Butler v. Exxon Corp.

• Decision Date: 16 November 1977
• Docket Number: No. 6644,6644
• Citation: 559 S.W.2d 410
• Parties: Ted BUTLER et al., Appellants, v. EXXON CORPORATION, Appellee.
• Court: Texas Court of Appeals

Page 410

559 S.W.2d 410

Ted BUTLER et al., Appellants,

v. EXXON CORPORATION, Appellee.

No. 6644.

Court of Civil Appeals of Texas, El Paso.

Nov. 16, 1977.

Rehearing Denied Dec. 14, 1977.

Cox, Smith, Smith, Hale & Guenther, Inc., Eugene B. Labay, Richard T. Brady, San Antonio, for appellants.

Baker & Botts, Frank G. Harmon, Michael Paul Graham, Diana M. Hudson, Walter B. Morgan, Houston, Walter B. Morgan, Exxon Co., Houston, for appellee.

Anderson, Brown, Orn & Jones, Earl A. Brown, Jr., Houston, for amicus curiae Earl A. Brown, Jr.

Strasburger & Price, Leo J. Hoffman, Dallas, for amicus curiae Strasburger & Price.

Stubbeman, McRae, Sealy, Laughlin & Browder, W. B. Browder, Jr., David K. Brooks, Midland, for amicus curiae Amoco Production Co., et al.

Vinson, Elkins, Searls, Connally & Smith, James W. McCartney, Houston, for amicus curiae Mobil Oil Corp.

OPINION

OSBORN, Justice.

This case involves the question of whether or not additional royalties are due to the lessors under gas royalty provisions of four oil and gas leases which were executed in 1966. The trial Court denied any additional recovery. We affirm in part and in part reverse and remand.

The basic dispute results from the fact that the price of natural gas in the intrastate market in Texas rapidly escalated from the time the gas discovered under these leases was sold for less than 20cents per mcf in 1970 to over $2.00 per mcf by early 1975. Relying primarily upon Texas Oil & Gas Corporation v. Vela, 429 S.W.2d 866 (Tex.1968), Appellants contend that they should have been paid a gas royalty based on market value when the gas was delivered to the purchaser. See: Kelly, "What Price, Gas?", 7 St. Mary's L.J. 333 (1975).

The four leases cover lands which form a part of the Atkinson Gas Field in Karnes and Live Oak Counties. In 1970, after the first wells were drilled, the lessee executed contracts to sell the gas for the next twenty years. On the gas produced from Units Nos. 2 and 4, the initial price was 18cents per mcf. On Unit No. 5, the price was 181/2cents. In addition, another 11/2cents per mcf was paid for processing rights for the extraction of liquid hydrocarbons. Each of the gas contracts had a provision for a price escalation of 1cents per mcf every five years. From the beginning of production in 1970 until it assigned the leases to a third party on October 1, 1975, Exxon made royalty payments to the lessors based upon the amount realized from such sales.

The two principal leases, being Exxon Leases Nos. 510294 and 510296 which cover nearly 80% of the Butler acreage involved in this suit, contained the following royalty clause:

"The royalties to be paid by Lessee are: (a) on oil, one-eighth of that produced and saved from said land, the same to be delivered at the wells or to the credit of Lessor into the pipe line to which the wells may be connected; Lessee may from time to time purchase any royalty oil in its possession, paying the market price therefor prevailing for the field where produced on the date of purchase; (b) on gas, including casinghead gas or other gaseous substance, produced from said land and sold or used off the premises or for the extraction of gasoline or other product therefrom, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale; * * * and (c) on all other minerals mined and marketed, 1/8 either in kind or value at the well or mine * * *."

Lease No. 510292 contains a very similar clause except for a provision for payment to two different royalty owners, the lessors and the State. See: Gregg, "Analysis of the Usual Oil and Gas Lease Provisions", 5 S.Tex.L.J. 1 at 13 (1960).

Lease No. 510266, which covers 26.11 acres and 3.2% of the Butler acreage involved in this suit, contains a clause which requires the lessee to pay to the Veterans' Land Board and to deliver to the credit of the lessor "one-sixteenth of the market value at the well of all gas produced and saved from the leased premises."

After gas was discovered in the Atkinson Field, parts of these leases were unitized pursuant to Railroad Commission Regulations to form parts of three one-well units. Following production, the Butlers executed a series of division orders which provided:

"Settlements for gas sold at wells or at a central point in or near the field where produced shall be based on the net proceeds at the wells. * * * "

After Hattie L. Butler, Appellant's mother, died in September, 1973, a new division order, dated November 1, 1973, was executed which provided for settlements on oil and gas to be in accordance with the royalty provisions of the leases. The original division orders were revoked on April 1, 1975, and a new division order was signed to require payments for oil and gas in accordance with the royalty provisions in the leases.

Much of the testimony in the case consists of opinion evidence of expert witnesses. Each side used a consulting petroleum engineer to develop their theory of the case. Mr. Max Powell, testifying as an expert witness for the Appellants, commenced with a tabulation of gas sales in a seven-county area of South Texas, and ultimately reached a conclusion as to the market value of gas in the Atkinson Field for each quarter from October, 1972, until October, 1975. These prices ranged from 32.9cents per mcf at the beginning to $2.06 per mcf at the end. Basically, he averaged the top three sales in Live Oak and Karnes Counties each quarter to determine market value during such period. He said all sales which he finally used were comparable in quantity, quality, and availability of gas. He concluded that the Butlers had been underpaid in the amount of $187,881.55, plus interest of $27,407.29. He readily admitted that this determination was based on new gas coming into the market under current market conditions. Mr. Powell testified, and the trial Court found, that the gas was delivered to the purchaser at the tailgate of a centralized separation, dehydration, and compressing facility of Exxon which was located approximately 100 feet west of the west fence line on the Butler property and thus was off the leased premises. Mr. Powell concluded that there could be a sale at the well even though delivery was made to the purchaser several hundred feet from the well head. But he said a sale off the premises, as in this case, was not in his opinion a sale at the well. In this regard, he said:

" * * * that the circumstance in which Exxon obligated itself to pay royalty to the Butler families called for market value at the well for gas sold or used off of the premises, and that is what happens here. You are not selling the gas on these premises. The delivery point is off of the premises and that is what invokes, in my view, the market value clause.

" * * * It cannot be construed as a sale at the well for the three units for which the Butler family owns royalty because the delivery point and the point of sale is not located on any of those three units.

"I'm saying to you that if the sale had taken place on the premises covered in the lease, then it would have been a proceeds royalty provision and not a market value provision."

Mr. H. J. Gruy testified as an expert witness for the Appellee and said that in his opinion Exxon was required to execute long term contracts to sell the gas in 1970, and that in his opinion they got fair market value and the best price available at the time of sale. He said sales after 1970 were not comparable and could not be considered in determining market value. Mr. Gruy considered the sale by Exxon to be at the well. He testified:

Q Normally what would you consider to be a well head sale?

"A Well, a well head sale is generally considered to be a sale in or near the wells as distinguished from tailgate of a plant sale.

"Q Okay. If you had a sale, say, that occurred at the tailgate of a, say, a compression station located off of the lease premises over on another lease, would you consider that as a well head sale?

"A I would."

The trial Court filed extensive Findings of Fact and Conclusions of Law. In addition to the undisputed facts set forth above concerning the leases and gas contracts, the Court found that in 1970 a prudent operator would make every reasonable effort to market the gas from Units Nos. 2, 4, and 5 as quickly as possible so as to prevent drainage from other wells in the field. The Court also found that in 1970 gas could only be sold on long term contracts with minimal price escalation provisions, and that the contracts for this gas were bona fide arms length transactions with a price as good or better than any prices being paid for gas in Karnes and Live Oak Counties at that time. The Court also found that Exxon had attempted diligently but unsuccessfully to renegotiate the contracts.

With regard to payments called for by the lease provisions and those actually made, the Court found:

"9. This Court finds that the gathering, compression and dehydration expenses incurred by Exxon and charged against the contract prices in the royalty computations were ordinary and reasonable.

"10. At all times material to this case, and specifically commencing with the last quarter of 1972, down through and including the third quarter of 1975, the defendant Exxon Corporation paid royalties to plaintiffs on the gas produced from the land covered by the above mentioned leases on the market value at the well of 1/8th of the gas sold.

"11. The market value at the well of the gas which was sold was the total proceeds received by the defendant Exxon Corporation from Lo-Vaca Gathering Company and Coastal States, less the cost of gathering, compressing and dehydration which were required to make the gas marketable. The Court specifically finds that the market value at the well of the gas produced from Unit 2 was 191/2 cents per mct (sic) at all times material to this case...