Superior Oil Co. v. Devon Corp.

604 F.2d 1063 (8th Cir. 1979)

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Nature of the Case

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Facts

In 1949 Olsen (D) executed an oil and gas lease in favor of P. The lease was recorded in the office of the Register of Deeds. The primary term of the lease was ten years and 'as long thereafter as oil, gas, . . . or any of the products covered by this lease is or can be produced.' Oil was discovered and produced on the leasehold within the primary term. In 1958, P assigned part of its interest in the lease to Lark Oil Company, which in turn made an assignment to plaintiff Petroleum, Inc. (Petroleum). After 1961, there was no further drilling by P or its assignees on the tracts covered by the lease. In February 1976 the successors of the original lessors, Schuler-Olsens (D), executed oil and gas leases to Chris L. Christensen, Jr., on certain tracts that were subject to the prior P lease. An oil well was successfully completed in February 1977. On June 30, 1977, P and Petroleum filed this action naming as defendants the Schuler-Olsens (D) and the lessee and assignees under the 1976 top leases, hereinafter referred to as the working interest defendants. Ps alleged that Schuler-Olsens (D) breached their contract with Ps by executing the top leases and that the working interest defendants were trespassers and converters. It was also alleged that the 1977 well was draining oil from the remaining portions of the P lease. The Schuler-Olsens (Ds) affirmatively alleged that Ps had failed to perform the implied covenants of the lease and had abandoned the lease. They sought cancellation of the P lease. There was no dispute that there was production in paying quantities on a portion of the leasehold prior to the expiration of the primary term, but that an affidavit of production had not been filed prior to the expiration of the primary term of the lease. The court found that production in paying quantities had continued to 'the present time,' but there were no drilling or farmouts after 1961 on the portion of the P lease. The court found that the Schuler-Olsens (D) had no actual knowledge of the P lease and in February 1976 they granted a total of six oil and gas leases to Chris L. Christensen, Jr., one of the working interest defendants, on tracts of land, all within a single section, covered by the 1949 P lease. Christensen had conducted a title search, obtained an attorney's title opinion, and concluded that P's lease was not held by production. Christensen combined with other working interest defendants and brought in a producing well in February 1977. The court concluded that P had failed to meet the standards required of a prudent operator and that prior to February 1976 it had breached the implied covenant to further develop. The court ordered that portion of the Superior lease outside the Willson Ranch Unit be canceled unconditionally as of a time preceding the execution of the Christensen leases. P appealed.