Cook v. El Paso Natural Gas Company

560 F.2d 978 (10th Cir. 1977)

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Nature of the Case

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Facts

P the owner of a United States Oil and Gas Lease assigned this lease to Phillips Petroleum Company on June 26, 1964, reserving a five percent overriding royalty. In the lease, there was a so-called potash stipulation that provided that no wells would be drilled for oil or gas at a location which, in the opinion of the Oil and Gas Supervisor of the Geological Survey, would result in undue waste of potash deposits or would constitute a hazard to or an undue interference with mining operations being conducted for the extraction of potash deposits. On November 1, 1971, Phillips assigned D an interest in the lease. D also happened to own a lease on the adjoining property. D completed a well on that property. On May 8, 1974, the United States Geological Survey determined that oil and gas drilling operations on P's property would result in undue waste of potash and would constitute a hazard to future potash mining. It entered an order prohibiting the drilling of wells on P’s property. P brought suit against D seeking a compensatory royalty anchored in that Ds breached their implied covenant to protect against drainage. The court found that Ds' well was draining gas in substantial quantities from the underground area beneath P's land. The court concluded that since the law implies a duty on an oil and gas lessee to protect the leased premises from offsetting adjoining land drainage of oil and gas, and since this is a covenant that runs with the land and the owner of an overriding royalty interest has standing to invoke the implied covenant to protect against drainage, and where a common lessee exists for two abutting oil and gas leases, the common lessee is obligated to protect its lessor from oil and gas drainage from a well located in the other lease. This would not be controlled or limited by the test as to whether a reasonable prudent operator would in the circumstances drill an offset well. The court held that the common lessee is under a duty to prevent drainage regardless of whether or not the drilling of an offset well on nonproducing land would satisfy the standards of the prudent operator rule. It ruled that Ds as common lessees under separate leases were under a duty to P to protect her interest in the oil and gas against drainage from D's well located on the adjacent property. The court ruled that payment of compensatory overriding royalty as an alternative to the drilling of an offset well where the interest owner is suffering losses as a result of drainage is appropriate. Thus P was entitled to a compensatory royalty. Ds appealed. Ds claim that the government prohibition relieved them of any implied covenant to protect against drainage and that a royalty-interest owner does not have standing to enforce a lease.