Cali-Ken Petroleum Co. v. Slaven

754 S.W.2d 64, 1988 Tenn. App. LEXIS 62
CourtCourt of Appeals of Tennessee
DecidedFebruary 3, 1988
StatusPublished
Cited by4 cases

This text of 754 S.W.2d 64 (Cali-Ken Petroleum Co. v. Slaven) is published on Counsel Stack Legal Research, covering Court of Appeals of Tennessee primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Cali-Ken Petroleum Co. v. Slaven, 754 S.W.2d 64, 1988 Tenn. App. LEXIS 62 (Tenn. Ct. App. 1988).

Opinion

KOCH, Judge.

OPINION

This appeal involves the interpretation of an oil and gas lease. After the lessors insisted that the lease had terminated for failure to tender timely shut-in royalty payments, the assignee of the lease brought suit in the Chancery Court for Fentress County seeking to gain entry to the leased property and for a declaration concerning the continuing validity of the lease. The trial court, sitting without a jury, held that the lease was still in effect. The lessors have appealed. We concur with the trial court’s construction of the lease and, therefore, affirm the judgment.

I.

The facts in this case are largely undisputed. Melvin Slaven and his brothers and sisters, Shirley Slaven, Elzadie Slaven, Rid-ley Slaven, and Louthie Smith entered into an oil and gas lease with Rebel Oil Corporation (“Rebel Oil”) on December 5, 1983. They used one of Rebel Oil’s preprinted, standard lease forms that was designed to be used for a term of years. However, they amended the habendum clause to provide for a primary term of six months without making corresponding modifications to the other provisions of the lease.1

Rebel Oil began drilling on January 16, 1984 and discovered natural gas and a [65]*65small amount of oil. The well was completed on January 27, 1984. Shortly thereafter, Rebel Oil began operations that were intended to make the well a producing oil well. An electric log was run on February 4, 1984. A cable rig was moved onto the well ten days later, and the well was bailed. The cable rig was removed on February 27, 1984, and operations ceased for approximately three months.

On June 1, 1984, Rebel Oil ran 1,284 feet of production casing into the well and cemented the casing in. It perforated the well on June 6,1984 and pumped two thousand gallons of 20% hydrochloric acid into the well. The well was swabbed on June 13,1984, and an additional 3,900 gallons of acid were pumped into the well two days later. The well was then swabbed for two or three days, left for thirty days, and then swabbed again. It was “sand fracked” at the end of July or the beginning of August, 1984. Rebel Oil installed a pump on the well a few days after completion of the sand fracking. The pump did not work properly and was replaced at the end of August or the beginning of September, 1984.

On September 25, 1984, Rebel Oil assigned one hundred percent of its working interest in the well to Cali-Ken Petroleum Co., Inc. (“Cali-Ken”). Cali-Ken bailed the well on October 31 and November 1, 1984. Then it reperforated the well and pumped in another two thousand gallons of hydrochloric acid. The well was swabbed every day for a week, and then the pump was replaced again.

The well produced less than a barrel of oil per week. On January 21, 1985, Cali-Ken capped the well and shut in the natural gas because there was no market for the gas at the time. At this point, Cali-Ken had spent in excess of $49,000 in reworking the well.

On May 15, 1985, Cali-Ken notified Melvin Slaven that it intended to reopen the well in anticipation of the construction of a gas gathering and transportation pipeline nearby. On August 16,1985, Cali-Ken tendered a check for $98.50 to the lessors for the shut-in royalty as required by the lease. The lessors refused to accept the check on the ground that the lease had terminated at the end of its initial term.

The Chancery Court found that the lease was kept in force following the primary term because Cali-Ken reworked and operated the well until January 21, 1985 when the well was capped. The court further held that January 21, 1985 became the “trigger date” from which Cali-Ken had one year to tender the shut-in royalty payment. Accordingly, the trial court found that the tender of the shut-in royalty payment on August 16, 1985 was effective to keep the lease in force.

II.

This dispute stems from the parties’ conflicting interpretations of the lease’s shut-in royalty clause. It is due, in large measure, to their shortening the initial term of the lease without making corresponding changes to the remaining portions of the lease. One authoritative text has noted that this is, unfortunately, a common problem in the oil and gas industry. See 3 H. Williams, Oil and Gas Law § 604.8 (1986).

Like any other contract, an oil and gas lease should be interpreted using the commonly accepted rules of construction. It should be considered in its entirety. Cocke County Bd. of Highway Comm’rs v. Newport Utils. Bd., 690 S.W.2d 231, 237 (Tenn.1985); Aetna Cas. & Sur. Co. v. Woods, 565 S.W.2d 861, 864 (Tenn.1978). Unless its language is ambiguous, it must also be construed according to its plain terms. Bob Pearsall Motors, Inc. v. Regal Chrysler-Plymouth, Inc., 521 S.W.2d 578, 580 (Tenn.1975); Bokor v. Holder, 722 S.W.2d 676, 679 (Tenn.Ct.App.1986). Notwithstanding sloppy drafting, we have determined that the resolution of the parties’ dispute can be found within the four corners of the lease itself.

The lessors’ primary contention is that the lease terminated because timely shut-in royalty payments were not made. Relying on paragraph two and the shut-in royalty [66]*66provision in paragraph four2, they insist that the time for making the shut-in royalty payments began to run in January, 1984 when the natural gas was first discovered. Paragraph four of the lease requires the shut-in royalty to be tendered “annually at the end of each yearly period during which such gas is not sold or used”. Thus, the lessors argue that the shut-in royalty should have been tendered by January, 1985 and that the tender on August 16, 1985 came too late.

We do not agree with this contention. Both oil and gas were discovered in January, 1984 when the well was first drilled. Operations to make the well a producing oil well were undertaken and continued diligently until the well was capped on January 21, 1985. Accordingly, like the trial court, we find that the time within which the shut-in royalty payment should have been made did not begin to run until January 21, 1985.

One of the purposes of an oil and gas lease is to encourage the diligent operation of the well. See Waddle v. Lucky Strike Oil Co., 551 S.W.2d 323, 326-27 (Tenn.1977); Young v. Dixie Oil Co., 647 S.W.2d 235, 237 (Tenn.Ct.App.1982). Thus, oil and gas leases generally provide that the lease terminates at the end of its primary term unless there is production. Shut-in provisions, such as the one contained in paragraph four, provide relief from the diligent operation requirement by permitting lessees who have discovered gas in paying quantities to keep the lease alive by paying a fixed money royalty even though the gas is not being produced. See Asberry v. Saint Joseph Petroleum, 653 S.W.2d 412

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Bluebook (online)
754 S.W.2d 64, 1988 Tenn. App. LEXIS 62, Counsel Stack Legal Research, https://law.counselstack.com/opinion/cali-ken-petroleum-co-v-slaven-tennctapp-1988.