Clifton v. Koontz

325 S.W.2d 684 (1959)

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Nature of the Case

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Facts

The lease was executed in 1940. In 1949, during the primary term, a well was drilled which produced both oil and gas but very little oil. No other drilling or reworking operations were carried on during the intervening years until September 12, 1956, when it was successfully reworked by 'sandfracting.' P sued seeking cancellation on the theory that after the expiration of its ten-year primary term, the lease was terminated due to cessation of production. Ps based their contention that the well had ceased to produce in paying quantities upon the showing that for the period of time from June 1955 through September 1956, the income from the lease was $3,250.00 and that the total expense of operations during the same period was $3,466.16 -- thus, a loss of $216.16 for the sixteen months' period selected by Ps. During the period of time indicated, some months showed a gain and some a loss. For the months of July, August, and September 1956, the total net loss amounted to $372.37. These were the months immediately following June 1956, the date D, acquired his 52 percent interest in the lease. Beginning July 1, 1956, he began making financial arrangements, securing the services of third parties, and commenced saving all oil produced from the lease to be used in reworking the well. The holding from the market of this oil accounts materially for the losses in the operations during the months of July, August, and September 1956. The record shows that for years, in view of the low allowable on gas, the oil production had made the difference between operating at a profit and at a loss. D testified that from two to three months were required to accumulate a tank of oil and that after such accumulation a sale would be made. It is undisputed that reworking operations were commenced on September 12, 1956, and that such operations resulted in an 1800 percent increase in production. There was a small operating loss for the period of time from July 1956 through September 1956. In the alternative, P sought cancellation of the lease on the theory that D breached an implied covenant to reasonably develop the property and to 'reasonably explore the same for the production of minerals therefrom * * *.' It was P's contention that the owners of the working interest, in the event that the alternative plea should be sustained, would forfeit all rights under the lease (except as to 40 acres around the producing well) upon failure within a reasonable time, to commence and continue the drilling of wells to a depth sufficient to test all known horizons in the general area. P also sought damages because of breaches of express and implied covenants of the lease. The trial court found that the existing gas well had at all material times continuously produced gas in paying quantities. The court then gave D 60 days to start drilling. P and D appealed. The Court of Civil Appeals affirmed the judgment denying termination of the oil and gas lease and P's claim for damages but held that Ds were not required to drill a second well. This appeal resulted.