Stevenson v. Barnes

George Rose Smith, Justice. In 1984 the appellee brought this suit to cancel a 1976 oil and gas lease on the ground that the appellant Stevenson, the lessee by assignment, has violated the implied covenant to develop the leasehold for the production of oil and gas. Stevenson asserts that he has acted as a prudent operator. The land covered by the lease consists of three contiguous 40-acre tracts lying in a north-south line. The chancellor canceled the lease as to all formations below the Nacatoch Sand and also as to all formations down to the Nacatoch Sand with the exception of five 10-acre tracts that were found to have been sufficiently developed that far down. The appellant argues that none of the lease should have been canceled. Our jurisdiction is under Rule 29(l)(n). We first examine what Stevenson has done before turning to the lessor’s charge that he has not done enough. The lease is in the usual form, for a primary term of three years. The land lies about a mile northwest of some producing oil wells, but for some years before 1977 there had been no activity in the immediate vicinity of the 120 acres in issue. Stevenson completed the test well, No. 1, in June, 1977. He testified that it proved to be very very good, started a small boom in the area, and has continued to produce about four barrels a day. It, like the other four wells he drilled, is in the Nacatoch Sand. That well is in the northeast ten acres of the southernmost forty of the 120 acres. Stevenson’s next venture was a well just west of that forty, not on the appellee’s 1.20 acres, but that was a dry hole. He then moved north of No. 1 and drilled No. 2 on the adjacent ten acres to the north, but production was so poor that it is used as a salt water disposal well. He then completed another four-barrel well in November, 1978. That well, No. 3, was on the southeast ten acres of the leasehold. He next tried still farther north, drilling No. 4 north of No. 2, but it has produced only at a loss. Since No. 1 was the east edge of the leased land and No. 3 was at the south edge, the only direction left was west. He tried that, drilling a well in the center of the south forty, but it averages only one barrel a day. Stevenson testified that in the process of his drilling he learned that the No. 1 well is high on the oil-producing structure. The active water drive that is present will drive the oil up through the sands to the high point. He testified that all the oil will eventually migrate to that point, “and we will eventually get it all.” When asked if he would be harmed if someone else went in and drilled a well (presumably to the west), he said he would be harmed, and explained: They may go in and get a barrel or two barrels a day on the acreage; that is possible. And once you get a well drilled, you’re going to go ahead and produce it even though it is a barrel a day unless it is totally a losing situation, in which case I would be losing that oil because eventually I will capture it with the wells I have now, so I must keep that acreage to maintain it, marginal as it is now. And I need every barrel of oil I possibly can [get] to break even. Stevenson’s testimony was not rebutted by the appellee’s principal witness, a petroleum geologist. He first said that if wells were drilled in the west part of the south fourth, “I suspect that you’d get from five to ten barrels a day.” He then admitted, however, that he did not know how much oil Stevenson was producing from any of his wells, a matter of obvious importance. Upon the record as a whole we think the decision to cancel the lease is clearly against the preponderance of the evidence. The chancellor was apparently in some doubt about the issue, for he wrote in his letter opinion that he felt it was his duty to follow the law as stated in Byrd v. Bradham, 280 Ark. 11, 655 S.W.2d 366 (1983), though he disagreed with that case. We do not regard Byrd as controlling. There the lessee of 80 acres had done nothing in 28 years except to allow 5 acres to be unitized for a well on neighboring land and to testify that she was “just about to drill a well” when suit was filed. Here, by contrast, the lessee of 120 acres has drilled five wells in the most promising part of the lease, with good production from two of them, and has shown why he would be unduly harmed by cancellation. He has also developed the leasehold systematically and proceeded in every direction as far as is reasonably practical. We are convinced that his actions have complied with the implied covenant to develop the leasehold at the Nacatoch level. The chancellor was right in canceling the lease as to the deeper acreage. Stevenson has already released or assigned all his interest in that deeper acreage except for the 20 acres on which his No. 1 and No. 3 are producing. He testified with respect to the deeper rights: “I do not have sufficient acreage to justify drilling a 7,500-foot test. If I had sufficient acreage. . . there is no doubt in my mind if I felt it was there, I’d immediately drill a well.” In view of the lessee’s own admissions, the cancellation of his lease with regard to the deep formations was proper. Reversed as to the Nacatoch Sand, affirmed as to the deeper levels. Purtle, J., not participating. Holt, C.J., and Newbern, J., dissent.