NO. 86-430
IN THE SUPREME COURT OF THE STATE OF MONTANA
1990
THE FEDERAL LAND BANK OF SPOKANE, a corporation,
Plaintiff and Petitioner,
-vs-
TEXACO, INC., a corporation,
Defendant and Respondent. *
ORIGINAL PROCEEDING:
COUNSEL OF RECORD:
For Petitioner:
W. H. Bellingham argued; Moulton, Bellingham, Longo
& Mather, Billings, Montana.
For Respondent:
Raymond K. Peete argued, Attorney at Law, Billings,
Montana.
Submitted: September 18, 1991
Decided: November 14, 1991
Filed:
Justice R. C. McDonough delivered the Opinion of the Court.
This matter is before us on certification from the United
States District Court for the District of Montana, Billings
Division. We accepted certification pursuant to Rule 44 of the
M.R.App.P.
Plaintiff-petitioners, Federal Land Bank (FLB), are lessors
and defendant-respondent, Texaco, is lessee under an oil and gas
lease. FLB brought. suit in the United States District Court of
Mont'anato terminate the lease as to all land not producing oil and
gas upon expiration of the 5-year primary term under the lease.
Texaco maintains the lease is in effect for all the lands under the
lease due to the production of FLB No. 1 oil and gas well. The
parties disagree as to the effect of the Pugh clause, paragraph 23,
on the Habendum clause, paragraph 5, in the lease. We conclude the
Habendum clause is modified by the Pugh clause.
On December 18, 1973, FLB leased the land to Ray Kemmis for
the purpose of drilling for oil and gas. Kemmis assigned the lease
to Texaco. The lease, which contained a five-year primary term,
expired on December .l8, 1978.
Texaco completed FLB well No.1 on February 4, 1978. The well
is located at the NE+SE$ of Section 7-T22N-R60E.
The Oil and Gas Conservation Board of the Department of
Natural Resources and Conservation for the State of Montana (the
Board) is the agency charged with regulating matters pertaining to
drilling of oil and gas for the State of Montana. Section 82-11-
111, MCA. The Board named all of the leased lands in question the
2
Mon Dak West Field' (The Field). The Field contains several
sections of land totalling 1,580 acres. In attempting to determine
how wells should be spaced on this acreage, the Board initially
determined 320 acre spacing per well.
Section 82-11-201, MCA, provides in part: "To prevent or
assist in preventing waste of oil or gas prohibited by this
chapter, the board, upon its own motion or upon application of an
interested person, after hearing, may by order establish well
spacing units for a pool as to oil wells or as to gas wells or
both.. ." The Board issued its spacing requirements for a period of
one year, after which permanent spacing of the producing well was
to be sought by the operator of the well. Texaco never applied for
a permanent spacing order. On May 26, 1977, August 18, 1977, and
May 12, 1978 the Board issued orders spacing the units in question.
On June 7, 1978 the Board conducted a hearing and issued an
Advisory Opinion. Certain members of the Board made a motion for
spacing to be changed to one well per 160 acres, but the motion
fail'ed. The spacing of wells, upon failure of the motion, reverted
to "state-widet1spacing; one well per 320 acres. Administrative
Rules of Montana 36.22.701, et sec.
The spacing per 320 acre drilling unit of the field is
important here because it is pivotal to the understanding of the
disputed clauses included in the lease. The Habendurn clause reads
as follows:
It is agreed that this lease shall remain in force
for a term of 5 years from this date, and as long
thereafter as oil, gas, casinghead gas, casinghead
gasoline or any of them is produced from said leased
premises, or drilling operations are continued as
hereinafter provided. If, at the expiration of the
primary term of this lease, oil or gas is not being
produced on the leased premises but lessee is then
engaged in drilling operations, then this lease shall
continue in force so long as drilling operations are
being continuously prosecuted on the leased premises; and
drilling operations shall be considered to be
continuously prosecuted if not more than sixty days shall
elapse between the completion or abandonment of one well
and the beginning of operations for the drilling of a
subsequent well. If oil or gas shall be discovered and
produced from any such well or wells drilled or being
drilled at or after the expiration of the primary term of
this lease, this lease shall continue in force so long as
oil or gas shall be produced from the leased premises.
The Habendum clause sets the term of the lease. The Habendum
clause in the FLB lease provides the lessee can extend the five
year term by producing oil and gas from said leased premises and in
addition can be extended past the five year term by the continuous
drilling clause. Also, the lease could be extended during the five
year term by payment of yearly delay rental. Texaco paid FLB the
delay rental fee on -December 18, 1977, to continue the lease for
another year. FLB No. 1 well has been producing since February 4,
Paragraph 23 of the FLB lease known as the Pugh clause reads
as follows:
23. Should any of the lands hereunder be included
in a unit or units, during the primary term, either by
written consent of the lessor or as the result of action
by any duly authorized authority having jurisdiction
thereof, then operations on or production from a well
situated on lands embraced in such unit, shall serve to
maintain this lease in force as to that portion of the
leased premises embraced in such a unit, but shall not so
maintain the lease on the remainder of the leased
premises not embraced in such a unit and not otherwise
maintained under the terms hereof beyond the next rental
paying date, unless on or before such rental date lessee
shall pay or te.nder to lessor, or to lessor's credit in
the manner provided in this lease, the amount of rental
provided herein to be paid upon the area then covered
hereby, reduced in the proportion that the acreage
covered by this lease and contained in such unit or units
bears to the total acreage then covered by this lease and
further reduced by the amount of any shut-in gas well
royalty payments made by lessee during the rental period
or portion thereof immediately preceding such rental
payment date on that portion of the leased premises not
embraced in such a unit. By similar tender or payments
on each succeeding annual rental date this lease may be
so maintained in force during the remainder of the
primary term as to the portion thereof not included in
such unit or units.
The main purpose of a Pugh clause is to "segregate the lands
under the lease outside the unit from lands included in the unit
for purposes of payment of delay rentals or perpetration by unit
production or both." Hemingway, Oil and Gas, 464-465 3rd edition
(1991). The Pugh clause may therefore, modify a Habendum (or term)
clause to the extent that the lease terminates as to all of the
lands included therein with the exception of a unit containing a
producing well. In construing an oil and gas lease courts will
app1.y the rules of contract interpretation. We have previously
stated:
[Tlhe intention of the parties is to be pursued if
possible. This intention is to be gathered from the
entire agreement, not from particular words or phrases or
disjointed or particular parts of it . . .
The contract
must be viewed from beginning to end, and all its terms
must pass in review; for one clause may modify, limit or
illuminate the other.
Lee v. Lee Gold Mining Co., et al. (1924), 71 Mont. 592, 599, 230
P. 1091, 1093. Further we stated:
[I]t is well established that a court, in interpreting a
written instrument, will not isolate certain phrases of
that instrument in order to garner the intent of the
parties, but will grasp the instrument by its four
corners and in light of the entire instrument, ascertain
the paramount and guiding intention of the parties.
Steen v. Rustad (1957), 132 Mont. 96, 102, 313 P.2d 1014, 1018.
In Riis v. Day (1980), 188 Mont. 253, 257, 613 P.2d 696, 698, we
said.:
A contract is to be construed so as to make
provisions effective, if possible. Repugnant provisions
should be interpreted in such a way as will give them
some effect, subordinate to the general intent and
purpose of the entire contract. Sections 28-3-201, 28-3-
202, and 28-3-204, MCA. Followed in St. Paul Fire &
Marine Ins. Co. v. Cumiskey (1983), 204 Mont. 350, 363,
665 P.2d 223, 229. See also Daniels v. Thomas, Dean &
Hoskins (1990), 246 Mont. 125, 145, 804 P.2d 359, 371.
For our purposes the pertinent part of the Habendum clause
provides :
It is agreed that this lease shall remain in force for a
term of five years from this date, and as long thereafter
as oil, gas, casinghead gas, casinghead gasoline or any
of them is produced from said leased premises, or
drilling operations are continued as hereinafter
provided.
Without more, inasmuch as FLB No. 1 well began producing
during the five-year primary period, the lease would remain in
effect as to the entire leased premises. However, the pertinent
part of the Pugh clause provides:
Should any of the lands hereunder be included in a unit
or units, during the primary term, either by written
consent of the lessor or as a result of action by any
duly authorized authority having jurisdiction thereof,
then operations on or production from a well situated on
lands embraced in such unit, shall serve to maintain this
lease in force as to that portion of the leased premises
embraced in such a unit, but shall not so maintain the
lease or the remainder of the leased premises not
embraced in such a unit ... (Emphasis added.)
Here the Pugh clause modifies the Habendum clause. Therefore,
the two clauses are not in conflict with one another. Reading both
paragraphs together, and the lease as a whole, their meaning is
clear. The Pugh clause does just what it provides; it terminates
the lease as to lands not embraced in a producing oil and gas unit.
The ~nainpurpose of the Habendum clause is to:
. . . describe the duration of the interest granted,
subject to other provisions contained in the lease
(emphasis added) which may provide for an earlier or
later termination under prescribed circumstances or upon
the happening of certain events. 2 Kuntz, Law of Oil and
Gas, 8 8 26.1, p. 318, (1989).
The Pugh clause here is another provision contained in the lease.
Texaco maintains that the S% of Section 7 where the well is
located has not been established as a unit and therefore the Pugh
clause does not apply. We disagree. To determine whether the Pugh
clause applies in this instance, it is necessary to set forth some
factual background. The producing well Texaco completed in
February of 1978 extracts oil and gas from the Red River, Stony
Mountain, Mission Canyon and Radcliff formations. The Red River
and Stony Mountain formations are part of the Ordovician geological
time period and the Mission Canyon and Radcliff formations are part
of what has been termed the Madison group, which is part of the
Mississippian geological time period. Texaco argues that the
result of the June 7, 1978 hearing before the Board reverting the
Mon Dak West Field to statewide spacing, did not have an effect on
the Red River Formation. It did have an effect, however, because
prior thereto, on May 15, 1978, Texaco requested and was given
perrr~issionto comingle the production from these two zones. The
Advisory Notice from the June 1978 hearing, refers to the Madison
and Devonian Formations.
On May 26, 1977, the Board spaced the Madison and Devonian
formations (which include Mission Canyon and Radcliff) for a period
of one year upon 320 acre drilling and spacing units. On May 12,
1978, the Board continued this order until July 1, 1979.
On August 18, 1977, the Board spaced the Silurian and
Ordovician formations (which include Red River and Stony Mountain)
upon 320 acre drilling and spacing units.
FLB maintains that even though the Board used different
nomenclature than the specific four formations from which
production was eventually obtained, that the four producing
formations are included in terms used in the various Board orders.
Further, FLB argues that Texaco in filing a Notice of
Intention to Drill with the Board, indicated that the land was
located in the Mon Dak West Field. And, Texaco specifically
designated the S$ Sec. 7 as a 320 acre spacing unit. The Board
approved the application. FLB further argues that both Texacols
and FLB1s division orders covered the S+ of Section 7-22N-60E only
and Texaco paid royalties under the division order, which further
indicates the tract was a properly spaced unit.
We agree that the Board's orders established well spacing
units for the field in question. We also hold that the lands
covered in the lease were included in a unit. Based on the above
discussion, we answer the certified questions separately.
The following questions were certified:
1. Is the term provision of the basic lease as set
forth verbatim in paragraph 5 in conflict with paragraph
23 of the basic lease, and if so, what is the legal
effect of such conflict? No, as stated above, the Pugh
clause modifies the Habendurn clause.
2. Are paragraphs 5 and 23 of the basic lease
referred to in the foregoing paragraph so indefinite,
uncertain and ambiguous that they are incapable of being
interpreted? No.
3. Under the facts of this case, have any of the
lands covered by the basic lease been I1includedin a unit
or unitsu as set forth in paragraph 23 of the basic lease
and if so, what is the legal effect of such inclusion?
Yes, as stated above, the inclusion of the land in a unit
triggered the Pugh clause.
4. Under the facts of this case, do the provisions
of paragraph 23 of the basic lease operate to terminate
and cancel the lease as to all of the lands included
therein with the exception of those lands located in
Section 7-22N-60E? Yes.
5. Have any formations in the Mon Dak West Field
been spaced under the applicable Montana statutes, rules
and regulations by Orders numbered 23-77, 42-77, 33-78
and 51-79 and Advisory Notice dated June 8, 1979, of the
Montana Board of Oil and Gas Conservation? Yes.
We Concur: