## Facts

- Lessors owned several small tracts in Anderson County, Texas, under separate oil and gas leases executed in 1935 and 1937.
- Lessees held leases over substantial surrounding acreage in the same wet-gas reservoir and conducted recycling (gas-repressuring) operations, including processing wet gas to extract condensate and reinjecting dry gas to maintain reservoir pressure.
- Recycling began in the field in 1939; the lessees adopted recycling the same year.
- The lessees drilled a well on each lessor tract, produced all oil that could be produced, produced all gas for which there was a market, and paid royalties on oil, marketable gas, and condensate separated at the well.
- The lessees sought to include lessors in a unitization plan so lessors could participate in recycling benefits on the same basis as other royalty owners; negotiations were conducted in good faith, but lessors refused to unitize.
- Lessors did not claim underpayment on production from their own wells; they claimed that recycling on adjacent lands caused wet gas originally under their tracts to migrate, be processed elsewhere, and be replaced by injected dry gas.
- The district court awarded damages based on reservoir-engineering estimates of wet-gas displacement and the value of the lessors’ royalty share of condensate allegedly lost due to migration.

## Issues

1. Whether lessees conducting recycling operations on other leased lands in a common reservoir breached an implied covenant to protect the lessors’ tracts from drainage or loss.
2. Whether lessors may recover damages measured by the royalty value of condensate allegedly removed through reservoir migration attributable to recycling, despite full development of the lessors’ tracts and payment of royalties on actual production.
3. Whether a lessor’s refusal to join a reasonable, good-faith unitization proposal bars or limits recovery for claimed losses tied to field-wide recycling operations.

## Decision

- The Fifth Circuit reversed the district court’s money judgment and rendered judgment for the lessees (no recovery).
- The court held the lessees satisfied their lease obligations by drilling on each tract, producing available oil and marketable gas, and paying all royalties due on substances actually produced and saved from the lessors’ wells.
- The court rejected imposing liability for alleged “recycling drainage” from a common reservoir under these circumstances.
- The court treated the lessors’ refusal to accept a reasonable, good-faith unitization opportunity as precluding damages measured by benefits they would have received had they participated.
- The Supreme Court denied certiorari.

## Legal Principles

- The implied covenant to protect against drainage is not absolute and does not require a lessee to forego economically reasonable field-wide operations on other tracts when the lessee has reasonably developed the lessor’s tract and paid royalties on actual production.
- A lessor who declines a reasonable, good-faith unitization arrangement cannot later claim damages calculated as though the lessor had joined the unit and shared in recycling benefits.
- Royalty rights generally attach to hydrocarbons actually produced and saved from the lease (or from agreed unitized operations), not to speculative accounting based on modeled subsurface migration of gas in a common reservoir.

## Conclusion

The Fifth Circuit denied damages for alleged losses from off-tract recycling in a common reservoir where the lessees reasonably developed the lessors’ tracts, paid royalties on actual production, and offered unitization in good faith; the lessors’ refusal to unitize prevented recovery measured by the recycling benefits they chose not to share.


Tide Water Associated Oil Co. v. Stott, 159 F.2d 174 (5th Cir. 1946), cert. denied, 331 U.S. 817 (1947)