
    HUGH FRANK POTTS, ROY A. GODFREY, AND ERNEST O’HEARN, Jr., v. THE UNITED STATES
    [No. 50051.
    Decided November 30, 1954]
    
      
      Mr. Charles B. Nesbitt for plaintiffs. Mr. Beuel W. Little was on the briefs.
    
      Mr. Howard, 0. Sigmond, with whom was Mr. Assistant Attorney General Perry W. Morton, for the defendant.
   Whitaker, Judge,

delivered the opinion of the court:

The construction of the Denison Dam and Reservoir on the Red River flooded the following described property:

NW% of the SE14, Section 20, Township 6 South, Range 7 East, Marshall County, Oklahoma, containing 40 acres, more or less.

Plaintiff Hugh Frank Potts had an oil and gas lease on it, and he sues for a taking.

On December 30, 1941, in anticipation of the flooding of these lands, defendant purchased them from John Marshall, but, prior to the purchase, he had executed an oil and gas lease to Colbert H. Marshall, which was assigned by him to plaintiff Hugh Frank Potts on September 8,1942.

In 1950 Potts assigned the lease to plaintiffs, Roy A. God-frey and Ernest O’Hearn, for a consideration of $42,000, and they also sue for a taking.

Defendant admits the taking; the question presented is, what is just compensation and who is entitled to recover it.

The pertinent facts presented to us can be briefly stated. On January 25, 1945, plaintiff Potts entered into a contract with the Bryan Petroleum Corporation of Tulsa, Oklahoma, for the drilling of an oil well on the land described. It was estimated that the well could be completed within 60 to 75 days. On February 9, 1945, drilling was commenced at a site at the approximate center of the property, which had an elevation of 610 feet. At this time the level of the lake was approximately 603 feet.

Prior to the commencement of drilling, Potts asked the Army engineers at Denison, Texas and Tulsa, Oklahoma, when it was expected that the level of the lake would reach 610 feet. From what the engineers told him and other investigation made by him, he concluded that the lake would not reach this elevation until 90 days after drilling operations had commenced or probably later.

His estimate, however, proved to be wrong. On March 15, 1945, due to unexpected heavy rainfall, the lake reached an elevation of 617 feet. But even prior thereto seepage from the encroaching waters caused the drilling machinery to bog-down, and drilling operations were abandoned by the Bryan Petroleum Corporation on February 27, 1945, as it had a right to do under its contract with plaintiff. At this time the well had been sunk about one-fourth of its expected depth.

Later, plaintiff caused to be erected above the surface of the waters a platform to support the drilling machinery, and an oil well was drilled in the bottom of the lake at another site.

In the case of a taking, the measure of just compensation is the difference in the market value of the property taken before and after the taking. For parallel examples, see Vandiver et al. v. United States, 67 C. Cls. 125; 11,000 Acres of Land v. United States, 152 F. 2d 566, 568; cert. den. 328 U. S. 835.

Since in 1945 there were no sales of gas and oil leases in the area here concerned upon which a market value at or near the time of taking could be established, resort must be had to other factors. United States v. Miller, 317 U. S. 369, 374. See also American-Hawaiian Steamship Co. v. United States, 129 C. Cls. 365.

Expert testimony has been introduced to show the difference in market value of the leasehold here involved before and after inundation. Our task is to evaluate this testimony and to arrive at a figure which in our judgment represents just compensation.

Defendant’s witness C. Y. Sidwell testified that plaintiff Potts’ lease was worth $240,000 before the inundation, and $200,000 thereafter, a difference of $40,000. Sidwell is a graduate geologist and the head of the Department of Petroleum Production at the University of Tulsa, Oklahoma. He had had extensive experience as a consultant for major oil companies and for the United States.

Plaintiffs’ witness, O. H. Hill, was a consulting petroleum geologist with experience in the valuation of leasehold estates. He valued the lease before the inundation at only $200,000, as against Sidwell’s valuation of $240,000. However, after inundation he valued the leasehold at only $20,000. But this must be considered in the light of the fact that after five years of extraction of oil, plaintiffs Godfrey and O’Heam paid $42,000 for it. Again, his valuation of $20,000 is to be compared with Sidwell’s figure of $200,000. Anyway, Hill said the difference in market value before and after inundation was $180,000.

Another of plaintiffs’ witnesses, Ed J. Kubat, a successful, independent Oklahoma oil operator, put the highest valuation of all on the lease before inundation, except the plaintiffs themselves. He valued it at $300,000, as against Hill’s valuation of $200,000, and Sidwell’s valuation of $240,000. But he did not place a value on it after inundation.

As might be expected, the testimony of plaintiffs, Potts and Godfrey, placed the difference before and after inundation at a much larger figure than any of the experts.

There is thus a wide variation in the testimony of the experts. How shall we evaluate their testimony ?

The following is of some assistance. The proof shows that it would cost about $50,000 more to drill a well after the lands had been flooded than it would cost to drill it on dry land. The proof also shows that it would cost about $1,000 a year to operate a well sunk through the waters of the lake over what it would cost to operate one on dry land.

In addition, since the cost of operation was greater after inundation than it was before, it would have become unprofitable to continue drilling earlier after inundation than it would have before inundation.

Drilling operations were stopped in 1952, at which time the well was producing only 7 barrels of oil a day. At that time it was thought that the salvage value of the pipe in the well would be greater than the profit from further operation. But had the lands not been flooded, the well could have been operated profitably for some longer time. However, the proof is quite indefinite as to how long the well could have been operated profitably, or what the profit would have been.

Plaintiff Potts also asks us to take into account the cost of relocating his well, after that well started on dry land had been inundated. Potts started the dry land operation without any assurance that the land would not be flooded before the well could be sunk to the required depth. He took the risk of completing the drilling before inundation. Piad he deferred drilling operations until the maximum water level had been reached, the cost of relocating the well would not have been incurred.

Because of the inundation of these lands plaintiffs have been forced to spend an amount of money more than they would have spent otherwise, and they may have been deprived of some additional profit that could have been realized from further drilling on dry land.

This is about all there is to aid us in evaluating the expert testimony, aside from the character, experience, and qualifications of the witnesses.

Taking all the above into consideration, we are of the opinion that $75,000 would fairly compensate plaintiff Potts for the taking of his mineral rights.

We are of the opinion that neither Godfrey nor O’Hearn is entitled to recover. It is the owner at the time of the taldng who is to be compensated. Danforth v. United States, 308 U. S. 271, 284. They took an assignment of the lease from plaintiff Potts in 1950, after the lands had been submerged to a depth of from 30 to 35 feet. They paid $42,000 for the assignment. After that time the defendant did nothing to impair the value of what they had purchased.

They are not, of course, entitled to recover anything on account of the impairment of the mineral rights while Potts owned them. Whatever claim Potts may have had against the Government for this, he could not validly assign to anybody. “Assignment of Claims Act of 1940” 54 Stat. 1029; 31 U. S. C. sec. 203; United States v. Shannon, 342 U. S. 288.

Only one more thing needs to be said. Plaintiffs say that after the lifting of the orders of the Petroleum Administration the regulations permitted Godfrey and O’Hearn to drill a second well on the 40-acre tract, and that they in fact did drill a second well, and that we must take into account the extra cost of drilling this second well, and the extra cost of its operation. Aside from the fact that our problem is to determine the difference in the value before and after the taking, and not the extra costs to which plaintiffs have been put, we do not think we should take into consideration a situation arising after the taking. Compensation for a taking must be determined as of the time and place of taking. United States v. New River Collieries, 262 U. S. 341, 344; Davis v. Newton Coal Co., 267 U. S. 292, 301; Brooks-Scanlon Corp. v. United States, 265 U. S. 106; United States v. Toronto Navigation Co., 338 U. S. 396, 404. At the time of the taking, the regulations permitted the drilling of but one well on a 40-acre tract. We think it is not in order to take into account the extra costs of drilling and operating the additional well.

Not only is this true, but this additional well was drilled by plaintiffs, Godfrey and O’Hearn, and, as we stated above, at the time they acquired this lease, for the consideration of $42,000, the lands had already been flooded, and after they acquired the lease defendant did nothing to impair the value of what they had purchased.

When they acquired the lease for $42,000 they no doubt took into consideration the possibility they might be permitted later on to drill an additional well.

On the whole case, we are of the opinion that just compensation to plaintiff Hugh Frank Potts is the sum of $75,000. Judgment will be entered for this amount, together with interest at 4 per cent per annum on that sum from March 15, 1945, to date of payment, not as interest but as a part of just compensation.

Plaintiffs Roy A. Godfrey and Ernest O’Hearn are not entitled to recover, and the petition insofar as they are concerned is dismissed.

It is so ordered.

Laramore, Judge; Littleton, Judge; and Jones, Chief Judge, concur.

Madden, Judge,

dissenting in part:

I think the court is wrong in failing to consider the additional cost of drilling a second well on the 40-acre tract as an element of the loss caused to the plaintiff Potts by the flooding of the land. The taking here involved occurred about March 15,1945. At that time Petroleum Administrator for War Order No. M-68 was in effect, which limited the drilling of wells in geological structures such as those here present, to 40-acre spacing. The order was a war measure^ based on a critical shortage of materials used in drilling and equipping wells. No one expected the order to remain in effect permanently. The owner of the lease, or one who contemplated purchasing the lease, would expect that, when the shortage of materials had disappeared, normal spacing would be resumed. It was in fact resumed on March 7,1946, when the Corporation Commission of Oklahoma issued a 20-acre spacing order.

At the time of the taking, the owner of the lease, or one who was considering the purchase of it, would not be thinking only of what he could do with the land that day, or that year. He would be thinking of the normal development of the land, in which a second well might not be drilled for years, if ever, after the first one. What a willing buyer would give a willing seller for an oil lease, at the time and place, would be affected hardly at all by a temporary restriction upon the number of wells which could be drilled.

FINDINGS OF FACT

The court, having considered the evidence, the report of Commissioner Marion T. Bennett, and the briefs and argument of counsel, makes findings of fact as follows:

1. The Flood Control Act approved June 28, 1938 (52 Stat. 1215, 1219), authorized construction of the Denison Dam and Reservoir located on the Red River between the States of Oklahoma and Texas. The impounded waters formed what is now known as Lake Texoma, covering the surface of many thousands of acres of land in Oklahoma and Texas. The public purposes for which the dam and lake were constructed included principally flood control and generation of electric power. The top of the power pool was established by the Army Engineers at 617 feet m. s. 1. Between that elevation and 640 feet the basin is devoted to flood control water storage.

2. On December 30, 1941, the United States of America acquired the surface of 40 acres of land involved in this action from John Marshall, who is not a party to this suit. Ten days prior to execution of this deed the owner executed an oil and gas lease for five years, or for as long as oil or gas is drilled for or produced from the tract, to Colbert H. Marshall, which was thereafter assigned to the plaintiff H. F. Potts on September 8, 1942. In 1950 the lease was further assigned to the plaintiffs Boy A. Godfrey and Ernest O’Hearn for a consideration of $42,000. At this time the land was inundated to the knowledge of Godfrey and O’PIearn, and they purchased the lease with the understanding that they would be recompensated for the additional costs of drilling because of the inundation. The oil and gas lease covers the following described tract of land:

NW54 of the SE14, Section 20, Township 6 South, Bangs 7 East, Marshall County, Oklahoma, containing 40 acres, more or less.

3. In the spring of 1945, the level of Lake Texoma rose originally to the point that the lands herein concerned were completely submerged beneath the surface of the lake waters to a depth of about 30 to 35 feet. The lake first reached 617 feet on March 15,1945. This action is for just compensation for the flowage easement taken by the defendant under the leasehold estate. The owner of the fee in the minerals is not a party to this proceeding.

4. At the time the defendant acquired the surface rights in the described land, no compensation was paid to plaintiffs or any other person for the right to limit or interfere with the plaintiffs’ right of ingress and egress to drill for and produce oil and gas from the lands. By the submersion of the land herein the defendant took by physical appropriation a flowage easement or the right to obstruct without limitation plaintiffs’ right of ingress and egress to drill for and produce oil and gas from the tract, and plaintiffs’ prior right to use of the surface of the land for that purpose, to the extent and for such periods of time as the operation of the Denison flood control reservoir shall require. For this taking the plaintiffs have received no compensation at any time.

5. At the time of the taking, geological information secured from the drilling of numerous wells and core holes in the vicinity showed that this tract was located within the productive area of the Aylesworth oil field of Marshall County, Oklahoma. It had been scientifically established that the productive oil sands lay to the south and west of a subsurface fault extending in a northwesterly to southeasterly direction through the area and passing just to the northeast of the tract here involved. The discovery well of the Alyesworth field had been drilled in 1942 a few miles northwest of this tract. Plaintiffs’ lease lay directly between an oil well producing approximately 227 barrels a day, located less than two miles northwest, and another oil well producing around 192 barrels per day, approximately one mile southeast thereof. The exploratory operations and the nearby production indicated the lease was favorably situated with regard to the established trend.

6. On January 25,1945, the plaintiff, H. F. Potts, then sole owner of the oil and gas lease here concerned, entered into a written contract with Bryan Petroleum Corporation of Tulsa, Oklahoma, for the drilling of an oil well to the approximate depth of 3,200 feet thereon. By the terms of the contract, the drilling contractor was to be paid by the plaintiff the sum of $250 per day for the drilling. The plaintiff was, among other things, to pay the cost of moving the drilling equipment to the location, constructing certain pits and roads, repair and replace tools, furnish fuel, water, casing and special services. It was anticipated by Potts and Bryan that the well could be completed within 60 to 75 days.

The drilling contract which was in the form of a letter from Bryan to Potts, and accepted by the latter, provided in part, as follows:

* * * if this contract should be terminated at a shallower depth than that above indicated, we shall be paid for a minimum of 30 days work.
By reason of the nature of the location of this well we shall be permitted to remove our equipment at any time that water encroachment occurs to such a degree as to endanger said equipment, and if it becomes necessary to remove said equipment prior to the 30-day time limit such minimum time limit shall be effective.
Further, due to the nature of the location, it shall be incumbent upon you to do such work as is necessary to provide satisfactory and suitable location. It is contemplated by the foregoing expression that it may be necessary to furnish substructure or other similar equipment to afford proper location.

7. On February 9, 1945, drilling was commenced at a site with a ground elevation of 610 feet. At this time the level of the lake was approximately 603 feet. Plaintiff Hugh F. Potts sought estimates from the Army Engineers at Denison, Texas, and Tulsa, Oklahoma, as to when the lake was expected to reach elevation 610 feet. His investigation led him to believe that this level would not be reached before 90 days in any event and probably considerably later. What happened, however, was that due to unusually heavy rainfall the lake filled more rapidly than had been estimated. Even before the lake level reached 610 feet the underground seepage of the encroaching lake waters caused equipment to bog down and on February 27 drilling operations had to be discontinued when the well had been drilled to a depth of 690 feet. Some of the equipment was moved to higher ground and some could not be removed and had to be abandoned.

8. The plaintiff employed a contractor to jack up the heavy equipment and build a platform for it in the lake. Heavy piling was driven into the lake bed and a drilling platform measuring 15 feet by 45 feet was constructed on it at an elevation of about 620 feet. Later drilling operations were carried on from this platform, using an oil well derrick constructed thereon for the purpose.

9. It was difficult to get men to operate on the platform due to the hazards. The Bryan Petroleum Corporation finally abandoned the drilling contract and, to prevent its removal of the drilling equipment from the site under the option to do so in the contract, plaintiff Potts made a settlement with Bryan. The sum of approximately $22,000 was paid by Potts to Bryan to cover expenses incurred, including damage to and loss of equipment in the lake and the purchase by plaintiff of the equipment at the well site. Approximately $7,500 of this sum was due Bryan for drilling time under the contract. Thereafter, about the middle of July 1945, the plaintiff recommenced drilling operations and went down to 3,475 feet. A producing oil well was completed in December 1946.

10. The drilling from the platform in the lake was slower and more expensive because of a number of factors. The initial flooding caused the hole to fill with sand and the casing to freeze, necessitating cleaning and making recommencement of drilling more difficult. All supplies had to be carried back and forth from shore by barge constructed for the purpose. Cuttings and mud from the drilling likewise had to be hauled to shore, and could not be dumped in the lake. Few, if any, experienced oil field workers were willing to work at such a location. Drilling operations were frequently shut down because high water or high waves flooded the drilling platform, or because the fluctuations of the lake level made the well inaccessible to the available barge equipment.

11. This well, which came to be known as the Burns-Marshall No. 1 well, cost $114,788.24 for drilling and equipping, plus $20,488 for casing installed therein. Allowing $13,527.62 for overhead at the rate of approximately 10 percent makes the total cost of this well $148,803.86. This same well, drilled pursuant to the same contract, would have cost a total of $45,184.99 had it been possible to complete the drilling on dry land. The difference between the total dry land cost and the total actual cost is the sum of $103,618.87. Of the latter sum, $50,000 is attributable to drilling in the water and the balance of $53,618.87 to lost equipment, relocation, purchase of equipment, moving in and out and the like.

12. The additional cost of operating an oil well located in the lake amounts to approximately $1,000 per year for each year of its productive life. The factors which contribute to the additional cost of operation include additional boat and barge rental to service the well, lost time due to the confined work area, the necessity of hauling all equipment and servicing machinery to the well by boat, paraffine accumulation in the long underwater flow lines to lease tanks, and similar difficulties.

13. While substantially as much oil could be produced from a submerged lease as from one on dry land, the additional cost of operation causes an oil well located in the lake to become marginal, or commercially unprofitable, more quickly than an equally productive well on dry land. The well drilled by plaintiff Potts on this tract was abandoned in November 1952 while producing seven barrels per day. If continued, its return would have been sufficient to support eight additional years of operation, but the well was abandoned at that time because it was thought that the value of the pipe which could be recovered from the well would exceed the profit thereafter received from the well above the cost of operation in the lake. The salvage value of the pipe recovered was $15,000.

14. In March 1950, the entire lease involved in this action was sold to plaintiffs Roy A. Godfrey and Ernest O’Hearn, Jr. In September 1950, a second well was commenced by those plaintiffs on this tract, which was drilled from a platform constructed in the lake for the purpose. The drilling progressed more slowly than usual because of the difficulties attendant to operations in the lake, and because of periodic shutdowns due to high water. The drilling was finally completed about May 1952 and after further servicing was finally put in production late in 1952. This well is known as the Marshall No. 2 and at the time of trial was producing at a rate of 19 barrels per day.

15. Based on the available geological information at the time of taking and the 40-acre spacing pattern then in effect, commercially profitable oil and gas production could be expected from this 40-acre tract with a total yield of between 200,000 to 250,000 barrels.

16. In 1945 there were no sales of gas and oil leases in the area here concerned which would establish the market value thereof at or near the time of taking.

17. Various witnesses, some with experience in the drilling of wells in the area and all with knowledge of the factors entering into the same and into valuation of such acreage, testified as to their estimates of the fair market value of the lease. Defendant’s witness, C. V. Sidwell, a graduate geologist and head of the Department of Petroleum Production at the University of Tulsa, Oklahoma, who has had extensive expei'ience as a consultant for major oil companies and for the United States, testified it was his opinion, based on the conditions as they existed in March 1945, that the lease on dry land was worth $240,000, and inundated had a value of $200,000. The first figure is computed at the rate of $6,000 per acre, and the second at $5,000 per acre.

18. The expert opinion of plaintiffs and their witnesses as to the difference in fair market value on a per acre basis, considering all factors, but with no specific amount attributed to each, varies somewhat. Plaintiff Potts testified that the 40-acre lease was worth $10,000 per acre or $400,000 before inundated. His estimate per acre after covered by the lake was $2,000 per acre, or a total of $80,000. This represents a diminished value of the leasehold estate of $820,000.

Plaintiff Godfrey put a value of $7,000 per acre, or $280,-000, on the market value of the lease before inundation and only $100 per acre, or $4,000, for the same after flooded. Yet, Godfrey and plaintiff O’Hearn paid $42,000 which would be at a rate of $1,050 per acre for this lease in 1950 after the land was covered by the lake. The difference between what they paid for it inundated and what Godfrey estimates its value to be when dry is $238,000.

Plaintiffs’ expert, O. H. Hill, a competent consulting petroleum geologist with experience in valuation of leasehold estates, gave a sum of $5,000 as the fair market value per acre of the 40-acre leasehold estate, prior to inundation, or a total of $200,000. Encumbered by water his estimate was $500 per acre, or $20,000, a diminished value of $180,000 for the tract.

Plaintiffs’ witness, Ed J. Kubat, a successful independent Oklahoma oil operator, with drilling experience in the Ayles-worth field and in Lake Texoma, put a valuation of $7,500 per acre, or $300,000, on the 40-acre leasehold estate if not subject to flooding, but no clear valuation if inundated.

19. The amounts established by the evidence relative to Burns-Marshall No. 1 well, which may be considered as pertinent items, are as follows:

Additional cost of drilling in lake-$50,000.00
Additional cost of operating in lake 1947-52 inclusive, at $1,000 per year plus similar cost for 8 years of possible additional production_$14,000.00
Eelocation costs-$53,618. 87

20. Considering all the factors involved, the difference in the fair market value of the oil and gas lease on the land involved herein at or about the time of taking on March 15, 1945, as opposed to the value thereof not subject to inundation, is found to be $75,000.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law the plaintiff Hugh Frank Potts is entitled to recover, and it is adjudged and ordered that he recover of and from the United States the sum of seventy-five thousand ($75,000) dollars, together with interest on that amount at 4 percent per annum from March 15,1945 to date of payment, not as interest but as a part of just compensation.

Plaintiffs Roy A. Godfrey and Ernest O’Heam are not entitled to recover and the petition as to them is dismissed. 
      
       Conservation Order M-68, Vol. 8 F. R. 104, 103, 446, 1470, 3955, 3960; Ex. Order No. 9718, 11 F. R. 4965.
     