164 S.W.2d 509 | Tex. | 1942
This suit involves the construction of an oil and gas mining lease. The lease was to run for a period of ten years "and so long thereafter as oil, gas, or other minerals is produced from said land." The material question to be determined is whether sufficient oil was produced from the land after the expiration of the primary period to keep the lease in force.
The lease in question covered 7,500 acres of land. From 1925 to 1929 the land was under a lease that required the payment of an annual rental of $13,284.00, regardless of the amount of oil produced. Lessees were unable to pay this annual rental. Litigation ensued and a settlement was reached by the terms of which lessees paid lessors $3,500.00 in cash and agreed to pay them $2,500.00 out of the 1/8 of production, and the 10-year paid-up lease with a 1/8 royalty now in question was executed. It provided in part as follows: *580
"Subject to the other provisions herein contained this lease shall be for a term of 10 years from this day (called primary term) and as long thereafter as oil, gas, and other minerals is produced from said land hereunder."
At the time the lease was executed there were 112 producing wells on the land. The wells yielded large quantities of oil, from which the lessors were paid royalties running into thousands of dollars annually. All production was from a shallow reservoir, less than 200 feet deep. In the spring of 1936 forty-seven wells were still producing. At that time production ceased temporarily because a gas well that was furnishing fuel for pumping played out. Thereupon the lessees abandoned the shallow wells and decided to explore for oil in deeper sands. The money for this exploration was raised by sale of the casings and other equipment in the shallow wells. The deep tests were unsuccessful, and the lessees began drilling shallow wells again. At the expiration of the primary term on February 6, 1939, six shallow wells were being operated. Before that time, on November 15, 1938, the lessees had entered into a contract with one Juarez whereby Juarez was to operate the lease and receive as his compensation the entire seven-eighths working interest belonging to the lessees. This contract continued until July 16, 1939. During this period a total of 195 barrels of oil was produced, averaging about 24 barrels per month. After deducting the lessors' royalty of $19.11, a total of $135.70 was received by Juarez for his seven-eighths of the oil, or $16.96 per month, which was barely adequate to pay for his labor in operating the wells. Out of this compensation, Juarez had to pay about a dollar each month for fuel. During this period of eight months the lessees received nothing at all from the lease, and yet they were paying the annual taxes thereon. In addition they had to make numerous trips at their own expense to the leased premises. The lessors received only about eight cents per day as royalty from the lease. From these undisputed facts it is clear that production was not in paying quantities when the primary term expired. However, there is evidence tending to show that production was increased after the termination of the Juarez contract, and that before the time of the trial production was obtained in paying quantities.
The lessors filed this suit against the lessees to cancel the lease and remove it as a cloud from their title to the land. Trial was to a jury, but upon the jury's failure to agree upon several of the special issues, the trial judge discharged the *581
jury and rendered judgment for plaintiffs on the ground that heir motion for peremptory instruction should have been granted. The court found that the undisputed evidence showed that the lease expired by its own terms at the end of the primary term because neither oil nor gas was then being "produced," within the meaning of the lease. Upon appeal the Court of Civil Appeals reversed the judgment of the trial court and rendered judgment for the defendants, holding that the term "produced" did not mean "produced in paying quantities."
It will be noted that the lease provides, in effect, that it shall run for a period of ten years, and as long thereafter as oil is "produced" from the land. It does not provide, as is ordinarily the case, that the production must be "in paying quantities" in order to continue the lease in force after the expiration of the primary term. At the end of the primary period the lease was producing only about 24 barrels of oil per month. This quantity was susceptible of division, but was insufficient to yield a profit over and above operating and marketing expenses. It becomes necessary for us to determine what is meant by the term "produced," as used in the lease. It is the plaintiffs' contention that the term "produced" means the same thing as "produced in paying quantities," while the defendants contend that the terms of the contract are met if enough oil is produced to be susceptible of division. So far as we have been able to determine, the question has not heretofore been passed on in this State.
The question was before the Supreme Court of Illinois in the case of Gillespie v. Ohio Oil Co.,
"The lease was for a five-year term, and so long thereafter as oil or gas was produced. Oil was produced continuously after the drilling of the well. It is true that the quantity produced was so small as to make the venture unprofitable, but the strict letter of the lease was complied with, and it had not expired by its own terms."
No authorities were cited in support of this ruling. It will be noted that the above case was decided in 1913, before the oil industry had been fully developed. *582
In the case of Enfield v. Woods,
"It will be observed that the lessee is not required to produce oil in paying quantities, but he is required to produce oil or gas one or the other, from the premises. This, of course, means a production of oil or gas in such quantities as to be susceptible of division, so as to pay the landowner a royalty, even though small. A mere showing of oil manifestly is not sufficient, even though produced. The production must be tangible and substantial, but it need not be great."
An examination of the case, however, discloses that the well there under consideration produced only a mere scum of oil, and the court held that this was insufficient to keep the contract in force. In view of the facts there involved the statement concerning production in paying quantities was not necessary to the decision of the case.
The above authorities are the only ones that we have found in which the question has been decided favorably to the defendants. After careful consideration we are of the opinion that the weight of authority supports plaintiffs' contentions.
In Gypsy Oil Co. v. Marsh,
"Some authority may be found holding that, if a lease is to continue so long as oil or gas is produced, it is immaterial whether the lease is a paying one or not, for so long as the well drilled produced either oil or gas the lease continues. Thornton, Oil Gas, Sec. 150, citing Gillespie v. Ohio Oil Co.,
"In Parks v. Sinai Oil Co.,
In defining the term "paying quantities" the court said:
"It has been generally held that `paying quantities,' when used in this connection, means paying quantities to the lessee. If a well pays a profit, even small, over operating expenses, it produces in paying quantities, though it may never repay its costs, and the enterprise as a whole may prove unprofitable. Ordinarily, the phrase is to be construed with reference to the operator, and by his judgment when exercised in good faith."
The court concluded that the lessee's claim that oil was produced in paying quantities was not made in good faith, and affirmed the judgment of the trial court cancelling the lease. This decision was followed by the Oklahoma court in Woodruff v. Brady,
In Berthelote v. Loy Oil Co.,
"Some courts have held that under a similar `thereafter' clause, any production which is capable of being divided is a sufficient compliance to continue the life of the lease, as in Gillespie v. Ohio Oil Co.,
"Frequently oil and gas leases in the `thereafter' clause provide that the lease is to continue after the fixed term so long as oil or gas is produced in `paying quantities.' Most courts hold the legal effect of that clause and of the one `so long as oil and gas is produced' to be the same; and to extend the lease under a clause such as is before us, the production must be in paying quantities. Summers on Oil and Gas, Sec. 98, pp. 315, 316; South Penn Oil Co. v. Snodgrass,
In Benedum-Trees Oil Co. v. Davis,
"The leases here in question were for five and one years respectively and `as long thereafter as oil or gas or either of them is produced from the land by the lessee.' There is absent from them the exact language that gas or oil must be produced in `paying quantities.' However, in arriving at the intent of the parties, this is implied because they contracted with the end in view that the business would be profitable to both lessor and *585 lessee. The latter may have realized a gain by retaining the leases for speculation. The former could receive no benefits from them except by marketing gas from the premises. * * *
"The term `paying quantities' involves not only the amount of production, but also the ability to market the product at a profit."
In Caldwell v. Alton Oil Co.,
"It was never contemplated that the lease under consideration should be continued for all time to come upon the mere production of oil in quantities not sufficient to compensate the lessee and totally inadequate as a consideration to the lessor for continuing the lease."
It should be noted that we are dealing with a situation in which, under normal conditions, all of the producing wells on the lease in question at the time of the termination of the primary period were not producing enough oil or gas to pay a profit over and above the cost of operating the wells. In order to understand and properly interpret the language used by the parties we must consider the objects and purposes intended to be accomplished by them in entering into the contract. The object of the contract was to secure development of the property for the mutual benefit of the parties. It was contemplated that this would be done during the primary period of the contract. So far as the lessees were concerned, the object in providing for a continuation of the lease for an indefinite time after the expiration of the primary period, was to allow the lessees to reap the full fruits of the investments made by them in developing the property. Obviously, if the lease could no longer be operated at a profit, there were no fruits for them to reap. The lessors should not be required to suffer a continuation of the lease after the expiration of the primary period merely for speculation purposes on the part of the lessees. Since the lease was no longer yielding a profit to the lessees at *586 the termination of the primary period, the object sought to be accomplished by the continuation thereof had ceased, and the lease had terminated.
The judgment of the Court of Civil Appeals is reversed, and the judgment of the trial court is affirmed.
Opinion delivered July 15, 1942.
Rehearing overruled October 7, 1942.