Shell Oil Co. v. Williams, Inc.
| Decision Date | 23 February 1983 |
| Docket Number | No. 82-C-0840,82-C-0840 |
| Citation | 428 So.2d 798 |
| Parties | SHELL OIL COMPANY and Pennzoil Producing Company v. WILLIAMS, INC., et al. |
| Court | Louisiana Supreme Court |
C. Murphy Moss, Loretto M. Babst, Lemle, Kelleher, Kohlmeyer & Mathews, New Orleans, for applicant.
Campbell C. Hutchinson, Anthony M. DiLeo, Stone, Pigman, Walther, Wittmann & Hutchinson, New Orleans, for respondents.
Shell Oil Company, as lessee, and Pennzoil Producing Company, as sublessee, instituted this action for a declaratory judgment against Williams, Inc. and various members of the Williams family (collectively referred to hereinafter as Williams), as lessors, seeking a determination that they had properly discharged their royalty obligations under the terms of two leases and that the leases were still in force and effect. They also sought injunctive relief. A temporary restraining order was granted. Thereafter, based on the verified petition of plaintiffs and agreement of counsel for defendants, the court entered a preliminary injunction. Defendants answered plaintiffs' petition generally denying the allegations thereof and reconvened for cancellation of the leases and an accounting for an alleged deficiency in royalty payments accruing from October 1, 1971.
The controversy centers around the market value of federally regulated gas which was irrevocably dedicated by the lessees to the interstate market. The alleged underpayments are based on the "market value" royalty payment provisions in two leases, one executed in 1934 and the other in 1952. Neither party contends that the provisions are ambiguous. Both agree and the evidence indicates that the terms "market rate" or "market price" refer to current market value. 1
Williams contends that the meaning of "value" calculated at the "market rate" or "market price" is clearly understood to mean the current price at which natural gas was sold in the open market, that is, the unregulated market, at the time the gas was produced. Thus, the market value should be determined only by comparable sales in the higher unregulated intrastate market. On the other hand, Shell and Pennzoil contend that to determine the market value of the gas, only comparable sales in the interstate market should be considered because the gas has been irrevocably dedicated to that market. Hence, the sole issue presented for our determination is how to arrive at the "current market value" of this federally regulated gas at the time of its sale.
The case was heard before a commissioner and essentially all of the operative facts, other than those with regard to comparable prices obtained by producers in the intrastate market, were stipulated to by the parties.
In 1934, the predecessors in title to Williams, Inc., as lessors, granted Shell, as lessee, an oil and gas and mineral lease covering 61,442 acres of land. Under the terms of the lease and subsequent agreements between the parties, Shell selected about 3,500 acres overlying portions of subsurface structures known as the Gibson and Humphreys Fields. 2 The lease contained the following royalty payment provision:
Lessee agrees as to royalties ... to pay Lessor for gas and/or casing-head gas produced and saved by Lessee and sold or used from the land hereby leased, (a) one-eighth ( 1/8) of the value thereof, calculated at the market rate prevailing at the well. (Emphasis added.)
In 1939, a gas well in Gibson Field was drilled and completed by Shell but was shut in. Prior to 1941, only oil was produced from the leased property.
In 1941, Shell entered into an agreement with Union Producing Company (now known as Pennzoil) in which Shell agreed to sublease to Union the gas rights to a portion of the 1934 Williams lease in exchange for an overriding royalty. In return, Union was required to drill two gas wells within a specific period of time and lay a pipeline of adequate size to connect all commercial gas wells to a ten inch pipeline to be constructed by United Gas Pipeline Company under a gas sales contract between Union and United Gas. United Gas' pipeline, known as the Lirette-Mississippi pipeline, was an interstate pipeline.
As required by the lease between Shell and Williams, the latter's consent was required in order for Shell to sublease to Union. All the documents pertinent to the sublease were reviewed by Williams, its lawyers and geologists, including the gas sales contract between Union and United Gas, and written consent to the sublease was given.
In 1944, Shell and another producer, not involved in this litigation, entered into a contract with United Gas for the sale of all gas being produced from the lands and leaseholds presently owned and thereafter acquired in Gibson Field by Shell including the remainder of the lands under the 1934 lease with Williams. The contract contained essentially the same terms and conditions as that between Union and United Gas. Pursuant to this contract, the gas which was to be produced and sold was to be carried in United Gas' interstate pipeline.
In 1952, Williams, Inc. leased 20 acres of land in the Gibson Field which had previously been released by Shell to various members of the Williams family. The royalty payment provision applicable to gas sold or used from the land leased provides:
One-sixth ( 1/6) of the value [of the gas], calculated at the market price prevailing at the well.... (Emphasis added.)
In 1955, this lease was assigned to Shell with the written consent of Williams, Inc. and the stipulated royalty payment was increased from 1/6 to 1/4. The first gas production from this acreage occurred in 1955 and was sold to United Gas pursuant to the 1944 gas sales contract between Shell and United Gas.
Prior to this assignment, the United States Supreme Court decided Phillips Petroleum v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 (1954). In Phillips, the Court held that gas producing companies engaged in the wellhead sales of natural gas which was transported and resold by the purchasers in interstate commerce were "natural-gas companies" within the intendment of the Natural Gas Act of 1938. Thus, the rates which could be charged by independent producers in the wellhead sales of natural gas became subject to the jurisdiction of and regulation by the Federal Power Commission (FPC). As a result of the Phillips decision and pursuant to Section 7(c) of the Natural Gas Act, 15 U.S.C. § 717f(c), natural gas producers were required to obtain a certificate of convenience and necessity from the FPC in connection with interstate sales then being made. In compliance therewith, Shell applied to the FPC in connection with its 1944 gas sales contract with United Gas and a certificate of unlimited duration was issued. Union also applied and was granted a similar certificate of convenience and necessity in connection with its 1941 gas sales contract with United Gas.
In 1949, 1959 and 1979, Shell and Union (now Pennzoil) extended the terms of their gas sales contracts covering much of the Gibson Field area. It is not contested that they acted prudently and at arms length in entering into these contracts and obtained and paid royalties on the highest price allowed by the FPC regulations for the particular category of gas sold to United Gas from the Gibson Field during the period in question.
Expert testimony in the record establishes that as a result of the Phillips decision there came to exist two separate markets for natural gas, the regulated interstate market and the unregulated intrastate market. The disparity in price between these two markets dramatically increased in the early 1970s with the price of intrastate gas being much higher than that of the federally regulated interstate gas. 3 As a result, Williams became dissatisfied with the royalties it was receiving for its gas which had been dedicated to the interstate market. In 1973, Williams, by written letters to Shell and Pennzoil, claimed that the gas royalties it was receiving were below the "market value" and requested that Shell and Pennzoil make the necessary adjustments. Shell and Pennzoil responded and asserted that the royalties were based on the highest prices allowed by the FPC and that they had satisfied their royalty obligations under the terms of the leases. In 1974, Williams reiterated its demand for additional royalties and sought cancellation of the leases for non-compliance with the royalty provisions. This action for a declaratory judgment and injunctive relief was instituted by Shell and Pennzoil.
After a preliminary injunction was granted, the matter was referred to a commissioner by the district judge. After a hearing at which virtually all the facts were agreed to by the parties in a written stipulation of fact, the commissioner found the gas in question had been dedicated to the interstate market and could not be sold otherwise. Thus, it was only in this market that the "measurement of value" could be made. The district judge accepted the findings of the commissioner and rendered judgment in favor of Shell and Pennzoil and against Williams declaring that the royalty payment provisions with respect to gas "included as a limitation" all appropriate ceilings on price imposed by federal regulations which "affect the gas saved and produced within the intent of the leases." The preliminary injunction previously issued was ordered to remain in full force and effect until the judgment became final. The reconventional demand was dismissed.
The court of appeal, finding that the market value of the gas is its value at the moment it leaves the well and before the producer places it into the interstate pipeline and under the umbrella of federal regulation, reversed the judgment of the district court. It also rendered judgment on the reconventional demand in favor of Williams and against Shell and Pennzoil recognizing defendants' right to an accounting for royalty payments based on market...
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