McDowell v. PG & E Resources Co.

PG & E Resources Company (Resources) (defendant) leased oil and gas rights from Howard McDowell (plaintiff). Resources combined “wet gas” from one well with “dry gas” from another well and sold the combination to United Gas Pipeline Company (United). When the dry-gas well stopped producing, United refused to accept only the wet gas. As a result, Resources invoked a shut-in royalty clause in the lease and began searching for a market for the wet gas. Resources asked United several times to make an exception and accept the wet gas. Resources also reworked the dry gas, attempting to restart production. Additionally, Resources contacted two other gas transporters in an attempt to sell the wet gas. One of these companies, Tex/Con, was interested in purchasing the gas, but Resources held off on entering into an agreement while waiting to see if the reworking of the dry-gas well was successful. When the rework failed, Resources entered into a contract with Tex/Con. The contract necessitated Resources constructing a brand new pipeline. Once the pipeline was constructed, one year after United stopped taking gas, Resources reopened the wet-gas well. McDowell brought suit against Resources to cancel the lease based on a 90-day cessation-of-production clause in the lease and alleged breach of the implied covenant to market. McDowell had not given notice to Resources that he was alleging a breach. The trial court cancelled the lease after determining that Resources had breached the implied covenant to market. Resources appealed.