Deep South Oil Co. of Tex. v. Texas Gas Corp.

Decision Date17 September 1959
Docket NumberNo. 6200,6200
Citation328 S.W.2d 897
CourtTexas Court of Appeals

Orgain, Bell & Tucker, Beaumont, Fulbright, Crooker, Freeman, Bates & Jaworski, Houston, for appellant.

Marcus, Weller & Evans, Beaumont, A. A. White, Houston, for appellee.

McNEILL, Justice.

This action was brought by appellee Texas Gas Corporation, hereinafter referred to as Texas Gas, against appellant Deep South Oil Company of Texas, hereinafter referred to as Deep South, for declaratory judgment seeking the construction of certain paragraphs of a contract involving the sale of gas from the Big Hill oil field in Jefferson County made between Deep South as 'seller' and by McCarthy Chemical Company, predecessor in interest of Texas Cas, as 'buyer'. The major questions involved are: (1) In the absence of Railroad Commission regulation, where the purchaser of gas from producers in the field is unable to take their full production, do Arts. 6049a and 6008, Vernon's Ann.Civ.St., provide a mandatory formula for ratable take of 25% open-flow potential from the wells of each producer?; and (2) May one of these producers cancel its contract for such sale of its gas in case of discrimination by such common purchaser?

The Big Hill field is a salt dome structure located in the southwestern part of Jefferson County. No field allowable or special spacing or well proration rules have ever been imposed by the Railroad Commission of Texas on this field. Deep South was one of the first producers in this field and was the first producer at Big Hill from which the predecessor of Texas Gas contracted to purchase gas. Soon after the first gas well was brought in by Deep South it and McCarthy Chemical Company executed the contract involved on February 15, 1952 which was to last for a 20 year period. It is appropriate to set out here certain paragraphs of this contract. Since the suit involves the obligation as to quantity of gas to be purchased we first quote Paragraph III(a):

'III. Quantity

'(a) Subject to the further provisions of this contract, Seller agrees to sell and deliver to Buyer, and Buyer agrees to purchase and receive from Seller, if available, a daily quantity of gas averaged over each year of the term of this contract equal to 1,000 MCF for each ten million (10,000,000) MCF of gas contained in Seller's recoverable reserves or seventy-five (75%) per cent of Seller's average daily deliverability during such year, whichever is the lesser quantity, provided, however, that in no event shall Buyer be obligated to take an average daily quantity of gas in excess of ten thousand (10,000) MCF. Pending the determination of Seller's recoverable reserves and daily deliverability, Buyer agrees to purchase and receive from Seller an average daily quantity of one thousand (1,000) MCF of gas.'

The term 'Recoverable Reserves' as used in the above paragraph and elsewhere in the contract is defined therein as follows:

'(g) The term 'recoverable reserves' shall meant the quantity of gas economically recoverable from wells drilled on the shall mean the quantity of gas economically or redetermination of the recoverable reserves pursuant to Article V hereof, puls the total quantity of gas theretofore delivered by Seller to Buyer from the dedicated leases subsequent to the date of the initial delivery of gas hereunder.'

Paragraphs V and XVIII of the contract are:

'V. Determination of Reserves and Deliverability--Upon the written request of either party, the parties hereto shall endeavor to determine by agreement the quantity of gas contained in Seller's recoverable reserves and Seller's estimated average daily deliverability for the next ensuing twelve (12) months. Thereafter, but not more often than once a year, upon written request of either party, the parties shall promptly endeavor to redetermine by agreement the quantity of such recoverable reserves and average daily deliverability. In the event the parties are unable to agree upon the initial determination or any redetermination within thirty (30) days after written request therefor, then the matter shall be submitted to arbitration in accordance with the provisions of Article XVIII hereof. The latest determination or redetermination shall be controlling until the next redetermination is made.

'XVIII. Arbitration--Any controversy between the parties arising under this contract not resolved by agreement shall be determined by a board of arbitration upon notice of submission given either by Buyer or by Seller to the other party also naming one arbitrator. The party receiving such notice shall, within ten (10) days thereafter, by notice to the other, name the second arbitrator, or failing so to do, the party giving notice of submission shall name the second. The two (2) arbitrators so appointed shall name the third, or failing to do so within ten (10) days, the third arbitrator may be appointed by the person who is at the time the senior judge of the United States District Court for the Southern District of Texas.'

The contract defines the term 'MCF' to mean 1,000 cubic feet. Deep South at the time held oil and gas leases from the Security State Bank & Trust Company and from C. Doornbos upon certain tracts in the field which leases were described in the contract and dedicated to its performance. After the date of this contract certain other wells were drilled by Deep South, and it transferred a tract of 80 acres it held under lease to the Delta Drilling Company. Shortly after February 15, 1952, Texas Gas succeeded as 'Buyer' to the interests of McCarthy Chemical Company in said contract. Texas Gas some two years after the beginning of this contract entered into contracts with four other gas producers in this field. It is thus seen that there are six producers (including Delta) at Big Hill from whom Texas Gas purchases gas, and by virtue of this fact Texas Gas is a 'common purchaser' at Big Hill with the statutory obligation imposed by Art. 6049a, Vernon's Annotated Civil Statutes, (known as the Common Purchaser Act) to purchase gas ratably. This obligation is recognized by both parties to the suit.

Negotiations were started between Deep South and Texas Gas within a reasonable time after the date of said contract looking toward an agreement to establish the 'recoverable reserves of gas' in the land under the leases involved. Such negotiations continued between the parties for a considerable time, during which the delivery of gas from the field to the common purchaser, Texas Gas, became greater and greater in volume. Finally, since the contracting parties could not agree on such reserves, Texas Gas invoked the arbitration provisions of the above Par. XVIII and appointed an arbitrator. Deep South refused to arbitrate and Texas Gas then appointed the second arbitrator as provided in the paragraph, and as a result an ex parte arbitration was held and an award made on May 21, 1955 which established the recoverable reserves under the Deep South at 32,957 MMCF as of April 1, 1955. During 1955 and 1956 several written requests were made by Texas Gas to Deep South to reduce the amount of its gas delivery to Texas Gas pipeline, and much correspondence developed between the parties on this score without appreciable success. At last, on September 28, 1956, Texas Gas requested Deep South to reduce its deliveries from 10,000,000 cubic feet a day to 7,000,000 which Deep South refused to do. Culminating this dispute on January 10, 1957, Texas Gas instituted this suit in the district court of Jefferson County praying for the construction of said contract and for an injunction to require Deep South's compliance therewith. It alleged that its system was connected to many high pressure wells in the area from which it took gas; that it could take gas at any one time in amounts equal to a fraction of the deliverability of these wells; that Deep South had ignored the request of Texas Gas as common purchaser to cut its deliveries and that one other such producer had refused to cut its deliveries and another was threatening to do so on account of the refusal of Deep South to reduce its deliveries; that therefore plaintiff, Texas Gas, was faced through chain reaction with complete loss and control of the gas coming into its system, subjecting it to pressures completely beyond its capacity and threatening dire consequences to persons and property. The petition prayed for a temporary restraining order which was granted and at the hearing thereon the court set the 'take' from Deep South at 8,500,000 cubic feet per day which was later reduced on final trial to 7,000,000 cubic feet. Deep South filed answer to this action and urged in cross-action that the contract should be canceled both on account of fraud at its inception on the part of the buyer and because of discrimination which was practiced and was being practiced upon it by Texas Gas by cutting down its deliveries and increasing the 'take' of gas from the other four producers and for damages after the cancellation date of said contract.

Texas Gas filed numerous pleas in abatement and exceptions to the cross-action of Deep South. Among the matters so urged were that since Deep South was a 'naturalgas company' within the meaning of the federal Natural Gas Act, 15 U.S.C.A. 717 et seq., and was engaged in interstate commerce its contract could not be canceled without permission of the Federal Power Commission; that any allowance by the court for damages to Deep South herein would in effect increase the rate of gas which could not be allowed without approval of said commission; that since under the conservation statutes of Texas the Railroad Commission of Texas has sole jurisdiction under Art. 6049a and related articles to decide the question of discrimination the court had no jurisdiction thereof.

Both parties filed motions for summary...

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