Amoco Production Co. v. Underwood
558 S.W.2d 509, 58 Oil & Gas Rep. 578, 1977 Tex. App. LEXIS 3620 (1977)
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Rule of Law:
A lessee must exercise good faith toward the lessor and royalty owners when exercising a pooling clause to designate a gas unit, meaning the designation must be genuinely necessary or advisable for proper development and operation of the premises, not primarily to perpetuate leases for the lessee's pecuniary interest.
Facts:
- Victory Petroleum Corporation (Victory) entered into a Farmout Contract with Amoco Production Company (Amoco) to drill a test well on Section 3, BS&F Survey, Wheeler County, Texas.
- L. T. Underwood and Ora Lee Underwood, and the predecessors in title to Circle Dot Ranch, Inc. (Walser), executed four oil, gas, and mineral leases in favor of Amoco on May 29, 1970, each with a five-year primary term and a pooling clause.
- The Victory Petroleum Circle Dot well on Section 3 was commenced in December 1974, completed as a gas well on or about May 16, 1975, and its official potential test conducted on May 21, 1975.
- On May 20, 1975, A. B. Rothwell, Vice-President of Westland Oil Development Corporation and Victory, sent a letter to Amoco explicitly stating that the gas unit was "designed to hold the majority of your leases which will expire on May 29, 1975."
- Victory filed a gas unit declaration on May 27, 1975, forming the 688.02-acre Circle Dot Ranch Gas Unit No. 1, which perpetuated eight oil, gas, and mineral leases covering 2,252.03 acres beyond their May 29, 1975 primary term.
- The designated unit excluded 90.21 acres in Section 3, where the well was located, despite indications the acreage was probably productive, and included 45 acres in Section 81, which perpetuated 602.90 additional acres, even though Section 81 was structurally 'lower' and considered 'extremely stupid' to drill in by one of the appellants' witnesses.
- At the time of trial, the appellants had no plans to drill additional wells on any part of the 2,252 acres affected by the gas unit, and after May 29, 1975, appellees could have leased their non-Section 3 land for a cash bonus of $75 per acre if it had not been 'tied up' by the gas unit.
Procedural Posture:
- L. T. Underwood and Ora Lee Underwood, and Circle Dot Ranch, Inc., sued Amoco Production Company, Victory Petroleum Company, Westland Oil Development Corporation, L. C. Rung, Natural Gas Pipeline Company of America, and others in a trial court, seeking, among other relief, cancellation of the Circle Dot Ranch Gas Unit No. 1.
- Nonparticipating royalty owners Kenneth P. Clepper and Euline S. Walser filed answers admitting the plaintiffs' allegations and requested realignment as plaintiffs.
- A jury in the trial court answered two special issues: (1) finding it was the defendants' judgment that designating the unit was necessary or advisable to properly develop and operate the leases (Yes), and (2) finding that the designation was not made in good faith (No).
- The trial court entered judgment canceling the Unit Designation, removing the cloud upon plaintiffs’ title, canceling the gas purchase contract insofar as it covered plaintiffs’ property, declaring the leases on plaintiffs’ property terminated for failure of production, and entitling plaintiffs to royalties from the existing well on Section 3.
- Amoco Production Company, Victory Petroleum Company, Westland Oil Development Corporation, L. C. Rung, and Natural Gas Pipeline Company of America appealed this judgment.
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Issue:
Does a lessee's designation of a gas unit under a pooling clause, intended primarily to perpetuate expiring leases rather than to properly develop and operate the premises, constitute a lack of 'good faith' toward the lessors and royalty owners, thereby warranting cancellation of the unit?
Opinions:
Majority - McCLOUD, Chief Justice
Yes, a lessee's designation of a gas unit that is not made in good faith towards the lessor and royalty owners, such as one primarily designed to perpetuate expiring leases rather than to properly develop and operate the premises, warrants cancellation of the unit. The court affirmed the trial court's judgment, upholding the jury's finding that the gas unit designation was "not made in good faith." Citing precedents like Elliott v. Davis and Pritchett v. Forest Oil Corporation, the court reiterated that a lessee must exercise good faith toward lessors and royalty owners in pooling designations, and good faith is a question of fact for the jury. The court reviewed the evidence under the "no evidence" standard, considering only evidence supporting the jury's finding. Key evidence included Rothwell's letter explicitly stating the unit was "designed to hold the majority of your leases which will expire on May 29, 1975," the filing of the unit declaration just two days before lease expiration, the lack of plans for additional wells, and the arbitrary configuration of the unit (excluding potentially productive acreage in Section 3 while including structurally "lower" and "extremely stupid" to drill in Section 81, thereby perpetuating 602.90 acres from Section 81 without geological justification). The jury could properly conclude from this evidence that the unit's configuration was not based on good faith geological or engineering judgment but was primarily a tactical move to retain expiring leases for the lessee's pecuniary interest.
Analysis:
This case reinforces the 'good faith' standard for lessees exercising pooling clauses in oil and gas leases, clarifying that a designation made primarily to perpetuate leases rather than for proper development can be found to lack good faith. It emphasizes that the question of good faith is a factual determination, relying heavily on the intent and geological/engineering justification behind the unit's formation. Future cases will likely scrutinize the timing of pooling declarations, explicit statements of purpose, and the geological rationality of unit boundaries, especially when challenged by lessors seeking to cancel units or re-lease their lands. The ruling underscores the fiduciary-like duty lessees owe to lessors, preventing self-serving pooling that disadvantages mineral owners.
