Face Challenges Confidently

018 Sun Explor. and Prod. Co. v. Jackson

Wednesday, September 2nd, 2015


Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
The issue in Sun Exploration and Production Company v. Jackson, 33 Tex. S. Ct. J. 57 (Opinion dated October 25, 1989) was whether there exists in Texas oil and gas leases an implied covenant to explore, independent of the implied covenant of reasonable development.
Ten thousand acres of the Jackson Brothers Ranch were placed under a single oil and gas lease in 1938. The Oyster Bayou Field was discovered on the lease in 1941, and $25,000,000 was spent drilling 66 wells on the lease, including at least 16 wells outside the known field. This prolific field generated more than $42,000,000 in royalties in just the last ten years, and royalties of more than $10,000 per day were not unknown. The Oyster Bayou Field encompassed 1,800 acres, and the Jacksons contended that the lease had terminated as to the remaining 8,200 acres under the lease for failure to reasonably develop and/or to reasonably explore.
The jury found that Sun had not failed to reasonably develop the lease, but that Sun had failed to reasonably explore the lease. The trial court unconditionally canceled that portion of the lease on which Sun had not drilled extensively and conditionally canceled the lease below the depth to which Sun had drilled in the developed area.
Held: The law of Texas does not impose a separate implied duty upon a lessee to further explore the leased premises; the law recognizes only an implied obligation to reasonably develop the leasehold. The jury’s finding that Sun did not fail to reasonably develop the Jackson lease was dispositive of the case. The Supreme court then reversed the trial court without considering whether, in a proper case, cancellation of the lease might be an appropriate remedy.
The Supreme Court relied heavily upon the landmark case of Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684 (1959), holding that if a landowner can prove that a reasonably prudent operator would have drilled the well, that well falls within the implied covenant of reasonable development, without regard to whether the well was classified as exploratory or developmental. The critical issue in nondevelopment cases is whether the lessor can prove a reasonable expectation of profit to the lessee. The Court approved an instruction which advises the jury that:
The term “to reasonably develop” means that development which a prudent operator would do with respect to any known producing formation of the lease. In this context, reasonable development may include the drilling of additional wells into any such producing formation. A prudent operator will undertake to drill additional wells into such producing formation only if there is a reasonable expectation that the proceeds, if any, from the production obtained, if any, as a result of such drilling will exceed the cost of drilling and operating the well and still produce a reasonable profit for the operator, bearing in mind the interests of both the Lessors and Lessee.
The Court goes on to say that “any known producing formation” includes currently producing formations and formations that have been determined to be productive but which are not now producing. This apparently excludes formations which have never produced.
The Supreme Court has struggled with this case for two years. This opinion on Motion for Rehearing withdraws its previously published opinion (reported in PPROA News Bulletin July/August 1988) and is a substantial revision. On the substantive issue in the case, the Court is now unanimous, and it is not likely that it will materially change before becoming final. The case is significant because the Court refuses to make new law by drawing distinctions between “exploratory” and “developmental” wells. There is no duty to explore formations which are not producing and which have never produced. The Court focuses the inquiry on whether the lessee can make a profit by drilling known producing formations. The case is also significant because it leaves many critical issues to be resolved in future cases, such as whether lease cancellation is an appropriate remedy, whether the profitability question is “well-by-well” or on a prospect basis, the degree of probability which must exist to prove profitability, and how to measure “profit.”