First National Bank in Weatherford v. Exxon Corp. ( 1980 )

OPINION

STEPHEN F. PRESLAR, Chief Justice.

This is a suit to recover alleged deficiencies in royalty payments to the owner of the soil from March 1, 1974, to April 30, 1979, on gas produced from a well located in Pecos County, Texas, on a section of Relinquishment Act land. Trial was to the Court without a jury, and a take nothing judgment was entered. We affirm.

Appellant, First National Bank of Weath-erford (Bank, Lessor), in its capacity as owner of the soil and agent for the State of Texas leased one-half of the section involved to a predecessor of Appellee, Exxon Corporation (Exxon, Lessee) and the other one-half to Gulf Oil Corporation (Gulf) in 1960. All interests were pooled by unity agreement in 1964 as the Oates Gas Unit No. 1. Exxon obtained a farm-out of Gulf’s lease; therefore, it is Exxon’s conduct that we are here concerned with; that is whom we will refer to as “Lessee.”

Exxon completed a producing gas well on the Unit in 1965. There were no pipeline connections available so shut-in royalties were paid as provided by the lease when “a suitable purchaser was not available.” In 1967, Exxon entered into a twenty-five year contract for sale of the gas to Northern Natural Gas Company (Northern), and secured Federal Power Commission approval of that contract. Bank was not consulted about or notified of the contract with Northern nor of the application for its approval by the Federal Power Commission. However, in November of 1968, Exxon wrote a letter to the Bank transmitting a division order. This cover letter advised the Bank that it should execute the division order if it was claiming the proceeds. On December 2, 1968, the Bank executed the division order which did provide that royalty on gas sold subject to Federal Power Commission jurisdiction shall be based on the net proceeds of the price approved by the Commission. Since that time, and at all times material hereto, Exxon has paid royalties to the Bank calculated as its fractional share of the net proceeds received from the sale of gas to Northern. The Bank accepted these royalty payments for over nine years before notifying Exxon of any dissatisfaction, and it brought this suit in the tenth year of such acceptance of royalty under the twenty-five year contract. The State of Texas and Exxon have reached some form of accord and the State is not a party to this suit.

The parties stipulated there was no market other than the interstate market available for the gas at the time of the contract between Exxon and Northern. The Court made extensive findings that Exxon prudently marketed the gas from the Unit by its sales contract with Northern, and the Bank does not contest those findings; rather, it agrees in its brief that the contract was negotiated on the best terms and conditions available, including price.

The Bank, as Lessor, seeks declaratory judgment construing the oil and gas leases to mean that the provision for payment of royalties based on value of gas contemplates such value will be determined upon prices prevailing in the open market as of the time that gas is run. It contends, then, that during the period of time involved from March, 1974, to April 30, 1979, the market value of its gas was more than it and Exxon were receiving under the Northern contract; therefore, they are entitled to additional royalties.

The royalty clause in the Exxon lease is: To deliver to the credit of the owner of the soil, free of cost, in the tanks or pipelines to which wells may be connected an additional %2nds part of all oil and gas produced and saved from said leased premises or at the option of owner of the soil Three Thirty-Seconds %2nds of the value of all oil and gas produced and saved from said premises.

The Gulf royalty clause provides:

To deliver to the credit of Lessor as the owner of the soil, free of cost, in the pipe lines to which wells may be connected, an additional equal ⅜2 part of all oil and gas produced and saved from said leased premises or at the option of Lessee to pay Lessor ⅜2 of the value of all oil and gas produced and saved from said leased premises.

The question is not before us as to whether this is a “proceeds” lease or a “value” lease; it was tried simply as a value lease. In affirming the judgment of the trial Court, we hold that Appellant did not prove that the value of the gas was greater than that received.

To prove market value of this gas, Appellant, through its expert witness, presented evidence of gas sold in the intrastate market. We do not consider these as comparable sales for purposes of arriving at market value of this gas; the intrastate gas was unregulated as to price while this gas was regulated during the five years involved. The use of this gas was restricted and its marketability thereby affected; it could not be sold in the intrastate market so its value in that market was zero. As held in Phillips Petroleum Co. v. Ochsner, 146 F.2d 138 (5th Cir. 1944):

There was no market for appellee’s gas for light and fuel purposes. For such uses it would bring nothing. The price of a thing is what it will bring,

Sales in intrastate market were based on what willing buyers and willing sellers agreed to, while sellers and buyers of this gas could not contract for a price above the regulated price. They could not lawfully contract for a price above that allowed by federal regulation. Evidence of a price arrived at above the federally regulated price would not be admissible as a comparable. City of Austin v. Cannizzo, 153 Tex. 324, 267 S.W.2d 808 (1954). Recognizing those facts, Appellant argues for fixing of a “theoretical market value.” That’s not the question here, for that’s not the lawsuit before us. Appellant by this suit seeks a real, actual monetary award and not a theoretical determination of its rights. The market value to be found, then, must be the actual real value which the product would in fact bring and for which Exxon is in default under the oil and gas lease for not in fact obtaining or paying to Appellant.

No appellate court in Texas has yet made a determination of market value of gas sold in the interstate market. But, in Exxon Corporation v. Middleton, 571 S.W.2d 349 (Tex.Civ.App.—Houston [14th Dist.] 1978, writ granted), the use of a field price which included interstate sales was held not to be the appropriate measure in determining the value of intrastate gas; this is the principle applicable here, that a sale in a regulated market is not comparable to open market sales and vice versa. In the field of eminent domain, where, as here, comparables are used to determine market value, Texas law excludes evidence of sales of unrestricted property as comparable in finding the value of property which is burdened with restrictions. City of Austin v. Cannizzo, supra. It follows that recent federal court decisions are in accord with Texas law in excluding unrestricted intrastate sales of gas as not being comparable to interstate sales burdened with federal regulations. Brent v. Natural Gas Pipeline Company of America, 457 F.Supp. 155 (N.D.Tex.1978) appeal docketed, 5th Cir.; Hemus & Company v. Hawkins, 452 F.Supp. 861 (S.D.Tex.1978). Those two cases enunciate Texas law as concerns this phase of oil and gas law.

Appellant’s evidence fails in another area. Its cause of action is for value as though the gas were sold when run from day to day. Texas Oil & Gas Corporation v. Vela, 429 S.W.2d 866 (Tex.1968). Appellant offered no evidence of any gas which was sold on a day by day basis; its evidence was from contract sales and there was no evidence of lessees or producers selling their gas in the open market or on a day to day basis. Appellant seeks recovery for the gas sold in that manner, but offers no evidence of what gas would bring when marketed in that manner.

Appellant offered evidence of other gas sales within the regulated market as an alternative to its basic contention that intrastate sales are comparables. It would seem that, within the regulated field, there can be no comparables, for the regulating agency classifies and divides the gas into various categories and fixes the price for each category. With all prices fixed, we fail to see how one could be comparable to the other to make either the “market value.”

Texas Oil & Gas Corporation v. Vela, supra, sets the test for determining market value of gas to be by sales of gas comparable in time, quality and availability of market. That case did not involve price-regulated gas; in the case before us, it was stipulated that such a regulated market was the only one available at the time lessee was obligated to sell the gas. That fact must be taken into account and given consideration under the element of marketability in the Vela test. That, we have done. We have paid our respects to Vela.

As noted earlier, this case is treated by all parties as a value case. Both leases are State form leases so the State is the author, so far as any rules of construction are involved. As is seen by the royalty clause, these are “in kind” leases fixing the lessee’s royalty obligation to be to deliver the lessor’s share of the gas to it. Exxon’s lease gives the Lessor the option to accept the gas in kind or the value. The Gulf lease gives such option to the Lessee but Gulf has sought to exercise it and offered the gas in kind to Lessor but Lessor has rejected it so in effect the option in both leases now rests with the Lessor/Appellant. Under the facts of this case, Appellant has elected to waive receipt of its gas in kind. By such waiver action, it placed title to the gas in the Lessee without restrictions and fettered only by Lessee’s obligation to market it with prudence. It concedes in its brief that has been done.

Exxon was prudent and diligent in attempting to find a purchaser for gas from the Unit. The only possible purchasers at this time were interstate pipeline companies. The gas sales contract entered into was an arm’s length, prudently negotiated contract with the best terms and conditions available, including the best price which could be obtained at the time.

The right of the Lessee to place the gas into a long term contract is not questioned. The fact that it chose a regulated market is not' questioned, nor is its right to chose such a market questioned. As was its right, Appellant has elected not to take its gas in kind and market it for such value as existed under its theory of recovery; it has brought this action to recover such value from its Lessee. The trial Court has held, and we have sustained its finding, that it failed in its proof of such value. We see no further questions as to the correctness of the trial Court’s judgment. All points of error have been considered, and all are overruled. The judgment of the trial Court is affirmed.