Opinion
No. 8432.
Submitted May 15, 1944.
Decided October 3, 1944.
Oil and Gas Leases — Cancellation — Operation under Unit or Pooling Agreement — Waiver of Defective Drilling of Well — Modification of Lease — Effect of Agreement as to Leased Land Included therein. Oil and Gas Leases — Cancellation — Operation under Unit or Pooling Agreement — Waiver of Defective Drilling of Well — Modification of Lease. 1. The owner of the east half of a section of land leased it for five years for gas exploration purposes and as long thereafter as gas was produced, the lessor to have gas for lighting and heating her ranch buildings. As required by the lease, the lessee drilled a well on the northeast quarter of the section which produced gas in commercial quantity but which because of alleged faulty drilling and consequent presence of water therein failed of its purpose. About three years and a half thereafter the parties at the instance of an operator entered into a unit or co-operative agreement whereby the southeast quarter, together with some 14,000 acres belonging to others was to be worked as one property, the total production of gas of the various tracts to be allocated to all of them, including the southeast quarter covered by the lease, for the use and benefit of all concerned, it being understood, however, that the agreement should not interfere with the interests of the parties to the lease. The northeast quarter of the section on which the alleged faulty well had been drilled was thereafter released from the operation of the lease by agreement between lessor and lessee. In an action to cancel the lease, commenced six years and a half after its execution, held that in joining in the unit agreement and later assenting to the segregation of the northeast quarter of the section from the operation of the lease, the lessor waived the lessee's defaults, if any, which occurred in drilling the well on that quarter and in effect brought about a modification of the lease which deprived plaintiff lessor of the right to have it cancelled. (See next paragraph.) Same — Effect of Unit Agreement as to Lease Land Included therein. 2. The practical effect of the unit or pooling agreement above referred to, as to the lands in the southeast quarter of the section covered by the lease and included in the agreement, was to eliminate the obligation of the lessee to drill wells on such quarter, wells drilled anywhere on the pooled lands being substituted therefor, and to protect the lease as to such quarter section, even though as to the northeast quarter the lease might have been subject to termination.
See 60 A.L.R. 955; 24 Am. Jur. 584.
Appeal from District Court of Fallon County; Rudolph Nelstead, Judge.
Mr. W.B. Leavitt and Mr. Fred Huntington, for Appellant, submitted an original and a reply brief; Mr. Leavitt argued the cause orally.
Mr. Al Hansen, for Respondent, submitted a brief and argued the cause orally.
Defendant Wight appeals from a decree cancelling a gas lease given to her predecessor in interest, Norbeck Company, covering the east half of section 18, township 8 north, range 63 east, M.M., in Fallon County, Montana.
The lease was for five years from its date of execution, June [1] 3, 1931, "and as long thereafter as gas is produced from said land by the lessee." It provided that a well should be drilled to completion before October 1, 1931, lessee then "to have the privilege of deferring the drilling of any other well * * * until market for the gas shall be obtained or a sale of the gas found," such period of deferment not to extend beyond June 3, 1936. The parties were to share the cost of additional wells in proportion to their interests under the gas lease, which were 25% in lessor and 75% in lessee. The lessor was also to have gas for heating and lighting her two sets of ranch buildings.
It is agreed that the first well was duly drilled on the northeast quarter and gas found in commercial quantities; but water came in and caused some trouble and expense to lessor, in order to obtain gas for use on her ranch, by the necessity of "blowing" the well so as to prevent water from getting into the pipes, especially in the winter when it would freeze. There was some discussion and correspondence between the parties about cementing off the water and about selling gas to a neighbor; but nothing came of the proposed sale, as the amount of gas to be purchased would not justify the cost of the necessary pipeline. It is agreed that there was no commercial market for gas until January 8, 1935, about three and a half years after the execution of the lease, when at Norbeck Company's initiative it and the lessor entered into a cooperative or unit agreement for development of the southeast quarter along with some 14,700 other acres of land, and an accompanying gas sale agreement with the Gas Development Company, in accordance with federal and state laws. (Act of Feb. 25, 1920, 41 Stat. 437, as amended by Act March 4, 1931, 46 Stat. 1523, 30 U.S.C. § 22, 48, 181 to 194, 201 to 208, 211 to 214, 223 to 229, 241, 251, and 261 to 263; Chapter 171, 1933, Session Laws of Montana.)
In accordance with those laws, whose purpose is to conserve natural gas resources and bring about their efficient and economical development, the contracts gave the Gas Development Company the sole and exclusive right to produce gas from the Judith River Sand in all lands included, the gas produced from wells, wherever situated thereon, to be allocated to each tract according to its acreage "for the use and benefit of the parties," which included the lessor and the Norbeck Company, defendant's predecessor. Thus the unit agreements were not intended to interfere with the parties' interests under the gas lease and were so understood, the parties sharing amicably in the proceeds of the gas allocated to the southeast quarter of the section under these agreements in the proportions provided by the lease until January 1938, six and one-half years after the execution of the lease. Plaintiff's complaint was then filed and thereafter defendant's 75% of the gas proceeds allocated to the quarter section was impounded to await the outcome of this suit. On December 19, 1938, defendant executed, and plaintiff accepted, a release of the gas lease as to the northeast quarter. This suit therefore concerns only the southeast quarter of the section.
The amended complaint, filed on August 11, 1941, alleged that the well was defectively drilled and was not completed in that the water was not shut off in spite of repeated demands; that the plaintiff had been put to great expense in keeping the well open and had been unable to obtain sufficient gas for her two sets of buildings; that the defendant had abandoned the well and had failed to do any further drilling, thereby terminating the lease.
Thus plaintiff's chief complaint concerns the well on the northeast quarter. But it must be remembered that more than three years after the well was drilled and when its condition was fully known, the lessor at lessee's instance and concurrently with lessee, entered into the unit agreement which expressly provided that the total gas production was to be allocated to the several tracts "for the use and benefit of the parties," which included both the lessor and the lessee. She thus waived any and all defaults then existing and known to her, and expressly recognized the lease as valid and subsisting. She is therefore not now in a position to contend that the default terminated the lease.
By the same action the parties worked a practical modification [2] of the gas lease, so far as the southeast quarter was concerned, by eliminating the lessee's right and obligation to drill any wells on that quarter section, and by agreeing to accept and divide between them, in lieu of the proceeds of gas so produced, the proceeds of gas produced anywhere in the pooled lands and allocated to this tract upon an acreage basis. It is true that the unit agreement referred only to gas from the Judith River Sand, but that was apparently the only horizon known or contemplated as a prospective source of natural gas, and the one to which lessee was under an implied covenant to drill. ( Berthelote v. Loy Oil Co., 95 Mont. 434, 28 P.2d 187.) Thus producing wells upon any of the pooled lands were agreed to be substituted for wells upon the southeast quarter, therefore protecting the gas lease as to it, even though as to another legal subdivision the lease might have been subject to termination. (See Severson v. Barstow, 103 Mont. 526, 63 P.2d 1022.) This segregation of the two quarter sections was expressly assented to by the plaintiff, both in executing the unit agreements and in accepting the subsequent release of the northeast quarter from the gas lease.
One of the trial court's findings, made without objection by plaintiff, is that the Montana-Dakota Utilities Company is the successor in interest to the Gas Development Company under the unit agreement, which was approved by the Secretary of the Interior on January 8, 1935, and "ever since * * * has been continuously and is now engaged in the production and marketing of gas" under that agreement. It follows that on and after June 3, 1936, when but for actual gas production the lease would have terminated, it was still in effect without regard to the sufficiency of the well on the northeast quarter.
The decree appealed from is reversed and the trial court is directed to enter a decree in favor of defendant Wight adjudging the gas lease in question valid and effective as to the southeast quarter of the section.
ASSOCIATE JUSTICES ERICKSON, ANDERSON, MORRIS and ADAIR concur.