Cowden v. General Crude Oil Co. , 217 S.W.2d 109 ( 1948 )

In order that the lease be continued beyond the primary term of ten years under the clause fixing the primary term it was necessary that oil or gas should be being produced in paying quantities on July 31, 1935, the end of the primary term. Freeman v. Magnolia Petroleum Co.,141 Tex. 274, 171 S.W.2d 339. It is clear from the Atlantic ledger sheets, Exhibit D-17 that oil was not being produced on that date in paying quantities. The only production shown during the primary term is 511 barrels in September 1934, 5 barrels in April 1935 and 5 barrels in July 1935. In other words, from October to July inclusive, a period of ten months, only ten barrels was produced. Under no possible theory could this be said to constitute production in paying quantities during this ten month period or any part of it. That there may have been production in paying quantities in September 1934 is immaterial — the important time is the date of the termination of the primary term. Freeman v. Magnolia Petroleum Co. supra. The ledger sheets also show that there was no substantial production of oil after the primary term until March 1937; therefore, as far as oil is concerned, even though there had been production during the primary term and at its end, the lease automatically terminated after the primary term upon cessation of production. Watson v. Rochmill, 137 Tex. 565, 155 S.W.2d 783, 137 A.L.R. 1032. That there may have been no market which would warrant profitable operation during this time is unimportant. Shell Oil Co. v. Goodroe, Tex. Civ. App. 197 S.W.2d 395.

The Atlantic ledger sheets Exhibit D-16 also show that the only gas produced and sold during the primary term was in March, April and May 1935. The revenues from these sales totalled $825.00. Dunlap's testimony shows that a profit was made from the gas sold from August 1, 1935 to July 31, 1936, of $289.74; also that there was gas revenue from August 1, 1936 to July 31, 1937 of $176.13. If it was incumbent upon Cowden to show what expenses were incurred against this revenue and the $825.00 revenue received from gas sold during the primary term as indicated in Persky v. First State Bank of Vernon, Tex. Civ. App. 117 S.W.2d 861, he did not do so. The question then is, was this showing sufficient to sustain the finding that gas was being produced in paying quantities either at the date the primary term ended or between that date and January 1, 1937 under the rule enunciated in Hanks v. Magnolia Petroleum Co., Tex.Com.App., 24 S.W.2d 5. In Texas this depends on the good faith of the lessee. Texas Pacific Coal Oil Co. v. Bruce, Tex. Civ. App.233 S.W. 535; Little v. Stephenson, Tex. Civ. App. 1 S.W.2d 353, affirmed Tex.Com.App., 12 S.W.2d 196; Nystel v. Thomas, Tex. Civ. App.42 S.W.2d 168; 2 Summers Oil Gas, Perm.Ed., § 307.

Under the first clause of the lease lessee agreed to deliver to the lessors: "On all other minerals or substances produced (clearly including gas) an equal 1/8 part of that produced and saved from said leased premises to be delivered at the surface." Under the Hanks case this would require the lessee to install facilities to receive the gas at the surface and carry it to a market. Under the fourth clause of the lease the lessee was given the "right to use free of cost gas * * * produced on said land for its operations thereon"; that is, on the 9534 acres. Under the tenth clause either party is given the right to assign the lease in whole or in part. Such partial assignee undoubtedly had the right to use gas from any well brought in on the portion of land assigned to him for his operations on said land without cost under the fourth clause of the lease. He clearly was under no obligation to furnish gas free to another producer not operating on the portion of the lease assigned to him, but had the right to sell gas to such producers. There can be little doubt that lessors or their assigns were entitled to an equal 1/8 part of gas so sold under the first clause of the lease, as well as the annual payment specified in the 8th and 9th clauses. Undoubtedly the primary consideration moving to lessors for their agreement that the lease should remain in force after the expiration of the ten year primary term so long as gas (among other minerals or substances) should be produced on the leased lands in paying quantities, was the 1/8 part of such gas and not the payments stipulated in the 8th and 9th clauses in the lease; otherwise the lease could have been continued after the primary term at less cost to lessee than during the primary term, since during that term he was obligated to pay in addition to the $100.00 and $25.00 specified in the eighth and ninth clauses, annual rentals of $953.40 or 10¢ per acre. From the standpoint of the partial assignee — lessee (appellee) there is no question but that a small profit was shown on gas produced not only during the primary term and at its termination, but "thereafter" until January 1, 1937. The serious question is whether sales to other producers on the premises show a market where the probable income would be in excess of marketing cost. The fact that such a market might and probably would be unstable because dependent on whether such producers brought in gas wells of their own is immaterial. The rule of the Hanks case is satisfied if it is shown that during the relevant times there was a market where a small profit was made or could have been made.

I conclude that while appellee did not make such showing as to oil, it did as to gas; that our original disposition is correct and the motion for rehearing should be overruled.