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Schnell v. Hudson

OPINION FILED MARCH 17, 1986.

BEATRICE SCHNELL, PLAINTIFF-APPELLANT,

v.

W.B. HUDSON ET AL., DEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Richland County; the Hon. Laurence Arnold, Judge, presiding.

JUSTICE JONES DELIVERED THE OPINION OF THE COURT:

Plaintiff, Beatrice Schnell, brought suit for partial cancellation of an oil and gas lease based upon the defendants' alleged breach of both express and implied covenants to develop the property in question. The plaintiff alleged that the defendants, after drilling an initial well on the property in 1967 and producing it since that time, had failed to drill an additional well in violation of an agreement contained in an addendum to the lease "to drill a second well within six months from the completion of the first well as a commercial producer." While the defendants strongly disputed the validity of the alleged addendum, the trial court found that it was unnecessary to determine the legal effect of that writing because the evidence showed that the first well never became a "commercial producer" so as to cause the lease to terminate for breach of an express covenant. The trial court additionally found that neither the production from the first well on the plaintiff's property nor production from other leases in the area during the time in question was sufficient to require the defendants to drill an additional well on the leased premises under an implied covenant to develop. The court ruled, therefore, that the defendant's lease had not terminated for breach of express or implied covenants and entered judgment for the defendants. We affirm.

On February 20, 1967, the plaintiff and her husband, now deceased, executed an oil and gas lease to the defendants, W.B. Hudson and H.L. Mansfield, covering 40 acres in Richland county. The lease was for a term of 90 days and for so long thereafter as oil or gas was produced from the land. Another document, also dated February 20, 1967, which purported to be a contract between the plaintiff and her husband, as lessors, and "Hudson & Mansfield, Oil Producers," as lessees, provided, inter alia, that "[l]essee [sic] agrees to drill a second well within six months from the completion of the first well as a commercial producer." This document, referred to as plaintiff's exhibit No. 2, was signed by William B. Hudson.

In March or April 1967 the defendants drilled a well on the north 20 acres of the plaintiff's 40-acre tract and began producing oil from this well, known as the Schnell No. 1, in July 1967. Production continued from the Schnell No. 1 well through October 1982, and it was stipulated by the parties that from July 1967 to October 1982, the Schnell No. 1 well produced 8,450 barrels of oil. During this time the defendants took no action to drill an additional well on the remaining acreage covered by the lease.

On March 18, 1981, the plaintiff executed a second oil and gas lease covering the south 20 acres of the previously leased property to J.C. Cummins, "d/b/a National Petroleum Company." Subsequently, on October 28, 1981, the plaintiff filed the instant action to have the first lease declared forfeited and released of record as to the acreage covered by that lease that remained undeveloped. On February 10, 1982, while this action was pending, J.C. Cummins drilled a well on the south 20 acres covered by the second lease and began producing oil from this well, known as the Schnell No. 2, by July of that year.

At trial, commenced June 21, 1983, plaintiff Schnell testified by means of an evidence deposition that during discussions with defendant Hudson regarding the oil and gas lease executed February 20, 1967, she and her husband had specified certain conditions or requirements in connection with the lease that were reduced to writing in plaintiff's exhibit No. 2. In particular, Mrs. Schnell stated, "if [the first well] would produce, were a producer, we wanted it offset in six months." This requirement was set forth in plaintiff's exhibit No. 2 as the lessees' promise "to drill a second well within six months from the completion of the first well as a commercial producer." Mrs. Schnell testified that both the lease and plaintiff's exhibit No. 2 were signed on the evening of February 20, 1967, and notarized the next day.

Mrs. Schnell testified further that the Schnell No. 1 well was drilled on the second 10 acres from the north, just south of a hole that had previously been drilled and abandoned on the first 10 acres to the north. In July 1967, after the Schnell No. 1 well had been drilled, the plaintiff and her husband signed another document, plaintiff's exhibit No. 3, providing, in pertinent part, that "[l]essees may drill Well #2 to be located 660 feet south of Well #1, [but not] nearer than 160 feet to [sic] any building * * *." This document, dated July 20, 1967, was signed both by the lessors and by William B. Hudson, "for lessees." Mrs. Schnell testified that neither Mr. Hudson nor Mr. Mansfield contacted them further after 1967. The defendants never explained why they failed to drill an additional well, and the plaintiff and her husband did not request that the defendants drill a second well on their property.

Defendant Hudson testified regarding plaintiff's exhibit No. 2 that he had told the Schnells that he would sign it and take it to Mr. Mansfield but that when he did, Mansfield refused to sign it because it was "not part of the lease." Hudson then gave exhibit No. 2 back to the Schnells "with the understanding it is no good unless Mr. Mansfield signs it." Hudson stated that the plaintiff and her husband said nothing at that time about either exhibit No. 2 or the lease.

Regarding the Schnell No. 1 well drilled in March or April 1967, defendant Hudson stated that "it wasn't very good" when it came in and that, when another producing zone was opened later that year, the production came up but "went down pretty quickly again." Defendant Hudson stated that at that point he had had no intention of drilling another well. Hudson testified further that "when the action began" in the area around the Schnell lease in December 1980, he was ready to drill another well but that by the time the defendants called Mrs. Schnell she had already leased to someone else. This activity included the Brooks well, drilled as a direct offset to the Schnell lease on the east, and the Van Blaricum well, drilled one-half mile southwest of the Schnell lease.

Defendant Harold Mansfield testified that while he had intended to drill a second well on the Schnell lease in 1967, he had wanted to wait until there was enough geological information for it to look "like something other than a wildcat." He had obtained logs from surrounding wells in the area but had never had a written geologist's report made recommending whether or not to drill a second well on the Schnell lease. He stated that the Schnell No. 1 well had had several different formations or oil bearing zones. In completing the well the defendants had opened the Warsaw zone and pumped it for several weeks and then had moved up to the Salem zone. Altogether they had opened four or five different zones, including the middle St. Louis, the Aux Vases, and the McCloskey zones.

While the defendants had continued to produce the Schnell No. 1 well from 1967 through October 1982, defendant Mansfield denied that the well was commercially productive, stating that a prudent operator might continue to operate a noncommercial well on the possibility that oil prices might go up. Mansfield later stated, when asked how much production was necessary for a well to be considered commercially productive, that a well making around 1 1/2 barrels of oil per day in 1981 would pay operating expenses so as to be considered a commercial producer. He testified that while the Schnell No. 1 well did not pump every day, it made an average of 1 1/2 barrels of oil per day in 1981 and that over the years it had made enough "in different months" to pay income over operating expenses, although this income was nominal. As stated, the parties stipulated that from July 1967 to October 1982, the Schnell No. 1 well had produced 8,450 barrels of oil.

Mansfield testified finally that he was aware of the intensive leasing in the vicinity of the Schnell lease that began as early as July 1980 and of the drilling that took place south of the Schnell lease. While he did not begin drilling operations on the south 20 acres of the Schnell lease, he stated that prior to March 1981 he had done "primary work" of mapping to determine if the Rosiclare formation or zone, which was the source of the new production in the area, was present in the Schnell No. 1 well. It was difficult to make this determination from the log of the Schnell No. 1 well since the Rosiclare formation was within six feet of the McCloskey formation. Mansfield was aware of both the Brooks well that was drilled in February 1981 and the Van Blaricum well, which began production in February 1981. These wells, lying to the east and southwest of the Schnell lease respectively, made a lot of oil from the beginning and had "good big flares." Mansfield stated further with regard to the history of drilling other wells in the area between 1967 and 1981 that wells had been drilled directly to the west and east of the Schnell lease that "weren't any good," although from the information available to Mansfield it looked like they were "close to the reservoir." Mansfield couldn't tell from the tests made of these wells whether the Rosiclare formation was present because the Rosiclare and McCloskey formations were so close together that they were indistinguishable without the benefit of an electric log. The Schnell No. 2 well later became a good producer from the Rosiclare formation.

J.C. Cummins, a geologist who drilled the Schnell No. 2 well as National Petroleum Company, testified that in 1979 he began an intensive study of the East Noble field, where the wells in question are located, in an effort to find leases that would lead to productive wells. From his examination of logs and production records from holes drilled in the vicinity of the Schnell lease, he determined that the area "looked suspicious," like it should be "doing more."

Cummins testified that National Petroleum Company, along with Perry Fulk, started acquiring leases in the East Noble field in early 1979 and continued into 1981. On November 18, 1980, Perry Fulk, for whom Cummins had worked as geologist, drilled the Balding No. 1 well approximately one-quarter mile southeast of the Schnell acreage. Despite a "reasonably good showing" of oil in the Salem formation, the Balding No. 1 well turned out not to be commercially productive because of problems completing the well. Fulk next drilled the Van Blaricum No. 1 well one-half mile southwest of the Schnell lease, which had ...


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