Exxon Corp. v. Middleton
| Decision Date | 04 February 1981 |
| Docket Number | No. B-7979,B-7979 |
| Citation | 10 A.L.R.4th 712,613 S.W.2d 240 |
| Parties | EXXON CORPORATION et al., Petitioners, v. Triphene MIDDLETON et al., Respondents. |
| Court | Texas Supreme Court |
Baker & Botts, Frank G. Harmon, Walter B. Morgan and Louis Bagwell, Houston, Orgain, Bell & Tucker, John G. Tucker, Beaumont, Herf M. Weinert and Julius L. Lybrand, Dallas, for petitioners.
Bracewell & Patterson, William Key Wilde and Charles G. King, Houston, for respondents.
ON MOTION FOR REHEARING
Our opinion and judgment dated October 1, 1980, are withdrawn and set aside.
Exxon Corporation, formerly Humble Oil and Refining Company, (Exxon) secured three oil and gas leases from A. D. Middleton in 1933 and 1934 and one lease from members of the White family in 1935. Sun Oil Company of Delaware (Sun) obtained two oil and gas leases from A. D. Middleton and others in 1940 and 1941, one lease from R. M. White in 1933, one lease from Lily Mae Hamilton and O. B. Hamilton in 1933, and two leases from Felix Jackson and others in 1933 and 1938.
Three lawsuits involving these leases were filed in 1974. The first was by the successors in interest to A. D. Middleton (Middletons) against Exxon. The second was by the successors in interest to R. M. White (Whites) against Exxon and Sun. The third was brought by the successors in interest to Felix Jackson (Jacksons) against Sun. These separate suits alleged a deficiency in the amount of royalties paid by Exxon and Sun, as lessees, for the years 1973, 1974 and 1975. The three original lawsuits were consolidated into a single suit, which was tried to the court in January of 1977, and judgment was rendered for the plaintiffs. The Court of Civil Appeals reversed the trial court judgment and remanded the cause in part and rendered judgment in part. 571 S.W.2d 349, Tex.Civ.App.
The problem begins with the gas royalty clause. That clause in the Exxon lease with the Middletons and Whites provides that royalties
... on gas, including casinghead gas or other gaseous substances, produced from said land and sold or used off the premises or in the manufacture of gasoline or other product therefrom, shall be the market value at the well of one-eighth of the gas so sold or used, provided that on gas so sold at the wells the royalties shall The gas royalty clause in the Sun-Middleton, White and Jackson leases provides that Sun would pay
be one-eighth of the amount realized from such sale.
... on gas, including casinghead gas or other gaseous substances, produced from said land and sold or used off the premises, or used in the manufacture of gasoline or other products therefrom, by lessee, 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.
The first question is "What is a sale at the wells?" or "What is a sale off the premises?" The Exxon leases are located in the Anahuac Field, Chambers County. Some of the natural gas produced from the Middleton and White leases was processed at Exxon's Anahuac Gas Plant. This plant is not located on any of the Middleton or White leases but is in the Anahuac Field. The processed gas was delivered by Exxon at the tailgate of its Anahuac Gas Plant to the City of Anahuac, the Houston Pipeline Company and the Exxon Gas System. Twenty percent of the processed gas was sold to the City of Anahuac and the Houston Pipeline Company. The remainder was delivered to the Exxon Gas System and was sold to Exxon's "eastend customers," and is marketed to fifteen industrial customers. The Exxon Gas System delivered gas to each eastend customer at the customer's "plant gate."
The distinction between "sold or used off the premises" or "sold at the wells" now becomes important because the oil and gas royalty clause provides two standards for computing royalties, market value and amount realized. The royalty clause provides
(1) ... on gas ... sold or used off the premises ... the market value at the well of one-eighth of the gas so sold or used.
The clause further provides
(2) ... that on gas sold at the wells the royalties shall be one-eighth of the amount realized from such sale ....
The parties agree that on gas "sold at the wells" royalties are based on the amount realized.
Exxon argues that its sale to the City of Anahuac and Houston Pipeline Company at the tailgate of the Anahuac Plant, not located on the Middleton or White leases, but within the Anahuac Field is a sale at the wells. Therefore, the royalties should be based on the amount realized from such sales. The Middletons and Whites argue that the Anahuac Plant is not on the leased premises and the royalties should be based on market value because a sale off the leased premises is not a "sale at the wells."
Stated another way, the issue with regard to Exxon's sales to Houston Pipeline Company and the City of Anahuac is whether a sale in the field, but not on the premises of the lease, is a sale "off the premises" or a sale "at the wells." If the former, the royalty is calculable on the basis of market value; if the latter, the royalty is payable on the basis of the proceeds received by Exxon for the sale of that gas.
The trial court found Exxon's sales to Houston Pipeline Company and the City of Anahuac at the tailgate of the Anahuac Gas Plant were "sales at the wells." The Court of Civil Appeals reversed that finding and held that gas sold at the tailgate of the Anahuac Gas Plant were sales "off the premises."
The court stated:
The court's finding that the gas was sold at the tailgate of the Anahuac Gas Plant is inconsistent with, and better supported by the evidence than the finding that the gas was "sold at the wells."
It is undisputed that "off the premises" means off the leased premises. However, the question is whether the boundary lines of the leased premises determines which The market value provision of the royalty clause stated:
royalty clause is applicable, market value or amount realized.
... on gas ... sold or used off the premises ... the market value at the well of one-eighth of the gas so sold or used.
The Whites and Middletons argue this clause provides royalties based on market value for all gas sold off the leased premises and based on the amount realized for all gas sold within the leased premises (sold at the wells). They argue that in the phrase "sold or used off the premises" off the premises modifies both "sold" and "used." Because the market value standard includes all sales off the leased premises, they contend that, by implication, the phrase "sold at the wells" includes all sales which occur "on the premises."
Exxon contends that "off the premises" modifies the word "used" only. It contends the phrase "sold at the wells" is neither defined nor limited by any language in the lease, and that the parties intended a sale at the well to include any sale which occurred in the field of production.
Exxon's contention that the words "off the premises" modifies the word "used" and not the word "sold" is weakened by looking at the entire clause.
... on gas ... sold or used off the premises ... the market value at the well of one-eighth of the gas so sold or used.
The words "so sold" imply the gas has been sold in a certain manner. In Webster's Third International Dictionary, "so" is defined as "in a manner or way that is indicated or suggested." If, as Exxon insists, "off the premises" modifies the word "used" only, parallel construction would rewrite the phrase to provide a royalty calculated on "the market value at the well of one-eighth of the gas sold or so used."
Exxon's construction creates royalty standards which overlap. According to Exxon, the market value standard applies to all sales wherever they occur, whereas, the amount realized standard applies only to sales at the wells even though sales at the wells are covered by the market value standard. Exxon's construction would cause the royalty clause to read as follows:
On gas ... produced from said land and sold ... the market value at the well of one-eighth of the gas so sold provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized.
We conclude "off the premises" modifies both "sold" and "used." The "premises" is the land described in the lease agreement. Therefore, sold "off the premises" means gas which is sold outside the leased premises. Thus, "sold at the wells" means sold at the wells within the lease, and not sold at the wells within the fields.
Our construction in no way conflicts with Texas Oil and Gas Corporation v. Vela, 429 S.W.2d 866 (Tex.1968). In Vela, the royalty clause obligated Texas Oil and Gas:
To pay to lessor, as royalty for gas from each well where gas only is found, while the same is being sold or used off the premises, one-eighth of the market price at the wells of the amount so sold or used, ... (emphasis added).
Gas produced from the Vela leases was sold on the leased premises. The sole standard for calculating royalties was market value, regardless of where the sale took place. Under those circumstances the phrase "off the premises" did not modify sold, and the words "so sold" as used in that context referred to all sales.
Exxon relies heavily on Butler v. Exxon Corporation, 559 S.W.2d 410 (Tex.Civ.App. El Paso 1977, writ ref'd n. r. e.). In Butler, supra, the royalty clause is almost In Skaggs v. Heard, 172 F.Supp. 813 (D.C.Tex.1959), it was held, under a gas royalty clause, that a sale at a separator on the leased premises, but 320 feet from a wellhead, was a sale "at the well" as opposed to being a sale not at the well and off the leased premises. Also, in Kingery v. Continental Oil Company, 434 F.Supp. 349 (D.C.1977), the Court, in construing a gas royalty provision similar to the one in question, held that a sale off the premises was not a sale at the wells. In that case the point...
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