Stanolind Oil & Gas Co. v. Newman Brothers Drill. Co. , 157 Tex. 489 ( 1957 )

Mr. Justice Walker

delivered the opinion of the Court.

This is an action to determine the ownership of an undivided one-half of the mineral leasehold estate in 786.33 acres in Kent County. The rights of the parties turn upon the construction and application of the following provisions of two identical oil and gas leases:

“2. Subject to the other provisions herein contained, this lease shall be for a term of five (5) years from this date (called ‘primary term’) and as long thereafter as oil, gas or other mineral is produced from said land hereunder.”

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“5. If prior to discovery of oil or gas on said land Lessee should drill a dry hole or holes thereon, or if after discovery of oil or gas production thereof should cease from any cause, this lease shall not terminate if Lessee commences additional drilling or re-working operations within sixty (60) days thereafter or (if it be within the primary term) commences or resumes the payment or tender of rentals on or before the rental paying date next ensuing after the expiration of three months from date of completion of dry hole or cessation of production. If at the expiration of the primary term oil, gas or other mineral is not being produced on said land but Lessee is then engaged in drilling or re-working operations thereon, the lease shall remain in force so long as operations are prosecuted with no cessation of more than thirty (30) consecutive days, and if they result in the production of oil, gas or other minerals so long thereafter as oil, gas or other mineral is produced from said land. * * *”

On March 23, 1950, the owners of an undivided one-half interest in the minerals under the land executed the two leases in question to H. A. Hedberg. Stanolind Oil and Gas Company, R. E. Smith and Warren Petroleum Corporation, petitioners, are assignees of Hedberg and claim title under such leases. Newman Brothers Drilling Company and Blanco Oil Corporation, hereinafter referred to as Newman, claim title under leases executed to the former in June and Septembr of 1955 by all of the owners of such undivided one-half mineral interest except Joseph D. Mitchell, Jr. and William Hilseweck, each of whom owns an undivided 20/786.33 mineral interest. The fact that Newman has no lease from Mitchell and Hilseweck is not material here. Stanolind is admittedly the owner of the one-half interest in the leasehold estate which is not involved in this suit.

Respondents, who are Newman and some of the lessors who executed the 1955 leases, brought this suit in two counts against petitioners and the other interested mineral owners. The first count is in trespass to try title to recover the interest in the lease hold estate which Newman owns if the 1955 leases are effective, and by the second count respondents sought a declaratory judgment that the Hedberg leases had expired and are of no further force or effect. Respondents also prayed for an accounting for minerals produced from the land by petitioners, but the accounting issues were severed by agreement and left for future determination. In a trial before the court without the intervention of a jury, the trial court rendered judgment that respondents take nothing, thus holding that the Hedberg leases are in full force and effect. The Court of Civil Appeals reversed the judgment of the trial court and rendered judgment in favor of respondents. 296 S.W. 2d 567. We have concluded that the judgment of the trial court was proper and should be affirmed.

All of the material facts are stipulated by the parties. Each of the Hedberg leases was kept in force during the five-year primary term by the timely payment of annual delay rentals.¹ No drilling operations were commenced on the land prior to March 1, 1955, and there was no production before the primary term expired on March 23rd of that year. Before the end of the primary term, however, Warren Petroleum Corporation and R. E. Smith, two of the petitioners, began drilling a well on the land as the Warren No. 1 Sieber, hereinafter referred to as the Warren well, and prosecuted the drilling of such well continuously until May 3rd, when the same was plugged and abandoned as a dry hole. Forty-five days later Stanolind began drilling a second well on the land known as the Stanolind No. 1 Cravey, hereinafter called the Stanolind well, and prosecuted such work continuously until July 26th, when the well was completed as a commercial producer. The Stanolind well did not result from reworking or additional drilling of the Warren well, for the two wells are at entirely different locations. No drilling or reworking operations were conducted on the land between the abandonment of the Warren well on May 3rd and the beginning of the Stnolind well on June 22nd. Oil in commercial quantities has been produced from the Stanolind well from the time of its completion down to and including the present time.

There is no question of innocent purchaser in the case, nor is there any controversy as to the form or manner of execution of the leases. The controlling question is whether the Hedberg leases have expired under their own terms. Since the drilling of the Warren well was in progress at the expiration of the primary term and there was no production at the time, the parties recognize that the leases were kept in force by the second sentence of paragraph 5, hereinafter called the thirty-day clause, at least until such well was plugged and abandoned May 3rd. Petitioners contend that the completion of the first well as a dry hole brought into operation the first sentence of the paragraph, hereinafter referred to as the sixty-day clause, and that this provision was effective to keep the leases alive and give the lessee the right to begin a second well at any time within sixty days. Respondents take the position that the sixty-day clause is a non-forfeiture provision which can be effective only while the lease is in full force and effect, either during the primary term or subsequent to such term when the lease is otherwise extended. They then say that when the thirty-day clause was exhausted by cessation of operations for more than thirty days, the leases automatically terminated and there was nothing left upon which the sixty-day clause could operate.

The precise question was considered and determined adversely to respondents’ contentions in St. Louis Royalty Co. v. Continental Oil Co., 5th Cir. 193 F. 2d 778. The lease in that case contained substantially the same provisions as the instruments involved in the present suit, and there was no discovery or production of minerals during the primary term. The first well was begun before, and was abandoned as a dry hole after, the end of such term. A second well, begun more than thirty days but less than sixty days after the first well was abandoned, was completed as a commercial producer. The court concluded that under settled rules of construction, if the plain and simple language of the sixty-day clause were accorded its ordinary meaning, the lease was kept in force by beginning the second well within sixty days after the completion of the first well as a dry hole.

The opinion discloses, however, that the court was somewhat uncertain as to the proper construction of the provisions of paragraph 5. As an alternative ground for holding that the lease had not terminated, it was said that there was at least some doubt as to its meaning and that the actions and conduct of the parties required a construction preventing forfeiture. This probably had reference to the fact that the plaintiff and its predecessors in title, although fully informed of the lessee’s claim to and operations under the lease, did not assert that the same had terminated until some ten years after the end of the primary term, during which time the lessee had developed the property by drilling seven producing wells. Nothing of that character is involved in this suit; petitioners were notified in writing before they began drilling the Stanolind well that Newman was claiming that the Hedberg leases had terminated. The court then went on to say that if the leases had lapsed, the plaintiff was still not entitled to recover because the evidence established as a matter of law that the defendants had perfected a limitation title to the leasehold estate.

A careful consideration of the lease provisions convinces us that the construction urged by petitioners and adopted by the Circuit Court is correct. We agree with respondents that the sixty-day clause can be effective only if the lease is in force at the time of the occurrence of the event which renders it operative. It could not revive a lease which had already expired when the dry hole was drilled or when production ceased. This brings us to the crux of respondents’ first contention. They recognize that if the leases had been maintained after the end of the primary term by production of minerals, the sixty-day provision would be brought into play by a cessation of such production. But here the leases were kept alive beyond the primary term by operations commenced and prosecuted in accordance with the thirty-day clause. Respondents argue that under our decision in Rogers v. Osborn, 152 Texas 540, 261 S.W. 2d 311, the sixty-day clause and the thirty-day clause must be regarded as separate and distinct provisions referring to different factual situations, not cumulative in application, and that one may not be tacked to the other to extend the lease.

The lease in the Rogers case contained the same provisions as the instruments now under consideration, but the fact situation was quite different from that involved in the present suit. A well was drilled and gas was discovered in paying quantities during the primary term, but there was no production from such well. The lessee contended that the lease was kept alive beyond the primary term by: (1) reworking operations upon the first well, and (2) the drilling of and production from a second well. Work on the first well had ceased for more than thirty days, and we concluded that the thirty-day clause could not be satisfied by operations on the second well, which was begun after the end of the primary term.

It was pointed out in this connection that the conditions of the two sentences should not be jumbled, and that words could not be transposed from one to the other. We also said that under the facts of that case, the period of the drilling of and production from the second well could not be tacked to the period of reworking the first well. This was so because neither of the events which made the sixty-day clause operative, i.e. the drilling of a dry hole or the cessation of production, had occurred. We did not say that the two clauses could never be tacked to extend the lease, or that the sixty-day clause would not be effective when the drilling which kept the lease alive under the thirty-day clause resulted in a dry hole. The question involved in the St. Louis Royalty case simply was not reached, and we so stated in the opinion.

In its broadest aspect, the question in this case is by what means and for how long the leases may be kept in force beyond the end of the primary term. If oil or gas had been produced at the end of the five-year period, they would have remained in effect as long as such production continued. Paragraph 2 specifically so provides. But here there was no production at the end of the primary term and for some four months thereafter.

It will be noted that the habendum clause does not merely provide for a term of five years and as long thereafter as production continues. Nor does it purport to make only the primary term subject to the other provisions of the lease. Instead it provides that “subject to the other provisions herein contained, this lease shall be for a term of five (5) * * * and as long thereafter as oil, gas or other mineral is produced * * The stipulation for a term of five years and as long thereafter as production continues is thus both modified and enlarged by the recital that it is subject to the other lease provisions, and is required to yield to any and all other provisions which affect the duration of the lease. It is clear then that the lease may be kept in force after the end of the primary term either by production or by the operation of its other provisions.

The thirty-day clause is one of the provisions by which the lease may be maintained beyond the primary term without production. A lessee may have no production at the end of the primary term either because (1) no well has been completed, (2) any or all wells drilled are dry holes, (3) oil or gas has been discovered but not produced, or (4) production has been obtained but has ceased. If the lease has been kept in force for the full primary term, and there is no production but the lessee is engaged in drilling or reworking operation at the end of such term, the thirty-day clause applies and will keep the lease alive as long as the particular drilling or reworking operation is prosecuted with no cessation of more than thirty consecutive days. The primary purpose of this provision is to keep the lease in force as long as the drilling or reworking operation is prosecuted with diligence, and a precise yet quite liberal standard of diligence is laid down. There must be no cessation of the drilling or reworking operation for more than thirty days if the lease is to be kept alive until the operation is completed to production or a dry hole. If the operation is prosecuted with the required diligence and production is obtained, the lease will remain in force as long as production continues.

The thirty-day clause does not tell what will happen to the lease if the particular operation, diligently pursued in accordance with its terms, results in a dry hole. In the absence of some other provision which keeps the lease in force, it would terminate. It will be noted, however, that the thirty-day clause does not provide either expressly or by implication that a lease which has been maintained beyond the primary term under its provisions can thereafter be kept in force only by the diligent prosecution of the particular operation begun during such term. This leads to a consideration of the first sentence of paragraph 5.

The sixty-day clause deals only with two fact situations: (1) where a dry hole or holes are drilled prior to the discovery of oil or gas, and (2) where after discovery of oil or gas production ceases from any cause. The sentence provides that in either of the two fact situations, the lease may be kept in force by additional drilling or reworking operations begun within sixty days or (if it be within the primary term) by resumption of payment of delay rentals within a stipulated time. The lessee is specifically given the right to keep the lease alive by resuming payment of rentals in either situation provided it occurs before the end of the primary term. By necessary implication the lease may be kept in force by the additional drilling or reworking operations in either fact situation whether occurring within or after the end of the primary term.

Although the clause stipulates that the lease will not terminate, it was not included simply to insure that the drilling of a dry hole or cessation of production would not be grounds for forfeiture of the lessee’s estate. If this were its only purpose, it could be effective only at a time when the lease is, and would otherwise remain, in full force and effect under its other provision, i.e. during the primary term. The parenthetical expression shows beyond any question that the parties contemplated that the provision would be effective both during and after such term. Its primary purpose is to give a lessee who has incurred the expense of drilling a well an opportunity to save his lease in the event the well is a dry hole or production ceases after having been obtained. The effect of the provision then, once it becomes operative and lessee begins additional operations within the stipulated time, is to keep the lease alive as long as the additional drilling or reworking operations, and any production resulting therefrom, continue.

There is nothing in the lease to suggest that the sixty-day clause will not be effective if the particular operation begun during the primary term results in a dry hole. Even though the dry hole results from drilling which was going on at the end of the primary term, or there is a cessation of production which kept the lease alive after the end of such term, the parties have agreed that the lease may be kept in force by additional drilling or reworking operations begun within sixty days, but only in the two fact situations mentioned. The lease was held to terminate in Rogers v. Osborn, supra, because neither of the two fact situations existed which authorized keeping it in force by additional drilling or reworking operations begun within sixty days.

Here the drilling of the Warren well was as effective as production to keep the leases alive until May 3rd. When this well was completed as a dry hole, the leases were in full force and effect and there had been no discovery of oil or gas on the land. The sixty-day clause states unequivocally that under these circumstances the lease will not terminate if the lessee commences additional drilling or reworking operations within sixty-days. Petitioners began drilling the Stanolind well within sixty days and prosecuted such additional operations continuously until production resulted therefrom. There has been continuous production from the latter well. We hold, therefore, that the sixty-day clause became operative when the Warren well was completed as a dry hole, and that the Hedberg leases are in full force and effect under their terms. This does not render either the thirty-day clause or the sixty-day clause meaningless, but gives effect to all of their provisions.

It is argued that this will enable the lessee to maintain the lease indefinitely after the primary term by drilling one dry hole after another, but there is little danger of the lessor’s being unduly prejudiced in this manner. We cannot believe that a lessee will continue to spend large sums of money indefinitely to keep a lease in force on apparently unproductive land. Unless production is obtained, therefore, the economic realities of the situation will soon compel the lessee to discontinue operations under the lease.

The judgment of the Court of Civil Appeals is reversed, and the judgment of the trial court is affirmed.

Associate Justices Griffin and Smith dissenting.

Opinion delivered June 19, 1957.

1 ’Paragraph 4 of the leases is a conventional “unless” drilling clause, stipulating that if operations for drilling are not commenced within one year the lease shall terminate unless delay rentals are paid as provided therein, and that the commencement of such operations may be further deferred in the same manner for successive periods of twelve months each during the primary term.