State v. Pennzoil Co., 86-211

• Decision Date: 05 April 1988
• Docket Number: No. 86-211,86-211
• Citation: 752 P.2d 975
• Parties: The STATE of Wyoming, Ed Herschler, Thyra Thomson, James B. Griffith, Stan Smith and Lynn Simons, as members of the Board of Land Commissioners, James B. Griffith, as State Auditor and Howard M. Schrinar, as Commissioner of Public Lands, Appellants (Defendants), v. PENNZOIL COMPANY and Marathon Oil Company, Appellees (Plaintiffs).
• Court: Wyoming Supreme Court

Page 975

752 P.2d 975

The STATE of Wyoming, Ed Herschler, Thyra Thomson, James B. Griffith, Stan Smith and Lynn Simons, as members of the Board of Land Commissioners, James B. Griffith, as State Auditor and Howard M. Schrinar, as Commissioner of Public Lands, Appellants (Defendants), v. PENNZOIL COMPANY and Marathon Oil Company, Appellees (Plaintiffs).

No. 86-211.

Supreme Court of Wyoming.

April 5, 1988.

A. G. McClintock, Atty. Gen., Michael L. Hubbard, Senior Asst. Atty. Gen., Vicci M. Colgan, and Clinton D. Beaver, Asst. Attys. Gen., for appellants.

William T. Schwartz, Schwartz, Bon, McCrary & Walker, Casper, Bruce F. Kiely and Thomas J. Eastment, Baker & Botts, Washington, D.C., Richard L. Edmonson, Houston, Tex., for appellee Pennzoil.

Morris R. Massey, Brown, Drew, Apostolos, Massey & Sullivan, Casper, Morris G. Gray and Kirby J. Iler, Casper, for appellee Marathon.

Before BROWN, C.J., and THOMAS, CARDINE, URBIGKIT and MACY, JJ.

THOMAS, Justice.

The single issue to be resolved in this case is whether the State of Wyoming (State), the lessor of an oil and gas lease entered into through the Board of Land Commissioners (Board), is entitled to royalty on payments made by a purchaser from the lessee who was required to make minimum payments for gas even though the gas was not received. The district court held that royalties were not due on these payments which were attributable to what is described in the industry as a "take-or-pay" clause. We are in accord that royalties are not due on such payments, and we affirm the judgment of the trial court.

Both parties articulate the issue in an argumentative way. The State, together with the individual members of the Board, the State Auditor, and the Commissioner of Public Lands, set forth the issue in their brief in this way:

"I. Did the district court err in its interpretation of the lease that royalties are not due on advance payments for gas?"

The appellees, Pennzoil Company (Pennzoil) and Marathon Oil Company (Marathon) assert this issue in their brief:

"I. Did the district court properly grant summary judgment to the appellees by declaring that the State of Wyoming, as lessor under the subject lease, has no royalty interest in take-or-pay obligations arising under gas sales contracts between the appellees/lessees and their gas purchaser?"

The crux of the matter is whether, under the oil and gas lease which was entered into, production of gas is essential to any requirement of royalty to the State.

The parties agree that the facts are not in dispute. Marathon and Pennzoil each acquired, through assignment, a 50% working interest in an oil and gas lease executed by the State, through the Board, as lessor. Section 2 of that oil and gas lease provides, in pertinent part:

"(d) ROYALTIES. The royalties to be paid by lessee are: (i) on oil, one-eighth of that produced, saved, and sold from said land, the same to be delivered at the wells or to the credit of lessor into the pipe line to which the wells may be connected; (ii) on gas, including casinghead gas or other hydrocarbon substance, produced from said land saved and sold or used off the premises or in the manufacture of gasoline or other products therefrom, 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.

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"For royalty purposes on gas and natural gasoline the value shall be as approved by the lessor * * * and in no event shall the price for gas, or natural gasoline, be less than that received by the United States of America for its royalties from the same field.

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"(g) MONTHLY PAYMENTS AND STATEMENTS. Unless the time of payment is otherwise extended by the Commissioner of Public Lands, [the lessee agrees] to make payment on or before the twentieth (20) day of the calendar month succeeding the month of production and removal and sale of oil and gas from said land, and to furnish sworn monthly statements therewith showing in detail the quantity and quality of the production * * *." (Emphasis added.) ¹

Marathon and Pennzoil drilled a well on the lands included in the lease which produces natural gas. The lessees have paid royalties to the State only on the gas produced and sold, based on the amounts realized from the sale of that gas.

Colorado Interstate Gas (CIG) is a customer of Marathon and Pennzoil. CIG, pursuant to separate contracts with Marathon and Pennzoil, agreed to buy gas produced by Marathon and Pennzoil from the land included within the lease in issue. These respective contracts each contain a "take-or-pay" clause. Pursuant to the clause, CIG is required to receive a specified amount of gas each year. ² If CIG fails to receive the specified amount of gas each year, it is required to pay to Marathon and Pennzoil a sum which represents the difference between the specified amount of gas to be received and the amount actually received. The contracts, in addition, include a makeup provision, ³ pursuant to which CIG receives credits for payments made under the take-or-pay clause with respect to any gas received in the succeeding five years, so long as the minimum amount has been received for any year in which the credit is claimed. ⁴ On September 26, 1983, the Board sent an audit letter to Pennzoil and Marathon demanding unpaid royalties attributable to payments under the take-or-pay clause. Marathon agreed to pay the requested royalties, but Pennzoil refused and brought a declaratory judgment action against the Board. Then Marathon filed its own declaratory action against the Board seeking, as additional relief, the return of any monies it had paid to the Board as royalties for the take-or-pay payments. These actions were consolidated, and both sides moved for summary judgment on the sole question of whether or not the royalty payments were due. Briefs were filed; a hearing was held; and the district court granted the motions for summary judgment of Pennzoil and Marathon. It held that royalty payments were not due on the amounts realized from the take-or-pay payments. It is from that order granting judgment to Pennzoil and Marathon that the Board appeals.

The Board argued to the district court, and maintains on appeal, that the pertinent lease provision is ambiguous and that an analysis of the intent of the parties results in a construction of the lease to the end that royalty payments should be made on payments received for future production as well as those received for actual production. The Board then contends that the take-or-pay payments which have been made or shall become due under the contract between CIG and Marathon and Pennzoil are made for future production of gas and that a royalty paid in advance is appropriate. Marathon and Pennzoil repeat their argument here, which was successful in the district court, that the pertinent provision in this lease entered into by the Board is clear, not subject to interpretation, and provides for royalty payments only in the event of actual production.

An oil and gas lease is a contract, and the general principles invoked for the construction of contracts and their interpretation, if necessary, applies. Wolff v. Belco Development Corporation, Wyo., 736 P.2d 730 (1987); State v. Moncrief, Wyo., 720 P.2d 470 (1986). These general principles have been related a number of times, and we need allude to only those which are pertinent in this case. See e.g., State v. Moncrief, supra; Cheyenne Mining & Uranium Company v. Federal Resources Corporation, Wyo., 694 P.2d 65 (1985); Amoco Production Company v. Stauffer Chemical Company of Wyoming, Wyo., 612 P.2d 463 (1980). The purpose of interpretation or construction of any contract is to ascertain the true intent of the parties. Wolff v. Belco Development Corporation, supra; State v. Moncrief, supra; Cheyenne Mining & Uranium Company v. Federal Resources Corporation, supra. Unless the terms of the contract are ambiguous, the language used in the contract expresses and controls the intent of the parties. State v. Moncrief, supra; Amoco Production Company v. Stauffer Chemical Company of Wyoming, supra; Kuehne v. Samedan Oil Corporation, Wyo., 626 P.2d 1035 (1981).

It is correct, as the Board asserts, that the language of a contract is to be construed within the context in which it was written. In so doing, the court may look to the surrounding circumstances, the subject matter and the purpose of the contract. Cheyenne Mining & Uranium Company v. Federal Resources Corporation, supra; Dawson v. Meike, Wyo., 508 P.2d 15 (1973); Houghton v. Thompson, 57 Wyo. 196, 115 P.2d 654 (1941); Pacific-Wyoming Oil Company v. Carter Oil Company, Wyo., 31 Wyo. 314, 226 P. 193 (1924); Energy Oils, Inc. v. Montana Power Company, 626 F.2d 731 (9th Cir.1980), quoting Liberty National Bank & Trust Company v. Bank of America Trust & Savings Association, 218 F.2d 831 (10th Cir.1955). The purpose of examining the context within which the contract was drawn, however, is limited to ascertaining the intent of the parties at the time the agreement was made. The context cannot be invoked to contradict the clear meaning of the language used, and those extraneous circumstances do not justify a court in proceeding "to insert therein a provision other than or different from that which the language used clearly indicates, and thereby, in effect, make a contract for the parties." Snow v. Duxstad, 23 Wyo. 82, 147 P. 174, 184 (1915). See also Arnold v. Mountain West Farm Bureau Mutual Insurance Company, Inc., Wyo., 707 P.2d 161 (1985); Adobe Oil & Gas Corporation v. Getter Trucking, Inc., Wyo., 676 P.2d 560 (1984); McCartney v. Malm, Wyo., 627 P.2d 1014 (1981).

In order to justify examination of the contextual circumstances, the Board contends that the language of the lease is ambiguous and extrinsic evidence is necessary to determine the intention of the parties. Ambiguity in the...