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Kingwood Oil Co. v. Bell

May 3, 1957


Author: Duffy

Before DUFFY, Chief Judge, and MAJOR and LINDLEY, Circuit Judges.

DUFFY, Chief Judge.

This case is here for the second time. Plaintiff seeks a declaratory judgment that it is obligated to pay only half the cost of secondary recovery methods of oil and gas allocated to the leases involved, and that the heirs and assignees of William Bell are obligated to pay the other half.

The District Court granted a motion to dismiss the amended complaint. This Court reversed, Kingwood Oil Co. v. Bell, 7 Cir., 204 F.2d 8, and remanded the case for a trial upon the merits. A trial was held before the Court without a jury. Findings of Fact and Conclusions of Law favorable to defendants were filed, and the amended complaint was again dismissed.

In our previous opinion we set forth the pertinent facts in considerable detail. We were enabled to do so before the trial because the determination of the issues herein depends in large measure upon the correct interpretation of written documents which were attached to the amended complaint as exhibits. We shall endeavor to set forth facts in this opinion only to the extent necessary to show the basis for our decision. However, some repetition is unavoidable.

In 1938, William Bell was the owner of three oil and gas leases in Marion County, Illinois. These were known as Shanafelt "A"; Shanafelt "C" and the Dodson leases. In June, 1938, the Lake Centralia-Salem oil field was opened up. Bell desired to have his leases tested for oil and gas, and made agreements with plaintiff to drill wells on each of the leases to the McClosky limestone formation, and upon completion of each well, to assign to plaintiff a one-half working interest in each of the leases. These agreements are hereinafter sometimes referred to as the 1938 agreements. The wells were completed and the assignments were made. Shanafelt "A" turned out to be one of the largest single producing leases in the field.

The first of these agreements dated September 7, 1938, provided that Kingwood should commence drilling a well upon the Dodson lease on or before September 30, 1938, and within 90 days should commence the drilling of a well on the Shanafelt "A" lease. Kingwood was required to drill additional wells "* * * until said Tract shall be fully developed and said Kingwood shall drill all off-set wells that may be necessary to protect said Tract from drainage by other wells * * *." The agreement then provided that Kingwood should, when necessary, shoot or acidize each well drilled by it and properly equip the same for the protection, saving and marketing of oil and gas.

In paragraph 4 it was provided that Kingwood "* * * shall pay all costs, expenses and charges that shall be incurred by it in and about the performance of its duties heereunder and * * * Kingwood shall pay all costs and expenses of drilling, equipping, maintenance and operating said leasehold, and said Bell shall not be liable to Kingwood for any of said costs, expenses, damages or charges."

The second agreement dated October 28, 1938, which covered other leases, is almost identical to the first agreement in the respects hereinbefore quoted. These provisions are the only ones which deal with the obligation of Kingwood to pay all the costs or expenses.

The 1938 agreements between William Bell and Kingwood contained no provision whatsoever with respect to costs and expenses of water-flooding operations or any other form of secondary recovery of oil and gas. In the negotiations no mention was made by either party of the prospect or possibility of secondary recovery. This is understandable in the setting in which the agreements were made. The first agreement was signed less than three months after the date of the bringing in of the discovery well. The field expanded at an extremely rapid pace, and within three months' time had reached the vicinity of the Shanafelt "A" lease.A well was then being drilled on the Young Schoolhouse lease, just across a 40-acre tract from the Shanafelt "A" property. Large portions of the entire field were being drilled in a mad, disorderly rush. Both William Bell and Kingwood were anxious to get into quick production before off-setting wells could drain the oil which underlay the Shanafelt "A" and their other leases. At that time in Illinois there was no proration and no limitation on the number of wells which could be drilled or how they should be spaced.

When the 1938 agreements were negotiated, the conferences were between Joe King, then President of Kingwood Oil Company, and William Bell. Both were experienced oil operators. King objected to what he termed a "free ride" for Bell, i.e., the delivery at the pipe line of one-half the oil produced, free of any cost of drilling, production and overhead. King maintained such a free ride would cause abandonment of the properties long before the end of the economic life of such properties was reached. King suggested that the free ride be changed when the production of the wells reached 40 or 50 barrels a day. Bell refused to agree but did suggest that when the time came he and King would sit down and discuss such amendments as might be necessary.King then said the deal was agreeable to him.

Kingwood contends the 1938 agreements are extremely limited in scope and were intended to apply only to usual and customary operations, and not to cover unusual costs and risks. Kingwood claims this is shown by the interpretation given to the contract by Joe King and William Bell and in support thereof, cites the following incidents:

A. The production from Shanafelt "A" and other leases was so great that pipe line facilities were soon entirely inadequate. Kingwood and Bell agreed to and did purchase two 80,000-barrel tanks for storage of oil which were installed on the Shanafelt "A" Tract. The purchase and incidental costs were shared equally between them. Later, they leased the tanks and shared the rental income equally. Finally, in 1942, they sold the tanks and each received one-half of the sale price.

B. In 1942, oil was discovered in the Trenton Lime, a deeper geological formation than the McClosky. On September 4, 1942 King and Bell entered into a written agreement by the terms of which Bell agreed to pay half of the costs of deepening Well No. 19 on the Shanafelt "A" Tract to the Trenton Lime formation. The well was deepened, oil was found, and Bell paid one-half of the costs. However, this agreement provided in part: "3. Upon completion as a producing well, Kingwood shall carry on the production and operations of this well at its sole cost and expense precisely as in the case of all other wells on this property and this special agreement entered into because of the unusual costs and risks involved is not intended to change, nor shall it have the effect of modifying any part of the ...

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