McKnight v. Manuf. N. Gas Co.

146 Pa. 185 | Pennsylvania Court of Common Pleas, Washington County | 1892

Opinion,

Mr. Justice Williams :

A lease of the surface for agricultural purposes implies, if it does not express an agreement on the part of the lessee to cultivate the demised premises in accordance with the ordinary methods of husbandry. Without such cultivation, the premises will not be productive, and the landlord will suffer a substantial loss. A lease of a mine or a quarry, at a rental to be fixed by reference to the quantity of material removed therefrom, implies an agreement on the part of the lessee to work the mine or quarry. The reason is that, while the lessor does not lose his material out of the mine or quarry, he loses his income therefrom: Watson v. O’Hern, 6 W. 362; Koch’s App., 93 Pa. 434. A lease of land for oil purposes imposes a somewhat different obligation upon the lessee. The oil is of such a nature that, if not removed through wells upon the surface of the leasehold, it may be wholly lost to the owner of the land by reason of operations on lands adjoining. The duty to develop the land, that is, to test thoroughly the existence of oil in the rocks that should bear it, and if oil be found, to sink so many wells as may be reasonably necessary in view of surrounding operations to secure so much of the oil underlying the land as may be obtained with profit, grows out of the nature of oil, and the methods by which the oil is reached and brought to the surface. An oil lease must be construed, therefore, with a due regard to the known characteristics of the business: Brown v. Vandergrift, 80 Pa. 142.

Oil and gas leases are ordinarily combined in the same instrument, and are classed together. For many purposes, such classification is natural and appropriate; but this case brings us to consider an important difference between oil and gas, which makes it necessary to distinguish for some purposes between an oil and a gas lease.

Oil, when brought to the surface, is gathered into a receiving tank or tanks at or near the well. When necessary or desirable, it is removed by gravity, or by pumping, into the pipe lines that serve the district in which the well is located, and conveyed to storage tanks, where it remains until delivered to a purchaser. It is a matter of no consequence what the pressure may be at the well, for there can be none in the tanks, except that of gravity. The well that throws off violently its five thousand barrels per day, and that which reluctantly gives up four or five barrels under the persuasive power of the pump, will have their product gathered into the same lines of transportation, or resting in the same storage tanks. Gras cannot be gathered, stored, or transported in this manner. If found in sufficient quantity, it is turned from the well into the line, and the pressure at the mouth of the well is the motive power by which it is driven through the line to the consumer miles away. If the pressure at a given well is much below that in the line with which it is connected, the gas from that well cannot enter the line, but will be driven back by the superior force it encounters at the point of connection. For this reason, a well producing gas in sufficient quantity to be profitably utilized if there was a market for it near at hand, may be entirely valueless if its product must find a market at a distance too great to justify its transportation by a line of its own. In an oil district, each well, no matter how large or how small its product may be, is separately operated, and a well may be profitably operated so long as its yield pays more than the cost of producing the oil. In a gas district this is impracticable. The product of many wells is gathered into one line, so long as the pressure is sufficient. When the pressure in any one falls below the standard necessary for purposes of transportation, that well must be turned off. Its product cannot be transported separately, and, unless it can be used near by, it is valueless. These well-known facts peculiar to the production of gas must be taken into account in the construction of leases for gas purposes.

The lease now before us shows that the parties to it were familiar with these facts, and that they dealt with the subject intelligently. The lease covered the lessor’s farm of two hundred and fifty acres, was to continue twenty years, and was for the “ sole and only purpose of mining and excavating for petroleum, carbon oil, and gas.” Operations were to commence on the land within eighteen months after the execution of the lease, and the lessor reserved to himself the exclusive right to locate all wells that should be put down upon it. If oil was not found in paying quantities, but a sufficient flow of gas was obtained by the lessee to justify an effort to utilize it beyond the premises on which it was found, the lessee was to pay a money royalty equal to “ one eighth of the net proceeds ” of the gas so obtained and utilized off the premise^. The royalty was changed by supplemental agreements, but the question now raised rests on the provisions of the original lease. If oil had been found in paying quantities in the first well, it is probable that the lessee, although not bound by an express covenant to do so, would have been under obligations to put down an additional well or wells, so as properly to test and develop the produetion of the farm of the lessor, upon a consideration of the character of the territory and the work being done on adjoining lands. But oil was not obtained, and so much of the contract as relates to it is now without significance. The parties had anticipated this contingency, and provided for it. Their contract made it the duty of the lessee to pay a royalty for gas, if the flow was sufficiently strong to enable him to utilize it off the premises; that is, if it was sufficient^ strong to justify its transportation by means of a pipe line to some market, off the premises, for sale. In that case, the royalty was to be one eighth of the net proceeds of the gas so utilized. The flow of gas was sufficiently strong. The lessees arranged to utilize it by means of a branch line, built to reach this well. Meantime it was sold to another company that continued to use it until at or about the time the line was finished, and the well turned into it. This was in December, 1886. It remained in the line until the spring of 1889. The packer got out of order, and an effort was made to draw the casing and clean out the well. An accident prevented this being done, and the well was abandoned.

This action was brought in 1890, upon the theory that the lessee was under an implied covenant to put down other wells upon the premises, to protect its lines against operations upon adjoining farms by other parties. This theory appears in the plaintiff’s second point, which is as follows: “ That, having commenced operations on this lease, the lessee and the defendant under it were bound to prosecute the business of developing, drilling for gas or oil, and securing the same, without interruption, for the common benefit of the parties.” The court made answer as follows : ‘‘ Affirmed; unless the evidence shows that there was a reasonable excuse for such interruption.” Again, in the plaintiff’s fifth point, the court was asked to say that, if the jury find gas to be a mineral of such nature that if not utilized at a proper time it may be lost forever, then it was the duty of the defendant to operate the plaintiff’s land so as to secure the gas before it was lost, and its failure to do so was a breach of an implied covenant which renders it liable to damages. This point was affirmed, with the following qualification: “ Provided, the prompt development and operation of the plaintiff’s land was not reasonably excused by facts and circumstances that may appear from the evidence.” The jury was thus left to apply the same rule, in the same manner, to a gas lease, that might be applied to a lease for the production of oil.

As we have already seen, every barrel of. oil brought to the surface may be utilized in the same way. Whether the well that produces it is a strong one, yielding many barrels per day, or a weak one, yielding but few, is a matter that in no way affects the ability of the producer to market his oil, or the price to be obtained for it. In gas territory, the lessee majr sink many wells, and find gas in them all, but he can utilize only such of them as have a volume and pressure sufficient to enable him to transport the gas through his line, and deliver it to the purchaser. If no one of them has the requisite pressure, then no one of them can be utilized; the gas must be wasted, the cost of the wells will be lost, and the lessor entitled to no royalty. What is the proper way to develop and operate a gas lease is, therefore, a question beset with some difficulty. Its settlement requires some general knowledge of the business, and some knowledge of the local field. The lessee may have a good well, from which he can utilize the gas' with profit. He may put down another on the same farm, and thereby so reduce the pressure in the first as wholly to destroy its value, without getting a sufficient pressure at the second to’enable him to utilize that. The gas, if coming from one well, would be of great value. Divided in such manner that the volume and pressure at each is below the necessary standard, the whole is lost. Thus-the application of the rule laid down by the court below, as the jury must have understood it, might result in this, that the effort of the lessee to discharge the implied obligation of his contract for the common benefit, should end in the total destruction of the leasehold and a common misfortune. The mistake of the court below was in failing to take account of, and to read into the contract between the parties, the peculiar nature and characteristics of the business of producing and transporting gas, which the parties themselves well understood, and which their contract shows were before their minds when it was entered into.

But the designation of the point at which all wells should be located was the right of the lessor. We do not see, in the testimony as printed, that he ever fixed upon a location for another well, or called upon the defendant to locate one for him. He says more wells should have been put down; but the lessee bad no right to put them down, except at the points which he should indicate as the location he had fixed upon. Whether the defendant is justified in abandoning the premises altogether because of the accident to the well in 1889, is a different question, and one not fairly raised upon this record. The defendant cannot hold the premises and refuse to orperate them. This question may assume more importance upon another trial.

The judgment is reversed, and a venire facias de novo awarded.-