Hillard v. Stephens, 81-231
| Decision Date | 12 July 1982 |
| Docket Number | No. 81-231,81-231 |
| Citation | 276 Ark. 545,637 S.W.2d 581 |
| Parties | O. Porter HILLARD et al., Appellants, v. J. T. STEPHENS et al., Appellees. |
| Court | Arkansas Supreme Court |
Niblock & Odom by Priscilla Karen Pope and Walter R. Niblock and Putman, Gallman & Dickson by James W. Gallman, Fayetteville, for appellant.
Warner & Smith by Gerald L. Delung and G. Alan Wooten, Fort Smith, for amicus curiae Tenneco Oil Co. and Shell Oil Co.
Ball, Mourton & Adams by E. J. Ball, Fayetteville, and Spence A. Leamons, Fort Smith, for appellees.
This case is before the Supreme Court pursuant to Rule 29(1)(n) as it presents issues of first impression regarding gas rights. Appellants, plaintiffs below, the "Hillards," are lessors of seven gas leases in Franklin County, Arkansas. Appellees, "Stephens," are the lessees.
The first lease was executed on or about February 6, 1957, and all of the gas produced from the wells, except that part used, retained and/or purchased by the Hillards under the leases and as modified by letter agreements was sold for use off of the premises under long-term gas purchase contracts. Stephens paid appellants over the years based on "net proceeds" which Stephens received for the sale of the gas under the long-term gas purchase contracts. Appellants contend that royalties have been underpaid.
All of the gas leases were on the same oil and gas lease form then in use in the State of Arkansas, and more particularly, the Arkhoma basin of Arkansas, but each such lease contained certain modifications. The first five of these leases provide for a royalty to the lessor as follows:
3. (b) The Lessee shall pay Lessor as royalty for gas the equal one-eighth ( 1/8) of the value of such gas calculated at the rate of "" Prevailing Market Price at Well per thousand cubic feet while the same is being sold or used off the premises, measured according to Standard Measurement Law in the State in which the above described land lays.
The term "five cents" as set out in the foregoing provision was struck out and the term "prevailing market price" was inserted therein. Stephens paid royalty to the Hillards and the Hillards accepted the royalty payments without complaint until this suit was filed on June 28, 1979, based on the "net proceeds" from the Ark-La contracts.
Two of the leases provided for a royalty to lessor as follows:
3. (b) The Lessee shall pay Lessor as royalty for gas the equal one-eighth ( 1/8) of the value of such gas calculated at the rate of seven (7) cents per thousand cubic feet while the same is being sold or used off the premises, measured according to the Standard Measurement Law of the State in which the above described land lays.
The term "five" as set out in the foregoing provisions of the two leases was struck out and the term "seven (7)" was inserted therein. Stephens paid royalty to the Hillards under these two leases from the commencement of production of natural gas to July 21, 1970, computed on the "net proceeds" received from the Ark-La contracts. After July 21, 1970, Stephens paid royalty to the Hillards computed at a set amount of approximately $ .16 per MCF and was unable to explain why it did not compute the royalty based on the "net proceeds" received from the sale of the gas as in the past. The Hillards accepted the royalty payments from Stephens without complaint until this suit was filed on June 28, 1979.
On June 30, 1981, the trial court held:
1. That the "prevailing market price at the well" provision of the royalty clause in the first five of the leases requires that Stephens' royalty obligation be settled on the basis of "current sales" of the gas on a daily basis through November 8, 1978, and thereafter by reference to § 105 of the Natural Gas Policy Act of 1978, 15 U.S.C.A. § 3315 which fixes the maximum price for such gas at the price specified in the existing contracts under which Ark-La purchased the gas from Stephens; and
2. That Ark.Stat.Ann. § 53-511 (Repl.1971) converted the two leases from the fixed price of $0.07 per MCF leases to "proceeds" leases and required that Stephens' royalty obligation be settled on the basis of the "net proceeds" received by Stephens for the sale of the gas to Ark-La under the contract. The trial court awarded Hillards a judgment for $193,749.00, with prejudgment interest. Hillards appealed and Stephens cross-appealed.
The Hillards contend on appeal:
1. That with respect to the first five of the leases, they are entitled to a royalty computed on the current market value of the gas in the field determined on a daily basis the moment the gas is produced and/or delivered to Ark-La under the gas purchase contracts;
2. That with respect to the last two of the leases (the fixed price leases of $0.07 per MCF) they were entitled to a royalty computed on the "net proceeds" received by Stephens from Ark-La from the sale of the gas under the contracts, because these leases were converted into "proceeds leases" under § 53-511, and alternatively, they own all of the gas produced under these two leases on and after June 28, 1974, because these two leases were forfeited retroactively by Stephens under Ark.Stat.Ann. § 53-514 (Repl.1971).
Stephens contends on cross-appeal:
1. That the "prevailing market price at the well" under the five leases is determined by the contracts between Stephens and Ark-La, for the sale of the gas and Stephens' payment to the Hillards of the royalty computed on the price per MCF received by Stephens under the long-term contracts discharges in full its obligation to pay royalty.
2. That § 105 of the Natural Gas Policy Act (NGPA), 15 U.S.C.A. § 3315, determines the "market value" of the Hillard gas on and after its effective date on November 9, 1978, and Stephens' payment to the Hillards of the royalty computed pursuant to § 105 of the NGPA, 15 U.S.C.A. § 3315 () discharges in full its obligation to pay royalty.
3. That payment of royalty to the Hillards computed at the rate of $0.07 per MCF as specified in the last two leases discharges in full its obligation to pay royalty because §§ 53-511 and 53-514 do not apply to gas leases, since these gas leases constituted a present sale of gas in place with all the title to such gas being vested absolutely in Stephens and none in the Hillards.
4. That if §§ 53-511 and 53-514 convert the fixed price leases (the 0.07 per MCF) into proceeds leases, then all the gas leases are converted into proceeds leases by the statute.
5. Other grounds for relief based on the doctrines of estoppel and laches and Stephens objects to the awarding of pre-judgment interest.
The first issue to be decided here is whether the "contract price" that Stephens receives according to the gas purchase contracts with Ark-La is the "prevailing market price at well" under the five leases. We hold that it is. The gas lease constitutes a present sale of all of the gas in place at the time such lease is executed; and as the gas leaves the well head, the entire ownership thereof is in the lessee, none being reserved in the lessor. Once the lessee-producer drills a well resulting in the commercial production of natural gas on the leased premises, the lessee-producer has the immediate duty to market the gas. In order to market such gas effectively, it is the custom in the industry and is usually necessary for the lessee-producer to sell the gas under a long-term gas purchase contract. In Tara Petroleum Corporation v. Hughey, 630 P.2d 1269, 1273 (Okl.1981), the Oklahoma Supreme Court stated:
We have recognized this necessity of the market, and we believe that lessors and lessees know and consider it when they negotiate oil and gas leases. Lessors and lessees also know that during the term of a gas purchase contract gas prices may increase, perhaps substantially. During the term a producer's revenues, fluctuations in the production aside, will not increase. Yet if royalty must be paid on the basis of a "current," steadily-increasing "prevailing price," then the lessor's share will take an even larger and larger proportion of the producer's revenues.
Following the foregoing quotation, the Tara court considered an example of how the lessor would continue to receive a larger portion of the revenues for the sale of the gas, if the lessor's contention were followed. Similarly, in this case, on December 1, 1981, Stephens would be receiving from Ark-La under the gas purchase contracts the sum of $0.3390 per MCF for the Hillard gas, and the Hillards contend that they are entitled to be paid royalty computed on a "prevailing market price at well" of about $2.40 per MCF with their royalty portion amounting to $0.30 per MCF, while Stephens' revenues per MCF remain constant. If this were true, then Stephens will keep only $0.0390 per MCF from the $0.3390 proceeds received. As stated by the Oklahoma court in Tara, supra, p. 1273:
This would not be fair to the producers ... We do not believe that the lessors in this case ... ever contemplated that the lessors' royalty could be over half of what the producers ... received for the gas. The better rule--and the one we adopt--is that when a producer's lease calls for a royalty on gas based on the market price at the well and the producer enters into an arm's-length, good faith gas purchase contract with the best price and term available to the producer at the time, that price is the "market price" and will discharge the producer's gas royalty obligation.
See also, Henry v. Ballard & Cordell Corp., 401 So.2d 600, (La.Ct. Appeals, 1981). We recognize that the Texas courts have taken a different approach, see Texas Oil & Gas Corp. v. Vela, 429 S.W.2d 866 (Texas 1968) and other Texas cases that followed it.
Here, the gas purchase contracts under which the Hillard gas was sold to Ark-La were effective as long as natural gas was produced from the Hillard...
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