Amoco Production Co. v. Alexander

The Alexanders (plaintiffs) leased oil and gas rights to Amoco Production Co. (Amoco) (defendant). The lease was for an area on the lower part of a sloped water-drive oil field. Its location on the lower part of the field put the Alexanders’ lease at a disadvantage as compared to leases on the higher end of the field. Leases on the lower end would “water out” more quickly, meaning that the wells would fill up with water rather than oil. This was particularly the case when leases on the higher end of the slope were producing significant amounts of oil. When the higher wells actively produced, oil from the lower end leases would drain to the higher lands and be replaced with water. In addition to its lease with the Alexanders, Amoco had separate leases on the higher end of the same sloped field. At some point the Alexanders’ portion of the field watered out. The Alexanders brought suit against Amoco. The Alexanders alleged that Amoco intentionally produced less oil on the Alexanders’ lower portion of the field and chose instead to overproduce on Amoco’s leases on the higher end of the field in order to cause the Alexanders’ lease to water out more quickly. Specifically, the Alexanders alleged that Amoco breached the implied covenant to protect against drainage. Amoco argued that the Texas Railroad Commission’s (Commission) regulations prevented Amoco from drilling replacement wells anywhere that would have prevented the drainage. Amoco had not sought an exception to the regulations. The trial court found in favor of the Alexanders and awarded damages, including exemplary damages. The Texas Court of Civil Appeals affirmed. Amoco appealed.