Panhandle Eastern Pipeline Co. v. State of Okl. ex rel. Com'rs of Land Office

• Decision Date: 06 May 1996
• Docket Number: No. 94-6325,94-6325
• Citation: 83 F.3d 1219
• Parties: 133 Oil & Gas Rep. 353, Util. L. Rep. P 14,108 PANHANDLE EASTERN PIPELINE COMPANY; Northwest Central Pipeline Corporation; ANR Pipeline Company; Natural Gas Pipeline Company of America; Mississippi River Transmission Corporation; KN Energy, Inc.; Public Service Company of Oklahoma; Tennessee Gas Pipeline Company, a division of Tenneco, Inc., Plaintiffs-Appellees, Colorado Interstate Gas Company; Amoco Production Company; Anadarko Production Company; Apache Corporation; CNG Producing Company, Cities Service Oil & Gas Corporation; Cotton Petroleum Corporation; Mobil Oil Corporation; Mustang Production Company; Phillips Petroleum Company; Sohio Petroleum Company; Sun Exploration and Production; Tenneco Oil Company; Texaco, Inc.; Union Oil Company of California; Warren Petroleum Company, a division of Chevron U.S.A., Inc.; Atlantic Richfield Company, Plaintiffs-Intervenors-Appellees, El Paso Natural Gas Company and Arkla, Inc. (now known as Noram Energy Corporation), Plaintiffs, v. STATE OF OKLAHOMA, ex rel., COMMISSIONERS OF the LAND OFFICE; Clifton H. Scott, John M. Folks, Jack D. Craig, Henry Bellmon, Robert S. Kerr, III, Commissioners of the Land Office, Defendants, Oklahoma Mineral Owners Association; Jess Stratton, Jr., Defendants-Intervenors-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1219

83 F.3d 1219

133 Oil & Gas Rep. 353, Util. L. Rep. P 14,108

PANHANDLE EASTERN PIPELINE COMPANY; Northwest Central Pipeline Corporation; ANR Pipeline Company; Natural Gas Pipeline Company of America; Mississippi River Transmission Corporation; KN Energy, Inc.; Public Service Company of Oklahoma; Tennessee Gas Pipeline Company, a division of Tenneco, Inc., Plaintiffs-Appellees Colorado Interstate Gas Company; Amoco Production Company Anadarko Production Company; Apache Corporation; CNG Producing Company, Cities Service Oil & Gas Corporation Cotton Petroleum Corporation; Mobil Oil Corporation Mustang Production Company; Phillips Petroleum Company; Sohio Petroleum Company; Sun Exploration and Production; Tenneco Oil Company; Texaco, Inc.; Union Oil Company of California; Warren Petroleum Company, a division of Chevron U.S.A., Inc.; Atlantic Richfield Company, Plaintiffs-Intervenors-Appellees, El Paso Natural Gas Company and Arkla, Inc. (now known as Noram Energy Corporation), Plaintiffs, v. STATE OF OKLAHOMA, ex rel., COMMISSIONERS OF the LAND OFFICE; Clifton H. Scott, John M. Folks, Jack D. Craig, Henry Bellmon, Robert S. Kerr, III, Commissioners of the Land Office, Defendants, Oklahoma Mineral Owners Association; Jess Stratton, Jr., Defendants-Intervenors-Appellants.

No. 94-6325.

United States Court of Appeals, Tenth Circuit.

May 6, 1996.

Allan DeVore of The DeVore Law Firm, Oklahoma City, Oklahoma (Marjorie Ramana, The DeVore Law Firm and Douglas E. Burns, with him on the brief), for Defendants-Intervenors-Appellants.

Donna Nix Blakley of Hill, Estill, Hardwick, Gable, Golden & Nelson, Oklahoma City, Oklahoma (Sharon Taylor Thomas of Hill, Estill, Hardwick, Gable, Golden & Nelson; Teresa B. Adwan and M. Benjamin Singletary of Gable & Gotwals, Tulsa, Oklahoma; Karen L. Pauley and Michael L. Williams of the Colorado Interstate Gas Company, with her on the brief), for Plaintiffs/Appellees.

Clyde A. Muchmore of Crowe & Dunlevy, Oklahoma City, Oklahoma (Mark D. Christiansen and Harvey D. Ellis, Jr., with him on the brief), for Plaintiffs-Intervenors-Appellees.

Before ANDERSON, McKAY and EBEL, Circuit Judges.

EBEL, Circuit Judge.

This appeal concerns the constitutionality of an Oklahoma law, Senate Bill 160 ("SB 160"), that amended Oklahoma statutory obligations owed by purchasers and producers of oil and natural gas to owners of royalty interests. SB 160 became effective in 1985 and remained so until July 1, 1993, when it was effectively repealed and replaced by legislation that is not challenged by these parties. The district court, exercising jurisdiction under 28 U.S.C. § 1331, ruled, on summary judgment, that SB 160 violated the Supremacy Clause, the Contracts Clause, and the Fourteenth Amendment. ¹ The district court also held that the Oklahoma legislature intended SB 160 to apply prospectively only. The Oklahoma Mineral Owners' Association ("OMOA") and Jess Stratton, Jr., a mineral owner (collectively, "Mineral Owners"), appeal. They also ask this court to certify certain questions to the Oklahoma Supreme Court, and contend that issues of material fact precluded summary judgment below. We DENY the motion for certification, and conclude that SB 160 is preempted by federal law insofar as it burdens interstate purchasers of natural gas. We further conclude that the invalid provisions of SB 160 are not severable from the remainder of the statute, and thus we conclude that SB 160 is unconstitutional in its entirety. Consequently, we AFFIRM the judgment of the district court.

Background

The Appellee pipeline companies ("Purchasers") are natural gas companies and interstate pipelines, as defined by the Natural Gas Act, 15 U.S.C. § 717a(6) and the Natural Gas Policy Act, 15 U.S.C. § 3301(15). ² During the times relevant to this appeal, Purchasers have purchased, sold and transported gas in interstate commerce. They each purchase natural gas from producers under gas purchase contracts covering wells throughout Oklahoma, most of which are located on "drilling and spacing units" created by orders of the Oklahoma Corporation Commission. The Appellee-Intervenor producers ("Producers") own interests in oil and gas leases within these drilling and spacing units. Producers primarily produce and market oil and gas, but occasionally they purchase gas from other producers, thus assuming the role of first purchasers.

Until 1985, Oklahoma statutory law imposed the following obligation on oil and gas producers:

In the event a producing well or wells are completed upon a unit where there are ... two or more separately owned tracts, any royalty owner holding the royalty interest [in a tract in the unit] shall share in the one-eighth (1/8) of all production from the well or wells drilled within the unit ... in the proportion that the acreage of their separately owned tract or interest bears to the entire acreage of the unit; provided, where a lease covering any such separately owned tract or interest included within a spacing unit stipulates a royalty in excess of one-eighth (1/8) of the production ... then the lessee of said lease out of his share of the working interests ... shall sustain and pay said excess royalty....

Okla. Stat. tit. 52, § 87.1(e) (Supp.1984). In 1963, the Oklahoma Supreme Court interpreted this provision to mean that a royalty owner whose own lessee is not selling gas is nonetheless entitled to a proportionate share of the statutory one-eighth royalty from all production in the unit. Accordingly, the court held that when a well is producing from a drilling and spacing unit established under the Oklahoma Corporation Commission, each producer-lessee selling production from a well must account to all royalty owners in the unit (as opposed to only its own lessor) for the owners' proportionate shares of the statutory one-eighth royalty share of production proceeds. Shell Oil Co. v. Corporation Comm'n, 389 P.2d 951 (Okla.1963) (the "Blanchard " case). According to Producers, standard industry practice before the Blanchard decision was to include in leases a minimum 1/8 royalty interest payment. See Richard W. Hemingway, The Law of Oil and Gas § 7.1, at 381 (3d ed. 1991) ("The then-customary provisions [in the earliest leases] were that the lessor was entitled to a fractional portion, usually 1/8, of the oil ....") (footnote omitted). Thus, the Blanchard decision did not alter the burden on producer-lessees; they still paid 1/8 of their proceeds to royalty owners. Any amount in excess of 1/8 was paid only by an individual lessee, out of its own working interest, to its own lessor pursuant to specific lease provisions.

The duties of oil and gas purchasers were not at issue in the Blanchard case. These Purchasers, pursuant to most of their oil and gas contracts, were obligated to pay the full sales price to producers, who in turn were independently responsible for royalty payments and any other obligations due under the oil and gas leases between lessee-producers and lessor-owners. ³

During the early 1980s there was an oversupply of natural gas. As a result, royalty owners experienced difficulty in obtaining their royalty payments. The Oklahoma Legislature responded by enacting Senate Bill 160 ("SB 160") in 1985, amending two existing statutes to provide greater rights to royalty owners. Okla. Stat. tit. 52, § 87.1(e) was amended to provide in relevant part:

In the event a producing well or wells are completed upon a unit where there are ... two or more separately owned tracts, the first purchaser or purchasers shall be liable to any royalty owner ... holding the royalty interest under a separately owned tract included in such drilling and spacing unit for the payment of proceeds from the sale of production from the drilling and spacing unit. Each royalty interest owner shall share in all production from the well or wells drilled within the unit ... to the extent of such royalty interest owner's interest in the unit. Each royalty interest owner's interest in the unit shall be defined as the percentage of royalty, including the normal one-eighth (1/8) royalty, overriding royalties or other excess royalties owned in each separate tract by the royalty owner, multiplied by the proportion that the acreage [owned] bears to the entire acreage of the unit. The first purchaser or purchasers shall also be jointly and severally liable for the payment to each royalty interest owner of any production payments or other obligations for the payment of monies contained within the leases covering any lands lying within the drilling and spacing unit. Nothing in this act shall relieve a lessee or his assignees from any obligations imposed by the lease.

(Supp.1985) (emphasized language added by SB 160).

Also challenged is SB 160's amendment of Okla. Stat. tit. 52, § 540. The challenged portion of that statute read:

B. Any said first purchasers or owner of the right to drill and produce substituted for the first purchaser as provided herein that violates this act shall be liable to the persons legally entitled to the proceeds from production for the unpaid amount of such proceeds with interest thereon at the rate of twelve percent (12%) per annum, calculated from date of first sale.

(Supp.1985) (emphasized language added by SB 160).

The legislation thus amended existing law in several significant ways. First, it amended the previous method under which a royalty owner's interest in a spacing or drilling unit was determined. Whereas the previous statute, as construed in the Blanchard case, provided that royalty owners in a unit would share in one-eighth of all production from the unit, the amended statute provides that each royalty owner shares in all production in the unit, to the extent of his " 'royalty owner's interest in the unit.' " Okla. Att'y Gen. Op. No. 88-76 (Jan. 13, 1989). The statute expressly defines "royalty owner's interest" to include both "the normal 1/8 royalty" and other royalties...