produced or would produce sufficient oil to repay the expense of drilling, equipping, and operating the well, and also pay a reasonable return on the outlay. * * * In other words, the ultimate fact necessary for them to establish was that it probably would have paid to drill an offset well."

This is also the established rule in the Oklahoma courts.*fn1

We have quoted at length from our opinion in the Gerson case because it clearly sets forth the principle by which the questions presented must be decided, and because, in the interest of brevity, we shall not cite the numerous other cases which have dealt with this problem.

Our first inquiry then is to search the record to see if there is substantial evidence supporting the court's finding that the acts and conduct of Stanolind did not meet the requirements of the rule. If so, the judgment in that respect must be affirmed even though we as the trier of the facts might have reached a different conclusion.

A somewhat extensive, detailed recital of the facts is necessary to present a clear picture. The West Edmond Oil Field is a large field comprising some 28,000 acres and containing approximately 700 producing wells. The Sellers lease in question is an east edge lease. No oil has ever been discovered in this field east of a line drawn north and south along the east edge of this lease. In fact, no producing oil and gas well has been found east of an extended line drawn north and south through the center of the Sellers tract. The discovery well in the Edmond Field ...


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