Amoco Production Company v. Alexander

622 S.W.2d 563 (1981)

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Nature of the Case

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Facts

The field at issue is a water-drive field. Water and oil are in the same reservoir. Because water is heavier than oil, the water moves to the bottom of the reservoir driving the oil upward. As oil is removed, water moves up to fill the space. As the oil is produced, the oil-water contact gradually rises until the wells begin to produce water along with oil. As the wells are produced, the fluid from the wells contains increasingly higher percentages of water. When the wells produce almost all water, the wells are abandoned. The wells are then said to be 'watered out' or 'flooded out.' The Hastings, West Field, reservoir is not horizontal. It is highest (closer to the surface) in the southeast part. It is lowest in the northwest. Hence, the reservoir dips downward gradually from the southeast to the northwest. In this field leases on the higher part of the reservoir are called 'updip leases' and on the lower, 'downdip leases.' D leases from Ps on the downhip. D, with 80% of the field production, has both updip and downdip leases. Exxon, D's chief competitor in the field, owns leases generally updip from Ps’ property and downdhip from the remainder of the D leases. The greater the production from updip leases, the sooner the wells on downdhip leases will be 'watered out' because of the water-drive pushing the oil to the highest part of the reservoir. Production anywhere in the field will cause the oil-water contact to rise and move from the downdip leases to the updip leases. This is field-wide drainage. P sued D claiming that d slowed its production on the downdhip leases and increased production on the updip leases causing P's downdhip leases to 'water out' much sooner. P is claiming that D owed an obligation to obtain additional oil production from P's leases by drilling additional wells and reworking existing wells to increase production. If D had fulfilled that obligation, additional oil would have been produced from which P would have been paid 1/6th royalty. D's updip leases pay 1/8th royalty. P is claiming a breach of contract from D's implied obligation to take such steps as a reasonably prudent operator would have taken to protect P’s leases from drainage. P also claims a tort for deliberate waste of the Ps' royalty oil. The jury found for P and awarded actual and exemplary damages. The Court of Civil Appeals held D had a duty to protect P from field-wide drainage. D urges the Court of Civil Appeals correctly held the drainage, in this case, was field-wide but the court erred in holding the law imposes an obligation upon D to prevent field-wide drainage, or an obligation not to drain P’s leases by its updip operations. D recognizes the obligation to protect from local drainage but states the Court of Civil Appeals was in error in extending that obligation to require a lessee to protect his lessor from field-wide drainage. Amoco argues this imposes a new implied obligation never previously held to exist.