El Paso Natural Gas Co. v. Sun Oil Co., MO-74-CA-57.

• Decision Date: 27 January 1977
• Docket Number: No. MO-74-CA-57.,MO-74-CA-57.
• Citation: 426 F. Supp. 963
• Parties: EL PASO NATURAL GAS CO., Plaintiff, Pacific Northwest Pipeline Corp. et al., Intervenors, v. SUN OIL COMPANY et al., Defendants.
• Court: U.S. District Court — Western District of Texas

426 F. Supp. 963

EL PASO NATURAL GAS CO., Plaintiff, Pacific Northwest Pipeline Corp. et al., Intervenors, v. SUN OIL COMPANY et al., Defendants.

No. MO-74-CA-57.

United States District Court, W. D. Texas, Midland-Odessa Division.

January 27, 1977.

Paul R. Connolly, J. Alan Galbraith, William E. McDaniels, Williams, Connolly & Califano, Washington, D. C., Charles Sapp, W. Robert Brown, Liddell, Sapp, Zivley & Brown, Houston, Tex., Richard S. Morris, Harris S. Wood, El Paso Natural Gas Co., El Paso, Tex., for El Paso Natural Gas Co.

David K. Watkiss, Watkiss & Campbell, Salt Lake City, Utah, Daniel F. Collins, Ross, Marsh & Foster, Washington, D. C., James M. O'Leary, Shafer, Gilliland, Davis, Bunton & McCollum, Odessa, Tex., for intervenor, Northwest Pipeline Corp.

Rufus G. Thayer, San Francisco, Cal., for intervenor, People of the State of Cal. and Public Utilities Commission of the State of Cal.

Thomas F. Brosnan, John F. Harrington, Gallagher, Connor & Boland, Washington, D. C., for intervenors, Tucson Gas & Elec. Co., Washington Natural Gas Co., Southern Union Gas Co.

Leonard L. Snaider, C. H. McCrea, Las Vegas, Nev., for intervenor, Southwest Gas Corp.

Howard V. Golub, Donald L. Freitas, San Francisco, Cal., Jack Q. Tidwell, Deaderick, McMahon, Cox, Todd & Tidwell, Odessa, Tex., for intervenor, Pacific Gas & Elec. Co.

Ed M. Cage, Herf M. Weinert, G. David Neal, Dallas, Tex., Leo J. Hoffman, Strasburger, Price, Kelton, Martin & Unis, Dallas, Tex., W. B. Browder, Jr., Stubbeman, McRae, Sealy, Laughlin & Browder, Midland, Tex., for Sun Oil Co.

George B. Mickum, III, Steven H. Brose, Steptoe & Johnson, Washington, D. C., Edward J. Kremer, Jr., Horace N. Burton, Dallas, Tex., W. B. Browder, Jr., Midland, Tex., for Atlantic Richfield Co.

Robert D. Haworth, Mobil Oil Corp., Houston, Tex., Philip R. Ehrenkranz, Craig W. Hulvey, Grove, Jaskiewicz, Gilliam & Cobert, Washington, D. C., W. B. Browder, Jr., Midland, Tex., for Mobil Oil Corp.

W. A. Schneeberg, American Petrofina Co. of Texas, Dallas, Tex., Gordon Gooch, Charles M. Darling, Baker & Botts, Washington, D. C., W. B. Browder, Jr., Midland, Tex., for American Petrofina Co. of Texas.

James J. Dawson, Gene Burke, Cable, McDaniel, Bowie & Bond, Baltimore, Md., Gordon Gooch, Washington, D. C., W. B. Browder, Jr., Midland, Tex., for Crown Central Petroleum Corp.

Edward Kliewer, Jr., Kliewer & Hood, Dallas, Tex., Gordon Gooch, Washington, D. C., for Delta Drilling Co. (Delta Drilling Corp.)

Dee H. Richardson, Union Oil Company of Cal., Midland, Tex., Platt W. Davis, III, Michael J. Henke, Vinson, Elkins, Searls, Connally & Smith, Washington, D. C., W. B. Browder, Jr., Midland, Tex., for Union Oil Co. of Cal.

Lionel E. Z., Cohen, Tulsa, Okl., Gordon Gooch, Washington, D. C., for Mr. and Mrs. Morris Mizel.

Vernon M. Turner, Houston, Tex., Millard F. Carr, Tenneco Corp., Denver, Colo., Gordon Gooch, Washington, D. C., W. B. Browder, Jr., Midland, Tex., for Tenneco Corp.

Thomas H. Burton, Jr., Continental Oil Co., Houston, Tex., Gordon Gooch, Washington, D. C., W. B. Browder, Jr., Midland, Tex., for Continental Oil Co. W. B. Browder, Jr., Midland, Tex., for W. Watson LaForce, Jr., et al.

MEMORANDUM ORDER

SUTTLE, District Judge.

This is a suit under the Natural Gas Act of 1938.¹ Its genesis is in the differential between the unregulated price of intrastate gas and the regulated price of interstate gas. El Paso Natural Gas Company produces natural gas for the interstate market. Plaintiffs claim that the Defendants must first seek certification from the Federal Power Commission (FPC) before they can collect overriding royalties in excess of the regulated interstate rate. Plaintiffs seek a declaratory judgment² that Defendants are natural gas companies selling gas for resale in interstate commerce. The suit reduces to the following proposition.³

Where certain agreements, by which lessees transferred working interests in oil and gas properties to a regulated pipeline, provided for payments of overriding royalties on a scale initially set at a certain number of cents per Mcf of production and escalated that amount per Mcf over an initial term of years, and provided for arbitration of the amount of payments after the initial term if the parties were unable to agree on the amount, and where a subsequent arbitration award placed the amount of the override payments in excess of the FPC regulated price, are those agreements "sales in interstate commerce of natural gas for resale" within the meaning of § 5 of the Natural Gas Act of 1938 (15 U.S.C. § 717d)?

Since this Court's jurisdiction coincides with the FPC's jurisdiction over "sales in interstate commerce of natural gas for resale," from January 21 to March 4, 1976, this Court heard evidence to determine its jurisdiction.⁴ Between April 23 and April 27, 1976, the Court heard arguments on the evidence. On November 22, 1976, the Court heard arguments on the law. The Court concludes that it lacks jurisdiction and enters the following findings of fact and conclusions of law.

FINDINGS OF FACT

(1) Plaintiff El Paso Natural Gas Company (El Paso), a regulated interstate pipeline, is producing natural gas from its own leases in the San Juan Basin (Basin). In July 1950, the FPC certified El Paso to build a natural gas transmission line from the Barker Dome Field in the Basin to California. FPC certification established El Paso as the dominant economic force in the Basin, because El Paso, the only pipeline having access to interstate markets, was the only potential purchaser of Basin gas. After certification, El Paso acquired extensive leasehold interests in the Basin,⁵ including the leaseholds involved in this litigation. All the agreements at issue in this case were executed after El Paso had completed its transmission line.

(2) The Defendants were originally lessees⁶ holding working interests in certain oil and gas properties in the Basin. Under agreements denominated Gas Lease Agreements (GLAs) the Defendants transferred certain of their working interests to El Paso.

(3) The GLAs in issue (GLAs 47, 52, 60, 61, 63, 66, 76, 78, 106, 125, 129, 172, 348 and 349) provided that El Paso would receive the rights to develop and market natural gas in one or more productive formations.⁷ The agreements typically provided⁸ that:

(a) El Paso was obligated to drill each 320 acre drilling unit on the acreage transferred. If El Paso failed to drill a 320 acre unit, the unit reverted to the lessee.

(b) El Paso was obligated to pay for wells located on the property which met a certain specified productivity.⁹

(c) El Paso had the option of returning acreage which proved to be noncommercial.

(d) El Paso was obligated to make a minimum payment if the amount of overrides on gas produced were less than that minimum amount.¹⁰

(e) El Paso was obligated to pay an amount per Mcf that was equivalent to the amount El Paso paid for similar gas under similar agreements; i. e. a favored nations clause.

(4) El Paso was obligated to pay an overriding royalty of a specified number of cents per Mcf of production. The amount to be paid per Mcf escalated over a fixed period of time (initial term). After the initial term expired, the amount of the override was to be redetermined by the parties. If the parties were unable to agree on the amount of the override payments, they were obligated to arbitrate.

(5) No agreement at issue specified an up-front payment tied to an estimate of reserves.¹¹

(6) The San Juan Basin is a distinct geological entity located in the four corners area of New Mexico and Colorado. The Basin takes its name from its structure. In cross-section, the Basin is a bowl shaped depression. Formations lying several thousand feet below the surface at the center of the Basin rise to the surface at its edge. The surface outcrops of the formations mark the Basin's perimeter.

(7) Three formations in the Basin are gas productive.¹² From the shallowest to the deepest the formations are the Pictured Cliffs, the Mesa Verde, and the Dakota. All three formations are tight in that each formation is characterized by low to moderate permeability and low porosity.

(8) Recovery of natural gas from each productive formation is a function of the variations in the permeability and in the porosity of the formation. Because the Basin's geologic structure does not reveal those variations in any productive formation, geologic structure has little or no direct influence upon the localization of recoverable gas reserves. Actual drilling is the only method of locating recoverable gas saturations.

(9) Because the productive formations are tight, even where drilling located recoverable reserves, completed wells delivered gas in low volumes.

(10) Two consequences do flow from wells in the Basin because large volumes of gas do not. First, drilling costs are significantly higher because more wells have to be drilled to supply a pipeline with commercially significant volumes of gas. Second, where the drilling costs are recouped out of the volume of gas sold, those costs are recovered more slowly for wells of low deliverability than for those of high deliverability.¹³

(11) Some properties had no drilled acreage when the respective GLA was executed. For those properties that had drilled acreage when the respective GLA was executed, the number of wells drilled was quite small in relation to the number of drilling spaces available.

(12) During the 1950's and into the 1960's, El Paso spent substantial sums developing properties it had acquired in the Basin.

(13) During each GLA's initial term, El Paso paid the specified overrides for volumes produced from the respective properties.

(14) After initial term of each GLA had expired, El Paso continued to pay overrides at the highest rate set out in the original agreement.

(15) When, in 1973, the level of the override for GLA 61 was to be determined again, Sun Oil Company (Sun) and El Paso could not...