Keener Oil & Gas Co. v. Consolidated Gas Utilities Corp., 4241.

• Citation: 190 F.2d 985
• Decision Date: 24 August 1951
• Docket Number: No. 4241.,4241.
• Parties: KEENER OIL & GAS CO. v. CONSOLIDATED GAS UTILITIES CORP.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

190 F.2d 985 (1951)

KEENER OIL & GAS CO. v. CONSOLIDATED GAS UTILITIES CORP.

No. 4241.

United States Court of Appeals Tenth Circuit.

August 1, 1951.

Rehearing Denied August 24, 1951.

Richard H. Wills, Jr., and J. C. Pinkerton, Tulsa, Okl., for appellant.

Conrad C. Mount and Coleman Hayes, Oklahoma City, Okl., for appellee.

Before PHILLIPS, Chief Judge, and MURRAH and PICKETT, Circuit Judges.

PHILLIPS, Chief Judge.

Consolidated Gas Utilities Corporation¹ brought this action against The Keener Oil & Gas Co.² seeking a declaratory judgment adjudicating the respective rights and obligations of Consolidated and Keener under a contract dated April 9, 1929.³ The contract was entered into between the Consolidated Gas Utilities Co. and the Bartlett Gasoline Co. Consolidated is the successor of the former and Keener is the successor of the latter. Since prior to April 9, 1929, Consolidated and its predecessor have been public utility companies engaged in the production and transportation of gas and the sale thereof for industrial and domestic uses in many communities in Oklahoma and Kansas. Consolidated now furnishes gas from the Elk City Field, transported through its 14-inch line and its connecting line to such field, to 51 cities and towns in Oklahoma and Kansas having an aggregate population of 244,681. Prior to April 9, 1929, Consolidated's predecessor had acquired producing gas wells in the East Panhandle Gas Field, in Wheeler County, Texas. In 1928, Consolidated's predecessor constructed a 14-inch pipeline from its gas wells in the East Panhandle Field to Enid, Oklahoma. Connecting lines of Consolidated extend from Enid through Blackwell, Oklahoma, and Wichita, Kansas, to Lyons, Kansas.

The gas produced in the East Panhandle Field was wet gas. It was desirable to have the gas processed so as to remove the natural gasoline therefrom and convert the wet gas into dry gas.

In the contract, Consolidated's predecessor was referred to as the first party and Keener's predecessor was referred to as the second party.

The pertinent provisions of the contract read as follows:

"(4) * * * It is definitely agreed that this contract shall apply only to the 14" line now owned and operated by First Party, it being understood, however, that First Party shall not construct any other lines which will by reason thereof decrease the average delivery of gas through said 14" line to less than fifteen million feet per twenty-four hours, * * *.⁴

"(5) That first party has granted, and by these presents does hereby grant to second party, the right to construct, maintain and operate a drying plant or gasoline plant in connection with and at a point along said first party's pipeline system, * * *.

* * * * * *

"(7) That first party shall * * * permit the flow of gas passing through its pipeline system to be diverted through the plant of second party so that second party may dry the gas handled by first party, and extract therefrom the gasoline contained and found therein; provided, however, that after the extraction of said gasoline from said gas in second party's plant, second party shall return said gas to first party's pipeline system for its further transportation and distribution to its customers and consumers, * * *.

"(8) That first party reserves, and shall at all times have, the exclusive right of regulating and controlling the volume and pressure of gas in its pipeline system, and the flow of gas through the same, and said volume, pressure and flow may fluctuate or be changed from time to time; * * *.

* * * * * *

"(15) That first party shall not during the life of this contract construct or install any gasoline plant or other device except standard drips for the extraction of gasoline at any point before or ahead of the flow of gas through second party's plant as herein provided for, nor allow anybody else to do so, except second party herein. * * *.

* * * * * *

"(26) That this contract shall remain in full force and effect for a period of ten years, and as long thereafter as said pipeline system is continued in use for transporting gas having a gasoline content, * * *."

Keener's predecessor constructed a gasoline plant near Butler, Oklahoma, approximately 70 miles east of the East Panhandle Field terminus of the 14-inch pipeline.

In 1929, Consolidated's predecessor owned 11 producing wells in the East Panhandle Field. At that time the average rock pressure in the field was more than 370 pounds and the average open flow per well was over 36,000 M. C. F. per day. In 1950 it was 1500 M. C. F. per day. A reputable geologist, prior to the date of the contract, had estimated the gas reserves underlying the leases of Consolidated's predecessor to be 94.9 billion cubic feet. The estimate was based on the assumption that a well would be abandoned when the pressure decreased to 50 pounds. Keener's predecessor was apprised of such estimate prior to the time it constructed the gasoline plant. Prior to January 1, 1950, there was processed through such plant 166 billion cubic feet. The large amount of gas produced in excess of the estimate resulted from the acquisition by Consolidated of 49 additional wells, and the fact that Consolidated was able to produce its wells down to an average pressure of 38 pounds by subjecting the gas to a three-step compression before it entered the 14-inch line.

By 1949, it became apparent that Consolidated's source of gas supply in the East Panhandle Field would be depleted in the near future. It had exhausted the possibilities of acquiring additional production in the East Panhandle Field. The pressure decline of Consolidated's wells in the East Panhandle Field between 1949 and 1950 was 30.44 per cent. When the pressure in a well declines to 25 pounds, water encroachment ordinarily prevents further production therefrom. The 14-inch line has a capacity of approximately 39,000 M. C. F. per day. On peak requirement days it needs that amount of gas for the customers presently supplied from the 14-inch line. The maximum amount of gas which it will be able to obtain from the wells in the East Panhandle Field on future peak days in 1950-1951 will be 17,000 M. C. F., in 1951-1952 10,000 M. C. F., and in 1952-1953 none.

In view of the approaching depletion of its reserves in the East Panhandle Field. Consolidated began, as early as 1944, to look for a new source of supply.

In November, 1947, Shell Oil Company⁵ discovered what is known as the Elk City Oil and Gas Field, located in Beckham and Washita Counties, Oklahoma, approximately 14 miles south of the 14-inch line and south and west of Keener's gasoline plant. The gas pool underlying that field is a separate and distinct geological formation from the producing area in the East Panhandle Field. Shortly after the discovery of the Elk City Field, Consolidated began negotiating with Shell and other producers for the purchase of gas in the Elk City Field. Shell was the dominant producer in that field. During the negotiations Shell disclosed to Consolidated that Shell intended to construct a gasoline extraction plant in the Elk City Field and as soon as the plant was put into operation, only dry gas, which had been stripped of its natural gasoline, pentane, butane and propane content, would be available in the Elk City Field and that any contract for the purchase of gas from Shell must reserve to it the right to process the gas through its gasoline plant. Other producers refused to sell wet gas to Consolidated because of their knowledge of Shell's plans to construct a gasoline plant through which they could process their gas, using a portion of the residue gas for reinjection to maintain pressure. Consolidated took up with Keener the question of whether the purchase by Consolidated of processed gas from Shell and the transmission thereof through the 14-inch line would constitute a violation of the contract. Keener contended, and has continuously since contended, that the transmission by Consolidated of processed gas purchased from Shell, through the 14-inch line would constitute a breach of the contract.

On August 6, 1949, Consolidated and Keener entered into a so-called no-prejudice agreement. It recited that Consolidated was negotiating an agreement to purchase gas produced in the Elk City Field from Shell; that Shell was insisting that the purchase contract contain a provision giving Shell the right to strip the gas to be...