Northern Natural Gas Co. v. State Corp. Commission

• Decision Date: 10 June 1961
• Docket Number: No. 42128,42128
• Citation: 188 Kan. 355,362 P.2d 599
• Parties: , 39 P.U.R.3d 255 NORTHERN NATURAL GAS COMPANY, Appellant, v. STATE CORPORATION COMMISSION, Appellee.
• Court: Kansas Supreme Court

Page 599

362 P.2d 599

188 Kan. 355, 39 P.U.R.3d 255

NORTHERN NATURAL GAS COMPANY, Appellant, v. STATE CORPORATION COMMISSION, Appellee.

No. 42128.

Supreme Court of Kansas.

June 10, 1961.

Syllabus by the Court.

1. The provisions of G.S.1959 Supp., 55-703 are considered and held to be sufficient to give the Corporation Commission powers to pass rules to insure the fair and equitable taking of natural gas from a common source, and in such an attempt to provide for the ratable taking of natural gas by a purchaser.

2. It is further decided that such an order as described in the first paragraph hereof did not impair the obligation of a contract possessed by the purchaser or impinge upon other constitutional rights of the purchaser.

3. It is also further decided that the order of the Commission as to the ratable taking of natural gas concerns only the production and gathering of gas and in no way impairs the control of the Federal Power Commission over the transportation of natural gas in interstate commerce under the federal Natural Gas Act, 15 U.S.C.A. § 717 et seq.

Mark H. Adams, II, Wichita, argued the cause; and Mark H. Adams, Charles E. Jones, William I. Robinson, J. Ashford Manka, Clifford L. Malone, John S. Seeber and Floyd E. Jensen, Wichita; Lawrence I. Shaw, F. Vinson Roach, and Patrick J. McCarthy, Omaha, Neb., Ray H. Calihan, Logan N. Green, Daniel R. Hopkins and Ray H. Calihan, Jr., Garden City, were with him on the briefs for appellant.

Charles C. McCarter, Gen. Counsel, Wichita, argued the cause, and S. F. Fleeker, Asst. Gen. Counsel, Topeka, was with him on the briefs for appellee.

JACKSON, Justice.

The appellant Northern Natural Gas Company began a judicial review action in the court below to review an order of the Corporation Commission directing it to take gas ratably from all gas wells in the Kansas Hugoton Gas Field to which its lines were connected including the gas wells owned by Republic Natural Gas Company with which company it had a special contract as to the purchase of gas. The district court affirmed the order of the Commission, and the appellant brings the matter to this court on an appeal from the district court's decision.

Throughout the remainder of this opinion we shall refer to the above parties as 'Northern,' 'Republic,' and the 'Commission.'

For many years Northern and Republic have been parties to a contract under which Northern agreed to take and pay for a sufficient amount of natural gas to supply 60% of the supply needed by Northern to satisfy the needs of its customers in a certain area in Iowa and Nebraska. The exact location of this area in Nebraska and Iowa is not important, but it is referred to in the briefs as the Omaha District. This contract covers only some 144 wells owned by Republic and in the briefs this group of wells is referred to as the 'Republic A' wells.

The above contract has been before this court in the former case of Northern Natural Gas Co. v. Republic Natural Gas Co., 172 Kan. 450, 241 P.2d 708, in which opinion a more detailed account of the contract may be found.

There can be no question that Northern is engaged in the interstate transportation of natural gas by pipe line for sale in states other than Kansas, as defined in the Natural Gas Act, 15 U.S.C.A. § 717 et seq. In the last case mentioned, the question at issue was the amount of gas which could be lawfully produced under the above contract and regulations of the Commission. The important part of the syllabus of the case just cited reads: 'An operator of gas wells * * * as to the amount of gas he can produce from the wells, is governed by the allowables for such wells made by the commission for the time in question and not by slightly less than three times such allowables.'

Another case which is connected with this same contract between Republic and Northern is that of Republic Natural Gas Co. v. State Corporation Commission, 173 Kan. 172, 244 P.2d 1196. Those interested in an account of the manner of establishing proration allowables for gas wells in the Hugoton field are directed to the opinion in the last mentioned case. The case affirmed the Commission in making an order refusing to reinstate canceled 'underages' of certain gas wells owned by Republic. The canceled underages had been canceled according to the rules of the Commission applying to the entire Hugoton field.

As early as 1938, Northern had begun to purchase additional gas supply in the Hugoton field in addition to the Republic 'A' wells. In 1949, Northern entered into a gas purchase contract with Cities Service Oil Company. Thereafter, Northern purchased other gas supply and now owns some 125 gas purchase contracts.

These gas purchase contracts cover a total of some 1100 gas wells in the Hugoton field. Such contracts contain provisions for the ratable taking of gas between all gas wells with the exception that Republic 'A' wells are specifically excepted from the provision for ratable taking and are given preference where the demand for gas does not equal the allowables for all of the wells. A copy of such contracts is contained in the abstract but need not be reproduced in this opinion.

Northern's position is quite clearly and forcefully stated in the following quotation taken from its brief:

'As Northern has interpreted its commitments under its gas purchase contracts in such field, when Northern's market requirements from the field are less than the total allowables assigned to the wells connected to Northern, Northern's contractual commitment (as previously interpreted by the Court) under the Republic 'A' contract is first deducted from Northern's gas requirements and allocated to the Republic 'A' wells. The balance of Northern's requirements is then allocated ratably to all other wells to it connected in such Field.'

Northern further tells us that from 1944 until 1958, Northern was largely able to take ratably from all wells connected with its lines, but it seems to concede that during 1958, it took gas from Republic 'A' wells at a much greater rate than from the rest of the wells connected to its gathering lines. In January, 1959, the Cities Service wells connected to Northern's lines had a monthly allowable of 2,084,874 Mcf. They had an underage of 11,411,727 Mcf., and 123,711 Mcf. of these underages were canceled by the Commission under its general rules as being underproduced in excess of six times the January current allowable. Northern's other connections aside from Republic 'A' wells had a January current allowable of 9,309,441 Mcf. and a total underage of 48,604,070 Mcf. The net status of these wells was 522.09 percent underproduced, and they suffered cancellation of 409,393 Mcf. of the aforementioned underage.

In contrast, Republic 'A' wells had a current January allowable of 2,674,390 Mcf. and an overage of 114,858 Mcf. They were overproduced 4.29 percent in that particular month.

Northern makes no claim that it would not have been possible to take gas ratably from all of its wells. It only claims that the contract with Republic gives it the right to prefer Republic 'A' wells.

On May 27, 1959, the Commission on its own motion took notice of the above situation and issued an order to Northern to show cause why it should not take ratably from the wells to which it is connected in the Hugoton field in Kansas. The hearing was set first on June 26, 1959, but later continued to July 24, 1959 and the order appealed from was issued October 7, 1959.

At the hearing before the Commission, an expert witness testified as follows:

'* * * I have expressed an opinion that there is drainage occurring. Our studies indicate that if the wells are produced with the same percent of allowable production or of net allowable production, then the wells will be ratable, and correlative rights will be protected. There are two ways of accomplishing this currently in the Hugoton Field. One is to raise the total (of) Northern Natural's takes up until they are ratable with the Republic 'A' group, and second would be to lower Republic 'A' by curtailing their production, so they will become ratable with the balance of the field.'

We do not read the record to show that there is any contention but that drainage was occurring, and that the under-produced wells were losing the right to produce gas from the common source of supply to the great damage of the owners of the wells in the loss of their correlative rights.

While the members of this court make no claim to be experts in the science of the production of natural gas, we believe that the court may take judicial notice of the fact that where natural gas is within the earth in one common source and is under pressure, if one gas well is allowed to take gas, this will result in the pressure being lowered around the vicinity of this gas well so that the gas in the common source will tend to drain or rush to the vicinity of the will taking gas. The result will be that the other wells in the common field or source will be able to produce much less gas and the owners of such wells will have suffered a definite loss.

It should be noted at this time, that shortly after the issuance of the order of the Commission dated October 7, 1959, directed only to Northern and which is appealed from in this present proceeding, the Commission, after due notice and hearing, issued a general rule applicable to all takers of natural gas from the Hugoton gas field and requiring that all takers of gas take ratably from the wells to which they are connected. Northern's appeal from that general order is to be found in Northern Natural Gas Co. v. State Corporation Commission, 188 Kan. 351, 362 P.2d 609.

In attempting to sustain its position in the present case, Northern first contends that our state Natural Gas Act does not provide for ratable taking; that the act applies only to producers of gas; that Northern is a purchaser of gas and a natural gas company engaged in interstate...