Sun Oil Company v. Whitaker

ON REHEARING

McGEE, Justice.

Our judgment of October 27, 1971 is set aside and our prior opinion is withdrawn and the following is substituted therefor.

This case was before us at an earlier time in an appeal from a judgment denying a temporary injunction. 424 S.W.2d 216. We affirmed the courts below. Our decision in the temporary injunction appeal turned on the fact that issue had been joined by the parties on a contention by the Whitakers and an intervenor, High Plains Underwater Conservation District No. 1, that Sun’s proposed use of water for waterflood purposes constituted statutory waste, but by agreement this defense, and no evidence thereunder, was submitted to the trial court for a ruling. In that appeal we held (page 219): “The agreement that issue would not be joined and arguments would not be made concerning the issue of statutory waste raised by Whitaker’s answer and the water district’s plea in intervention completely destroyed Sun’s ability to show its probable right on final trial to a permanent injunction.” We did not reach the merits of the case; our prior judgment in no way established the law in this case, nor in fact did it purport to do so.

After our prior decision, the issue of waste was later eliminated by withdrawal of all pleadings raising it, the Water District withdrew from the case, and this issue is not now before us. A part of the factual statement set out below has been lifted from our former opinion.

Earnest Whitaker is the owner of the surface estate and Sun Oil Company is the owner of a mineral leasehold estate in a 267-acre tract of land in Hockley County. Sun acquired its lease on the property on April 5, 1946, from L. D. Gann and his wife, then the owners of the fee title subject to an outstanding non-participating one-sixteenth free royalty in the west one-half of the tract. The surface estate was conveyed by Gann and his wife to Whitaker on January 2, 1948. The conveyance to Whitaker was subject to Sun’s lease, and the deed expressly excepted and reserved all minerals that might be produced from the land to the Ganns, their heirs and assigns.

Sun’s lease has been kept alive beyond the primary term of five years by production from eight oil wells which are producing from the San Andres formation. When production from its oil wells decreased because of diminishing pressure in the San Andres formation, Sun obtained permission from the Railroad Commission to inject fresh water into the San Andres in furtherance of a pressure maintenance program. Whitaker and his son-in-law, Doyle Henderson, are using water from the Ogallala formation for cultivating the land as an irrigated farm.

Following our decision in the appeal from the temporary injunction judgment, the parties proceeded to trial of the case on its merits. Sun sought a permanent injunction enjoining the defendants from interfering with its production of not more than 100,000 gallons of fresh water per day, through an existing supply well, from the Ogallala formation underlying Whitaker’s tract of land for use in producing the oil. By cross-action Whitaker sought to enjoin Sun from producing and using the fresh water to produce the oil. Whitaker also sought to recover actual damages for the water theretofore used and for crops destroyed, and, as well, exemplary damages. The case was tried to a jury and based upon the jury’s verdict, judgment was rendered that Sun take nothing by its suit, that Whitaker recover the sum of $12,598.03 for actual and exemplary damages, and that Sun be permanently enjoined from producing and using the fresh water for its waterflood program. The court of civil appeals affirmed. 457 S.W.2d 96. Judgments of the courts below are reversed and judgment is rendered that the permanent injunction prayed for by Sun is granted, and all relief sought by Whitaker is denied except Whitaker is to recover the sum of $431 which has been tendered into court by Sun.

Sun’s lease grants and leases the 267-acre tract to Sun “for the purposes of investigating, exploring, prospecting, drilling and mining for and producing oil, gas and all other minerals. . . .” The lease also provides: “Lessee shall have free use of oil, gas, coal, wood and water from said land except water from Lessor’s wells for all operations hereunder. . . . ”¹

The evidence shows that the water produced from Sun’s well is being produced from the only available source of water on the land and that such water in being used exclusively for the benefit of the leased premises, the so-called Gann-Whitaker tract. Efforts to use available salt water, other than that produced with the oil, have failed. The waterflood operation will result in the production of additional oil, valued at $3,200,000. The evidence further shows that the Sun water supply well is equipped so that it cannot produce in excess of 100,000 gallons of water per day. Sun’s water supply well is located 3,138 feet from Whitaker’s water supply well on this lease.

The defendants stipulated at this trial that (1) “the waterflood process is a reasonable and proper operation for the production of oil from the San Andres Reservoir under the L. D. Gann tract”; (2) the use of “Ogallala water as the extraneous or make-up water for injection into the San Andres Reservoir under the L. D. Gann tract in conducting secondary recovery of oil by a waterflood process” is a reasonable and proper operation; and (3) “the location of the injection wells and the rates of water injection” as conducted by Sun “constitute reasonable and proper operations for the production of oil.” There is, therefore, no fact issue in the case concerning the stipulated matters.

Sun relies on two legal theories upon which it bases its claim to use the Ogallala water, from its own water wells, under the Gann lease to waterflood wells on this lease. (1) As owner of the dominant estate by virtue óf its oil and gas lease it has the implied right as a mineral lessee to use such part of the surface and so much thereof as may be necessary to effectuate the purposes of the lease, and (2) it possesses an expressed contractual right to “free use of . . water from said land except water from Lessor’s wells for all operations hereunder. . . . ”

In affirming the trial court’s judgment, the Court of Civil Appeals dealt with the case as though it involved only the second of Sun’s theories; the Court held that the meaning of the quoted language authorizing free use of water from the Whitaker land was doubtful and ambiguous when applied to the subject matter of the contract, and that evidence introduced on the trial supported jury findings that the parties to the lease did not contemplate or intend that large quantities of water would be used for waterflood purposes. We need not decide whether the opinion of the Court of Civil Appeals is sound inasmuch as we are satisfied that Sun has the implied right to free use of so much of the water in question as may be reasonably necessary to produce the oil from its oil wells.

The oil and gas lessee’s estate is the dominant estate and the lessee has an implied grant, absent an express provision for payment, of free use of such part and so much of the premises as is reasonably necessary to effectuate the purposes of the lease, having due regard for the rights of the owner of the surface estate. Humble Oil & Refining Co. v. Williams, 420 S.W.2d 133 (Tex.1967); Warren Petroleum Corp. v. Martin, 153 Tex. 465, 271 S.W.2d 410 (1954); Warren Petroleum Corp. v. Monzingo, 157 Tex. 479, 304 S.W.2d 362 (1957); Brown v. Lundell, 162 Tex. 84, 344 S.W.2d 863 (1961). The rights implied from the grant are implied by law in all conveyances of the mineral estate and, absent an express limitation thereon, are not to be altered by evidence that the parties to a particular instrument of conveyance did not intend the legal consequences of the grant.

The implied grant of reasonable use extends to and includes the right to use water from the leased premises in such amount as may be reasonably necessary to carry out the lessee’s operations under the lease.

“The grant of the oil carried with it a grant of the way, surface, soil, water, gas and the like essential to the enjoyment of the actual grant of the oil. Guffey v. Stroud, 16 S.W.2d 527, 528 (Comm. of App. 1929).

“. . .we believe that the reservation in the deeds by implication retained to the Southwest the right to use the amount of water from the land reasonably necessary to enable it to develop the mineral rights; this it sold and transferred to Magnolia. . . . Magnolia had the right to use the amount of water reasonably necessary for the development and enjoyment of the oil discovered on its lease. Stradley v. Magnolia Petroleum Company, 155 S.W.2d 649, 652 (Tex.Civ.App.1941), writ ref.”

In Brown v. Lundell, supra, this Court, though holding the lessee liable for negligence reaffirmed the above quoted rule from Guffey v. Stroud.

Water, unsevered expressly by conveyance or reservation, has been held to be a part of the surface estate. Fleming Foundation v. Texaco, Inc., 337 S.W.2d 846 (Tex.Civ.App.1960, writ ref’d, n. r. e.). However, that decision expressly recognized the right of the oil and gas lessee to drill water wells on said land and to use water from such wells to the extent reasonably necessary for the development and production of such minerals. The added language in the instant case that Sun was to have “free use of . water from said land except water from Lessor’s wells for all operations” under the lease added no limitation on the implied grant except that such water should not be taken from lessor’s wells.

Courts have held waterflood projects to be reasonably necessary operations under oil and gas leases. Carroll v. Roger Lacy, Inc., 402 S.W.2d 307 (Tex.Civ.App.1966, writ ref’d, n. r. e.); Gulf Oil Co. v. Walton, 317 S.W.2d 260 (Tex.Civ.App.1958, no writ hist.); Tidewater Oil Co. v. Penix, 223 F.Supp. 215 (U.S.D. C.Okl.1963) ; Utilities Production Corp. v. Carter Oil Co., 2 F.Supp. 81 (U.S.D.C.Okl.1933). As stated in Holt v. Southwest Antioch Sand Unit, 292 P.2d 998 (Okl.1956) at page 1000:

“It would be difficult to conceive of a use of the water more essentially a part of the operation of mining and removing the petroleum minerals from under said land.”

In Carter Oil Co. v. Dees, 340 Ill.App. 449, 92 N.E.2d 519 (1950), though the lease was silent as to a gas repressuring method of secondary recovery, the Court held that the lessee in using reasonable diligence under the lease could adopt such method. Sun has an implied right to waterflood because the waterflood operation is reasonably necessary to carry out the purposes of the lease. The reasonableness of Sun’s water-flood operation stands uncontradicted in this record. Its use of Ogallala water for injection was approved by the Railroad Commission. The stipulations are conclusive under this record that the use of Ogallala water was reasonably necessary to effectuate the purposes of the lease.

The jury’s answers to Special Issues Nos. 3, 4 and 7 were that: “. . . the use of fresh water by Sun Oil Company for secondary recovery purposes from the well which it has drilled on said tract will materially affect the supply which the surface owner could produce by wells”; “. . . it is not reasonably necessary for Sun Oil Company to use water from the Ogallala formation underlying the Whitaker farm to waterflood the L. D. Gann lease”; and “. . . the proposed use of fresh water by Sun Oil Company for waterflood purposes will substantially devalue the farm owned by the Defendant Whitaker.” Whitaker argues that these jury findings support the judgment of the trial court in that they support a conclusion that it is not reasonably necessary for Sun to use the fresh water underlying his tract to waterflood the lease.

We have concluded that there is no evidence to support the jury’s finding that it is not “reasonably necessary” for Sun to use the water underlying the Whitaker farm for its waterflood project. As pointed out above, efforts to use available salt water for the waterflood project have failed, and there is no other source of usable water on the leased Whitaker tract which is available to Sun. To hold that Sun can be required to purchase water from other sources or owners of other tracts in the area, would be in derogation of the dominant estate.

Our holding in Getty Oil Co. v. Jones, 470 S.W.2d 618 (Tex.1971), is not applicable under the facts of this case. It is limited to situations in which there are reasonable alternative methods that may be employed by the lessee on the leased premises to accomplish the purposes of this lease.

Judgments of the courts below are reversed and judgment is hereby rendered granting Sun’s application for permanent injunction enjoining Whitaker from interfering with its production of not more than 100,000 gallons of fresh water per day, through its supply well, from the Ogallala formation underlying the Whitaker-Gann lease tract for use in producing oil and denying all relief sought by Whitaker except that Whitaker recover the sum of $431 which had been tendered into the registry of the court.

Dissenting opinion by DANIEL, J., in which GREENHILL, STEAKLEY and DENTON, JJ., join.

1 . Emphasis ours throughout unless otherwise indicated.