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Oelze v. Key Drilling

OPINION FILED JUNE 27, 1985.

ELMER OELZE, JR., PLAINTIFF-APPELLEE,

v.

KEY DRILLING, INC., ET AL., DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Washington County; the Hon. Carl H. Becker, Judge, presiding.

JUSTICE HARRISON DELIVERED THE OPINION OF THE COURT:

Defendants, Key Drilling, Inc., Laura E. Struck and Robert A. Grosse appeal a judgment of the circuit court of Washington County invalidating a lease executed by Laura Struck in favor of Key Drilling, and decreeing as valid a prior lease executed by Ms. Struck in favor of plaintiff Elmer Oelze, Jr. The essential facts are not disputed.

On May 8, 1982, defendant Struck executed an oil and gas lease in favor of plaintiff. The lease was to remain in effect for one year and as long thereafter as oil or gas was produced from the land or as long as drilling operations were sustained. Paragraph 12 of the lease contained the following provision:

"Notwithstanding anything in this lease contained to the contrary, it is expressly agreed that if lessee shall commence operations for drilling at any time while this lease is in force, this lease shall remain in force and its terms shall continue so long as such operations are prosecuted and, if production results therefrom, then as long as production continues."

• 1 In November 1982, plaintiff employed a surveyor to stake a well location on the premises. A drilling permit was issued to plaintiff on January 26, 1983. On May 6, 1983, plaintiff's employees began clearing trees and brush, leveled a well site, and dug slush pits. On May 9, 1983, Laura Struck, by her son-in-law, Robert Grosse, executed a second lease of the premises in favor of defendant Key Drilling. This lease was recorded the following day. On May 10, 1983, defendant Key Drilling took possession of the premises. Alleging that the first lease was still in effect by reason of plaintiff's preliminary drilling operations, plaintiff filed, on May 18, 1983, a complaint seeking to invalidate the second lease and enjoin defendant from any activities interfering with plaintiff's development of the land. Following a bench trial, the trial court entered judgment for plaintiff on June 27, 1984. From this judgment, defendants appeal. The issue presented is whether the activities of plaintiff in obtaining a drilling permit, clearing brush, leveling a well site and digging slush pits were sufficient to "commence operations for drilling" within the meaning of paragraph 12 of plaintiff's lease. The authorities indicate that this determination essentially hinges on plaintiff's good faith, i.e., whether plaintiff possessed a bona fide intent to complete the well. The general principle is stated by Professor Summers:

"There are several provisions of an oil and gas lease which make it necessary to determine what constitutes the beginning or commencement of a well or of drilling or reworking operations. * * *

The general rule seems to be that actual drilling is unnecessary, but that the location of wells, hauling lumber on the premises, erection of derricks, providing a water supply, moving machinery on the premises and similar acts preliminary to the beginning of the actual work of drilling, when performed with the bona fide intention to proceed thereafter with diligence toward the completion of the well, constitute a commencement or beginning of a well or drilling operations within the meaning of this clause of the lease. * * *

* * * [I]f there is doubt or controversy as to the intent of the lessee in performing the acts claimed as a commencement of operations, then the question should be submitted to the jury." (2 Summers, The Law of Oil & Gas sec. 349 (2d ed. 1959).)

While courts have consistently refused to allow a lease to be held beyond its primary term where the evidence has shown that preliminary activities toward the commencement of drilling operations were no more than a pretense and holding device to retain possession of the lease for speculative or other purposes (True Oil Co. v. Gibson (Wyo. 1964), 392 P.2d 795, 800), such a determination is, as Professor Summers notes, one properly reserved for the trier of fact. The question in the instant case, therefore, is whether the trial court's determination of plaintiff's good faith was supported by the manifest weight of the evidence.

In finding that plaintiff's preliminary activities were not "a mere sham or * * * activity to keep the lease alive," the court noted that the evidence indicated that plaintiff was a legitimate and prudent oil operator who had previously drilled several hundred wells, and that there was no showing that in any prior operation plaintiff had commenced preliminary drilling operations in bad faith. The acts performed by plaintiff, the court further noted, were standard procedures necessary to the commencement of drilling. The court further stated that the evidence indicated that plaintiff possessed the equipment and personnel to begin drilling operations during the final week of April 1983 and failed to initiate such operations only because of unfavorable weather.

• 2 Activities similar to those performed by plaintiff have been held sufficient to constitute good-faith commencement of drilling operations. (Stoltz, Wagner & Brown v. Duncan (W.D. Okla. 1976), 417 F. Supp. 552; Jones v. Moore (Okla. 1959), 338 P.2d 872; Petersen v. Robinson Oil & Gas Co. (Tex. Civ. App. 1962), 356 S.W.2d 217.) The determination of an operator's good faith is one dependent upon the totality of the circumstances of any given case considered in light of what reasonably would be expected by operators of ordinary prudence. (LeBar v. Haynie (Wyo. 1976), 552 P.2d 1107.) While the fact that an operator commences operations only a short time before the expiration of the lease may support a finding of bad faith (e.g., Illinois Mid-Continent Co. v. Tennis (1951), 122 Ind. App. 17, 102 N.E.2d 390), it does not compel such a finding. (E.g., Jones v. Moore (Okla. 1959), 338 P.2d 872; Peterson v. Robinson Oil & Gas Co. (Tex. Civ. App. 1962), 356 S.W.2d 217.) It is our judgment that the evidence before the trial court was sufficient to sustain a reasonable conclusion that plaintiff had commenced drilling operations in good faith within the term of the lease.

The judgment of the trial court is accordingly affirmed.

Affirmed.

WELCH, J., ...


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