Untitled Texas Attorney General Opinion ( 1946 )

Honorable Bascorr Giles Opinion No. O-7149
Ccmnissioner, General Laud Office
Land Office Building Re: Whether remittance
Austin, Texas of royalty on certain
University lease com-
puted on a basis of
lO# per barrel below
ocsted price is autho-
rized under the facts
subnitted, and related
Dear Sir: question.
Your letter of tiarch 29, 1946, requestin,g an opinion
on the'above condensed and relat-d westion has been given our
careful consideration. Far the purposes cf this opinion, we
quote your letter in its entirety.
'I have heretofore sent you a photostatic copy of the
lease from Mineral F-;le No. 17810 on Section 17, Block 14,
University Lauds, Crockett County, which le,ase was issued under
;;h;````i``~r~l``u``ar,ter 202, Acts of the Regular Session of
1323, which lease is now owned and ope-
rated by hiTcrease PGoduction Company.
"Preliminary to the questions which I desire to ask
you with respect to this lease, I want to make the following
statement: Paragraph 2 on page 1 of the lease which sets cut
the rcyalty to be paid on oil reads as follcws:
"2 . Lessee agrees to pay or cause to be paid during
the term hereof:
"(a.) As a rcyalty on oil the suin cf one-eighth of
the value of the gross production based on the highest posted
price, plus premium, if any, cffered or paid for oil of like
zravitg in the general area or cne-eighth of the gross pro=
duction, the same tc be delivered at the wells or to the cre-
dit of the Lessors intc pipe lines tc which wells may be
connected.
"At the time this lease was brought intc production,
there was no pipeline immediately adjacent to the field, and
the Gilcrease Production Company built a gathering system some
Hon. Bascon Giles, page 2 (O-7149)
ten miles in length to transpcrt the oil to a connection
with a common carrier pipeline at, or near, McCamey, Texas.
Gilcrease Production Company has claimed a deduction of lO#
per barrel from the posted price in the zeneral area to reim-
burse itself for this gathering, or transportation cost. How-
ever, i~thas remitted the full posted price from year to yew
under protest, as to the lO# per barrel discussed above.
"The gatherino svstem mentioned in the orecedinp
parapapl is owned and operated by~,Gilcrease .Froduction Company. It
does net hold itself out as acommon carrier. It has no tariff
approved by and filed with the Railroad Comaissicn, though it
does carry a small amount of cil for Wc other operators in
the field on what it calls a rental basis of 154 per barrel.
The Humble Oil snd Refining Ccmpany or the Humble Pipeline
Company, whichever purchases the oil, pays to each operator
an amount cf s$ per barrel to cover a gathering service which
is ordinarily performed by the purchasing company. The Gilcrease
Production Comoany is now askin,7 to be permitted to make remit-
tances for royalties on a basis of lOq! per barrel less than
the posted price which it receives for the oil at the pump
staticn at McCamey, and is also asking that a refund of appro-
ximately $6,000, which it has paid under protest, be returned
to it, which said sum of $6,000 is represented by the lO#
per barrel Bss than the posted price at McCamey, which it has
paid under protest and which it claims it is entitled to as a
gathering or transportation charge.
"All of the royalty received from the protesting
company has been deposited to the credit of the Permanent
University Fund, and the company asks that it be permitted
'ccwit'bhold part, or all, of the rcyalty due from this Lase
until it has recovered the said sum cf approximately $6,OGO
paid under protest.
"This lease was executed under the rovisions of
Chapter 282 of the General and Special Laws, E 1st Legislature,
Regular Sessicn. Let me call your attention especially to
Section 11, Page 619 of said Chapter 282, which deals with the
questicn of royalties, and to Section 18, Page 621 of the same
Act with respect to the powers of the Board tc adopt proper
forms, regulations, rules and contracts.
"Gilcrease Production Company has been sellinS this
oil at its delivery point at, cr near, McCamey, Texas, at the
posted price for this grade of crude in that general area. I
would like to have your answers to the following questions:
"1 . Is there any authority under the hw to grant
this Company permission to remit for royalties on a basis of
Hon. Basccm Giles, page 3 (0-7&Y 1
lo,! per barrel below the posted price for this grade of crude
at McCamey, the nearest concentration point?
"2. Is there any authority for refunding to this
Company the sum of approximately $6,000, which was paid under
pretest as recited herein?"
The following further facts related to a full dis-
cussion of the problem here involved as supplied to this
department by competent and reliable parties are also stated.
There are 23 wells from which all of the production involved
in this discussion is obtained. Until quite recently the oil
could not be marketed, but was stored in a central stcrage
space. The #Gilcrease Oil Company is the principal operator
in this area. Althcu~gh there are several pipelines quite
near the Gilcrease-University Fi~eld, there is no market in the
field, no posted prices in the field, and no purchasers in
the field.
The Yates Pool is about 10 miles southwest cf the
prcduction located in the Gilcrease-University area. The
Taylor Link Field is some 15 tc 20 m!les southwest. The Big
Lake F;eld is 23 miles northeast. The McCameg F;~eld is abcut
16 miles northwest. The pipelines passing near the area in-
volved, the Gjlcrease-University Area or field, carry Yates
oil. They will not take this oil because they refuse to mix
it with the Yates oil on account of its higher sulphur content
t:han the Yates oil. For this reason, t'here is no mar:ket in
the field. The McCamey oil is frcm a different horizon and
is a different grade and gravity of oil. The wells in the
h!cCamey field are some 2300 feet in depth; those in the Gilcrease-
University Field are only some 1353 to 1403 feet in depth,
where the formation is sand and li-ne.
Notwithstanding the differences in the McCamey oil,
the Humble Oii 8~ Refining Ccmpany offered a market at Hurdle,
some & miles distant from the field now under consideration,
but refused to build a line or to extend their line to the
field necessitating on the part of Gilcrease Oil Company the
bu'ldin; of a pipeline tc Hurdle, for purposes of marketing
the oil.
The specific terms of the lease ccntract, Wneral
File NC. 1'7810, on Sec. 17, Blcck 14, Universi~ty Land, Crockett
County, Texas, executed under authority a=d by virtue of Act
1929, blst Legislature, Regular Session, Chapter 282, as amended
by Act 1931, 42nd Leqislature, Regular Session, Chanter 174,
provides as a royalty provision to be paid on oil as follcws:
Hon. Bascom Giles, page 4 (O-7149)
"2 . Lessee agrees tc pay or cause to be paid dur-
ing the term hereof:
(a) As a royalty on oil the sum of one-eighth of
the value of the gross production based on the highest pcsted
price, plus permium, if any, offered or paid for oil of like
::ravity in the general area or one-eighth of the gross pro-
duction, the same to be delivered at the wells or to the cre-
dit of the Lessors into pipelines to which wells may be
connected.
Thus, the immdiate problem before us clearly appears
to be the determination of the proper value on which royalty
shall be paid to the General Land Office for the use and bene-
fit of the University Permanent School Fund, by virtue of the
terms of the lease in question, subject to its pertinent sta-
tutory provisions.
Assuming the verity of the facts herein set out, the
McCamey field or area which is about 16 miles northwest cf the
Gilcrease-University field area, is the closest area or place
where a posted price for a market has been found fcr :;he oil
in question. We have been unable to find a statute or a case
defining or determining the term "general area' as such term
is used in the lease in cpestion. It is the commonly recog-
nized practice, however, for oil purchasing companies to post
prices for oil of a specific kind and gravity which they will
pav for designated amounts ef oil in each an3i every field from
wh:ch they elect to purchase. Iowa Park Producing and Refining
Ccmpany vs. Seaboard Oil and Gas Company, 296 S.W. 697, 701.
1n view of this practice, we believe that the price posted for
the oil in question in the McCamey "ield area, an area ,which is
entirely distinct, and about 16 miles distant from the Gilcrease-
University Field Area, is not the posted price intended under
the lease agreement to be used as a price basis for determining
the state royalty under the lease. We are of the opinion that
the term "general area' as used in the leasepwas intended to
mean and does mean tineGilcrease-University ield Area. We do
not agree with the claim of t‘neGilcrease Oil Company for a
deducticn of lO# per barrel frcm and based on the posted price
as fixed in the KcCamey Area, as a proper basis for determining
the royalty payment it shall make to the State.
The lease contract in question specifically provides
“as a royalty on oil the sum of one-e!ghth of the value of gross
production", and then reads, "based on the highest posted prices,
etc." A careful study of the statutes under which this lease
was executed and the terms of the le as8 in its ent!,rety leads
us to conclude that the lessee under this lease on University
Land, in view of the stated facts and circumstances, is obligated
Hon. Bascom Giles, page 5 (O-7149)
to pay royalty, using as a basis the value of the gross pro-
duction in the Unive-sity-Gilcrease "ield Area which royalty
is made payable by statute in mcney;or its eq,uivalent, to
the Commissioner of the General Land Office at Austin, Texas.
Arts. 2603, Vernon's An,lotated Civil Statutes, Secticns 4, 5,
6, 11, 14 and 18; that'furthermore, "value of gross production,
as used in the lease executed subject tc the provision of the
quoted statutes was intended to mean and does mean "market
value".
We believe that the Land Commissioner in the year
1933 obligated as he was to execute a lease which would obtain
the highest royalty possible on University Land for the use
and benefit of the University Permanent Fund, inserted therein
the phrase, "based on the highest possible price, etc.", thrcugh
an abundance of precaution and to secure by.contract for the
University fund a royalty based on the highest prices available
for oil from University land in that well area. In 1933, when
many of the Texas oil fields were experiencing depression
markets, posted prices cf major oil companies for limited pur-
chases certainly did not constitute the open and free market
value. Posted prices for limited'purchases of oil were then
higher than prices obtainable on the spot market. 296 s. u'j.
697, supra. We understand that, ordqnar'ly, posted prices
fixed by the major oil companies, when there is an open market
fcr oil, constitutes the market value for oil in the posted
area during the tine 'posted.
Your question under consideration seems tc be the
value, i. e., market value, of the cil at the mouth of the well,
rather than one of transportation costs,;although it would be
futile to attempt to arrive at the value without giving con-
sideration to the expense of transporting the oil to a free
and open market. This is a fact question and not a legal one.
In the case of Haines et al v. Southwest Natural Gas Ccmpany,
et al, 123 Fed. (2d) 1011, Circuit Court of Appeals, Fifth
Circuit, Judge Hutcheson in writing the opinion had this to
say about a sir?ilar situation:
"In long drawn cut controversies, arising in Lcuisi-
ana, we have had recent occasion to canvas and determine, the
meaning and effect of a market value clause in a ;;as lease, the
reouirements
7 of o-roof with resuect thereto. and the rights of
the parties thereunder. We have there made it clear ti;at such
a clause makes the value at tne well controlling, that it is
only where the proof shows there is no market value at the well
that prices obtained in the vicinity thereof, can be resorted
to, and that this resort is only for the purpose of the light
they throw on market value at the well and not for the purpose
Hon. Bascom Giles, page 6 (o-7149)
of obtaining those prices. Under the principles there announced
--.
plaIntiff's case completely fails."
In the case above cited the plaintiff was attempting
to recover instead of b$ per thousand which had been paid them
by defendants, 'as the market value at the well", of their
rcyalty gas, an amount of 75$ per thousand, the price at which
defendant marketed the gas in neighboring towns. Jud e Butcheson
cites other authorities as follows: (78 Fed. (2d) 92$; 04 Fed.
(id) 436; 117 Fed. (2d) 22S--holding market price at value at
well was question of fact for jury; 117 Fed. (2d) 231).
In an opinion written by Cecil C. Botsch, Assistant
Attorney General, on April 26, 1939, this question was discussed
as follows:
"This question of the basis on which a producer should
pay royalty, where the lease contract is not clear, has been
acted on by courts in Kansog Kentucky and Louisiana. In the
case of Scott v. Steinberger, (Kan. Sup. Ct.) 113 Kan. 67,
213 P. 646, the court said:
sr+*O~V the dispute arises whether the plaintiff
was entitled to the value of the gas at the wells or at the
price at which it was sold at the end of the pipe line. +t i:-
5(
"'The terms of the lease are somewhat ambLguc#us as
to the point where the gas was to be measured and its price
fixed. There was no pipe line in the vicinity when the ccn-
tract ;was made. Evidently the parties ccntemplated that, if
oil or gas in paying quantities was found, some pipe line com-
'pang wculd build into the field and transport it to plazes of
cc,nsumptj.on.'.:-i:-if
'
"'We think the parties contemplated and the provi-
sion shoL'ld be construed that gas, if produced, should be
measured and the price determined at the place ,&are the
wells were ccnnccted with pipe lines,and not at some distant
market that might be found at the end of a pipe line remote
from the field and where the cost cf transportation might
equal or exceed the value of the gas produced. If the pipe-
line had been built by defendants to Kansas City or Chicago,
and the gas transported and marketed there at four or five
times Its value at the place of production, would it be con-
tended that the price received at either of these distant mar-
kets should be the measure of defendants liability?'~ I* G .
"In the case of Warfi~eld Natural Gas Co. v. Allen,
(Ky. Ct. App.) 261 Ky. 840, $8 S. W. (2d) 989, the Ccurt said:
Hon. Bascom Giles, page 7 (O-7149)
"'The lease recited, 'That the Lessee is to deliver
to the Lessor in tanks, tank cars, or pipe lines a rcyalty on
one-eigh,th (l/8) of all oil produced and saved from the pre-
ITliSCS, and to pay for each gas well from the time and while
the gas is marketed the sum of one-eighth of proceeds received
from the sale thereof, payable each three months.'
"IDefendant had the exclusive right to produce the
gas and to market the Ras. It was as much its duty to find
the market as to find the gas. ft -::-
2:
"'The lease is silent as to where this market must
be found. In such cases, it is usually held to be at the place
of production. ?t % i+
"'SC we can say the defendant took this gas at the
well, and the question is what must it pay for it. Must it
pay its value there or must it pay what it may ultimately
have got for it?
11Iijle testimony of the plaintiff J. H. Allen shows
gas is usually scld at the well in the locality where these
wells are situated and the 12 cents per thousand feet is the
usual price in that locality, and that this price and cu~stom
prevailed there when these leases were made. Then that must
have been what the parties contemplated ,when they made this
lease. jt3: 3t
"'Nothing was said in the lease about a sale else-
where and this lease must be held to mean one-eighth of the
gross proceeds of a sale cf the gas at the well side, and
that ins all fcr which defendant must account even though it
may market the gas elsewhere and get a much greater sum for
i.t.j; 1.'.
j>I
"In the case of Wall v. United Gas Public Service
Cc., (La. Sup. Ct.) 178 La. (208, 142 Sou. 561, the Court said:
"IIn t'he lease contract here involved, the lessee
was required tc pay to the lessor one-eighth of the value of
the cas sclG oi‘f the premises, calculated at the 'market
nrice' thereof. The price to be paid was left open or made
to depend upon the 'market price' at the time the gas was pro-
duced. The lessee settled with the lessors for the gas at
4 cents per thousand cubic feet, which it contends was the
'market price' at the Well, its theory being that the market
price there is the proper basis for the settlement. It ad-
mits that it sold the gas at a place two miles from the field
at 5.8 cents :per thousand cubic feet. The plaintiffs demand
settlement on the basis of the sale price of the gas where sold.
Hon. Bascom Giles, page 8 (O-7149)
"IThere is nothing in the contract itself nor in
the testimony to show the Intent of the parties touching the
question whether the term 'market price' meant the price at
the well or the price the gas would bring in a market remote
from the well. We think it reasonable to assume that the par-
ties intended that, if there was a market for gas in the field,
the current market price there should be paid. There is where
the gas was reduced to pcssession and there is where ownership
of it sprang into existence. The result of bringing the gas
to the surface of the ground in the field was to reduce to
ownership there to a commercial commodity. i:-
JE +>Q~"
Usually, the price paid for oil by the purchasing
company is a proper criterion on which to figure "market
value", but a producer and a purchaser, perhaps, might enter
intc a contract for a price less than the market value for
reasons known only to themselves, and such a orice in that
case should not be taken as market value. Art. 2603a. Sec.
11, Vernon's Annotated civil Statutes and paragraph 7 of the
lease require the lessee tc file sworn monthly statements
with the Land Commissioner showing, among other data, the
market value of oil sold on the premises; and the lessees'
accounts, etc., pertaining to transportation, sale and market-
ing of the oil, are at all times subject to his inspection.
Our answer, ~therefore, to your first question is in
the negative; that under the facts of the case in question, the
royalty paya~ble to the State under the said lease should be
computed on the basis of the actual market vaiue of oil at the
Gilcrease-University field area, and you are advised that if
the oil has no market value in that area, you may determine
its market value at the area ::y taking the uctuaj. market value
&here there is a market and deducting the reasonable cost of
taking the oil to that market. The determinat:~on of what is a
proper and reascznable transportation charge is a question which
is not w;thin the province of this department to answer. Th%s
opinion dces not held, nor is it intended to hold that deduc-
tions for the gathering system of the Gilcrease Company be
considered in arrivin.3 at a reasonable transoortation charge.
Article 8, Section 6 of the Texas Constitution, reads
as follows:
"No money shall be drawn from the Treasury but in
pursuance of specific appropriations made by law; nor shall
any appropriation of money be made for a lonser term thantwo
years, except by the first Legislature to assemble under this
Ccnstitution, which may make the necessary appropriations tc
carry on the government until the assemblage of the Sixteenth
Legislature."
Hon. Bascom Giks, page 9 (O-7149)
This department has been advised that the sum of
y;;e$ paid by the Gilcrease Company under protest, apprcximat-
6,000.00, has been deposited in the Texas Treasury to
the use and benefLt of the University Permanent Fund. In the
absence of a specific appropriation by the Legislature autho-
rizlng payment of the stated sum, our answer to your second
question must be in the negative. The remedy of the Gilcrease
Company, if any, lies in the Legislature. We do net attempt,
in this cpinion, to ccnstrue whether or not the Gilcrease
Company has a valid claim against the State of Texas fcr the
money paid under protest.
Trusting the above satisfactorily answers your
inquiry, we are
Yours very truly,
ATTORNEY GENERAL OF TEXAS
By /s/ E. M. DeGeurin
APPROVED APR 25 1946 E. Id. DoGeurin,
/s/ Groover Sellers Assistant.
ATTCRNEY GENERAL OF TEXAS
EMD:rt:br