Federal Oil Co. v. Brower

TRAYNOR, J.

The Federal Oil Company is the operating lessee under two leases for the production of oil and gas from adjoining tracts of land. Under the original terms of the first lease Federal had the right to produce oil and gas from a 16%-acre parcel of land. The lease provided that all wells should be bottomed under the land and that no wells should be drilled on a certain 100-foot strip on the edge of the leased premises. The lessee was given exclusive possession of the surface except for a limited right in the lessors to use the land for agricultural purposes. After Federal acquired its interest in the first lease it executed an assignment of a one and one-third per cent overriding royalty to defendants’ predecessors in interest. This assignment provided:

“That the Federal Oil Company . . . does hereby sell, set over, transfer, assign and convey . . . the total amount of One and One-third (1%%) Percent ... of the gross proceeds received from the sale of all of the gross oil which may be produced, saved, and/or sold at any time from the [16% acre parcel] . . . held under lease by Assignor ....

“To Have and To Hold forever unto the Assignee so long as oil and gas and/or other hydrocarbon substances shall be produced in paying quantities from said well[s] upon the

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aforesaid premises and under the aforesaid lease, or any modification or substitution therefor ....

“The Assignor will not sell, encumber, assign or convey its estate, or any part thereof or any interest therein without first making adequate provision for the protection of the interest holders and submitting a copy of the assignment, conveyance or other instrument utilized for such purpose to the Division of Corporations of the State of California."

Approximately six years later Federal acquired by assignment from the Hilo Oil Company a subsurface lease' from Culver City entitling it to produce oil and gas from beneath the surface of city lands by means of wells to be slant drilled from the surface of adjoining land. This city land was adjacent to the 16%-acre parcel already held under lease by Federal, and Federal with the cooperation of Hilo secured the right from the lessors under the first lease to slant drill under the city land from the 100-foot surface strip on which, under the original terms of the first lease, Federal was not permitted to drill. The assignment of the Culver City lease from Hilo to Federal reserved to Hilo a 16% per cent royalty of all oil and gas and other hydrocarbon substances produced from any wells bottomed under the land described in the Culver City lease. The assignment also provided that Hilo should indemnify and hold Federal harmless from any claims to the Culver City oil based upon' 'ownership of the royalty interests held by defendants. After Federal commenced to produce oil from a well bottomed under the Culver City land but located on the surface of the 16%-acre parcel, it brought this action to determine whether defendants were entitled to a one and one-third per cent royalty from the production of that well. The Hilo Oil Company and its partners were made parties to the action since under the terms of its indemnity agreement Hilo would be responsible to Federal if Federal should be required to pay defendants a royalty based on production of Culver City oil. The case was tried upon a stipulated statement of facts and the various documents defining the respective interests of the parties. The trial court held that defendants were entitled to a one and one-third per cent royalty from the oil produced by Federal from wells bottomed under Culver City land, and the Hilo Oil Company and its partners have appealed.