Saulsbury Oil Co. v. Phillips Petroleum Co.

• Court: U.S. Court of Appeals — Tenth Circuit
• Writing for the Court: PHILLIPS and BRATTON, Circuit , and KENNEDY
• Citation: Saulsbury Oil Co. v. Phillips Petroleum Co., 142 F.2d 27 (10th Cir. 1944)
• Decision Date: 01 May 1944
• Docket Number: 2771.,No. 2770,2770
• Parties: SAULSBURY OIL CO. v. PHILLIPS PETROLEUM CO. et al. PHILLIPS PETROLEUM CO. et al. v. SAULSBURY OIL CO.

142 F.2d 27 (1944)

SAULSBURY OIL CO. v. PHILLIPS PETROLEUM CO. et al. PHILLIPS PETROLEUM CO. et al. v. SAULSBURY OIL CO.

Nos. 2770, 2771.

Circuit Court of Appeals, Tenth Circuit.

March 21, 1944.

Rehearing Denied May 1, 1944.

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COPYRIGHT MATERIAL OMITTED

F. H. McGregor, of Amarillo, Tex., for Saulsbury Oil Co.

Warren M. Sparks, of Amarillo, Tex., and Rayburn L. Foster, of Bartlesville, Okl. (Don Emery, of Bartlesville, Okl., and E. H. Foster, of Amarillo, Tex., on the brief), for Phillips Petroleum Co.

D. H. Culton, of Amarillo, Tex., amicus curiae.

Before PHILLIPS and BRATTON, Circuit Judges, and KENNEDY, District Judge.

PHILLIPS, Circuit Judge.

On September 5, 1933, Saulsbury Oil Company¹ was the owner of oil and gas leases on five tracts of land situated in Gray County, Texas. On that date, Saulsbury entered into a contract with Phillips Petroleum Company,² whereby Saulsbury agreed to drill six wells on the tracts covered by such leases and Phillips agreed to furnish the drilling rigs and equipment with which to drill and complete such wells and to advance to Saulsbury $2,500 upon the completion of each well. Out of three-fourths of the seven-eighths working interest, Saulsbury agreed to pay Phillips for the equipment used in drilling and completing the wells and not returned and to repay the money advanced by Phillips. It also agreed to assign to Phillips one-half of the working interest upon the completion of each well. By a supplemental agreement entered into by Saulsbury and Phillips on September 18, 1933, Saulsbury gave Phillips an option to purchase the interests of Saulsbury in the casinghead gas produced from such leases and agreed to execute Phillips' usual form of casinghead gas contract therefor. By a supplemental agreement entered into March 31, 1934, the number of wells to be drilled was reduced to five. Pursuant to such contracts, three wells were drilled, referred to in the record as the Cubine wells, which were productive of sweet gas as defined in Art. 6008, Sec. 2(h), Vernon's Ann.Tex.Civil Stat.³ On October 18, 1933, Saulsbury and Phillips entered into a casinghead gas contract by which Saulsbury agreed to sell to Phillips the natural gas produced from the three Cubine wells.

On March 15, 1940, Saulsbury brought an action against Phillips and the Independent Natural Gas Company⁴ in the District Court of Oklahoma County, Oklahoma, to recover damages for alleged breach of such casinghead gas contract. The case was duly removed to the Federal court.

On September 30, 1935, Saulsbury was the owner of three oil and gas leases on three tracts of land situated in Gray County, Texas. On that date, it entered into three separate contracts with Phillips whereby Saulsbury agreed to drill one well on each of such tracts. Under two of the contracts, Phillips agreed to advance Saulsbury $6,600 and, under the third, $5,800 when the respective wells were commenced to enable Saulsbury to pay for such leases. Phillips also agreed to advance Saulsbury $7,000 upon the completion of each of the three wells. Under each contract, Phillips was to be repaid the sums advanced out of one-half of the seven-eighths working interest. The three wells were completed and are referred to in the record as the Haden wells. On September 30, 1935, Saulsbury entered into three casinghead gas contracts with Phillips for the sale of gas produced from such wells. These contracts were identical except that each contract described a different tract of land. On June 26, 1940, Saulsbury commenced an action against Phillips and Independent in the District Court of Oklahoma County, Oklahoma, for alleged breach of the last three mentioned casinghead gas contracts. The suit was duly removed to the Federal court.

In the three casinghead gas contracts of September 30, 1935, Saulsbury is referred to as "seller" and Phillips as "buyer." They describe the tracts of land covered by the leases. They recite that the seller is the owner of the leases; that it is operating wells thereon that are or may be productive of casinghead gas; that the seller desires "to sell the casinghead gas" which may be produced from such wells. They define casinghead gas as follows:

"* * * The term `casinghead gas' is defined herein as it is defined in existing law; and also includes any other natural gas from which natural gasoline can be extracted, provided the residue gas therefrom is utilized as required by law, * * *"

They further recite that the buyer has in operation a gasoline plant in the vicinity of such wells and "desires to buy said casinghead gas." They provide that in consideration of $1.00 and other specified payments and covenants, "* * * the Seller hereby grants, bargains, sells and agrees to deliver and take from the Seller, subject to the stipulations and conditions hereinafter specified, all the casinghead gas now or hereafter produced from * * *" such wells.

They provide that the gas sold "is conveyed to the Buyer for the purpose of manufacturing therefrom gasoline or such other product or products as may be manufactured at Buyer's plant"; that the buyer shall "take all the gas testing more than ¾ gallons of gasoline per thousand cubic feet of gas"; that the buyer shall return to the seller sufficient residue gas for the development and operation of the respective leases, not to exceed the amount of gas remaining from the casinghead gas delivered to the buyer after the extraction of the gasoline therefrom, less "the proportionate part" of such residue gas necessary for gasoline plant operation, both determined by the residue gas curve attached to the contracts; and that if and when there is residue gas in excess of buyer's needs for plant operation and seller's needs for lease development and operation "the Buyer shall have the right without the obligation to sell any or all surplus residue gas so remaining" and that the buyer shall pay the seller fifty per cent of the net proceeds received from the sale of such gas. They define net proceeds as gross proceeds less "any cost of boosting and/or transportation necessary to market such gas."

They provide:

"* * * The volume of surplus residue gas sold from the casinghead gas delivered hereunder shall be determined by the proportion which the volume of surplus residue gas available for sale from said delivery bears to the total volume of surplus residue gas available for sale from all casinghead gas delivered to said plant. * * *"

"8. — Settlement Tests — The gasoline content shall be determined by a field compression test or charcoal test, at Seller's option made in accordance with the official code of the Natural Gasoline Association of America for testing natural gas for gasoline content. * * *"

They provide that the buyer shall pay the seller for the casinghead gas delivered under the contract a price per M. C. F.⁵ computed on a basis set forth in the contracts.

They provide that the seller warrants its title to the casinghead gas, and that it has good right to sell such gas to the buyer; that the buyer shall not be required to pay therefor until the seller shall have furnished buyer abstracts of title covering such leases showing good and merchantable title in the seller; and that the seller shall account and pay to the lessors or royalty owners, in strict accordance with the leases, royalty on the casinghead gas "sold and delivered * * * to the Buyer."

The casinghead gas contract of October 18, 1933, differed only from those of September 30, 1935, in the following particulars:

It describes different leases; its provision with respect to the sale of residue gas by the buyer does not contain the phrase "without the obligation"; its provision respecting settlement tests omits the provision: "or charcoal test, at Seller's option"; and it defines casinghead gas as follows:

"it being understood that the term casinghead gas means all natural gas produced from the above described premises including the gas issuing from oil wells whether produced from the same sand or strata from which the oil is produced or by the induction of gas with compressors or other means for flowing the oil."

In other respects it is substantially identical with the contracts of September 30, 1935.

While the casinghead gas contracts covered all types of natural gas, sweet, sour, and casinghead,⁶ the Cubine and Haden wells produced only sweet gas.

The Cubine and Haden wells are situated in the Panhandle Gas Field, which runs from Southern Wheeler County in a northwesterly direction through Wheeler, Gray, Carson, Potter, Hutchinson, Moore, and Hartley Counties, Texas. It is approximately 124 miles in length and of an average width of 20 miles. It contains 1,504,386 acres, of which 1,066,662 acres produce sweet gas, and 437,724 acres produce sour gas. A detailed description of the field is set forth in a special order of the Railroad Commission of Texas⁷ of December 10, 1935, quoted in part in the footnotes of the opinion in Consolidated Gas Utilities Corporation v. Thompson, D.C., 14 F.Supp. 318.

At the time the casinghead gas contracts were entered into, Phillips was engaged in the manufacture of natural gasoline from gas at its five gasoline extraction plants located in Gray County, Texas, known as the Gray, Pampa, Bowers, North, and Lefors plants, and collectively as the Pampa System. It acquires the raw material by purchase from producers from hundreds of wells and also in substantial quantities from wells on its own leases. The gas is gathered from areas in Gray and Wheeler Counties, Texas, through 250 to 300 miles of gathering lines, delivered to connecting trunk pipe lines, and carried by them to the gasoline plants for gasoline extraction. Sweet and casinghead gas are commingled in the gathering system and processed in the plants as a single commingled gas. All of the plants, except North, are interconnected on the intake or raw gas side. All of the plants, except Lefors,...