Texas Oil & Gas Corp. v. Vela

Citation405 S.W.2d 68
Decision Date08 June 1966
Docket NumberNo. 14479,14479
PartiesTEXAS OIL & GAS CORPORATION et al., Appellants, v. Juan M. VELA et al., Appellees. . San Antonio
CourtCourt of Appeals of Texas. Court of Civil Appeals of Texas

Geary, Brice & Lewis, W. S. Barron, Jr., Turner, Atwood, Meer & Francis, Dean Carlton, Dallas, G. C. Mann, Laredo, Robert R. Barton, Kerrville, Walter B. Morgan, Houston, for appellants.

Bobbitt, Brite, Bobbitt & Allen, San Antonio, Mann, Cronfel & Mann, Fansler & Fansler, Laredo, for appellees.

BARROW, Justice.

This suit was brought by appellees Juan M. Vela and three others as lessors, hereinafter referred to as appellees Vela, under an oil and gas lease, against four groups of owners of the working interest in such lease, to recover alleged deficiencies in royalty payments, as well as additional relief on the theory that the lease premises were being drained and had not been properly developed. Appellees L . A. Nordan and Hannah D. Gaines intervened and asserted that they were owners of part of the royalty interest, and sought to recover if appellees Vela recovered.

A judgment was entered, following a non-jury trial, that: (1) appellees recover from the various owners of the working interest specified sums totaling $52,789.55 as unpaid royalties and interest, during the period each respective appellant was working the lease; (2) appellant Texas Oil & Gas Corporation drill certain protection and development wells on the lease premises or suffer cancellation of the leasehold estate beneath the Upper Queen City sand; and (3) that future royalties be paid at the market price.

On April 1, 1933, appellees Vela executed an oil and gas lease to Thor Warner and C. E. Jamison, covering 1500 acres of land in Zapata County, located in what is known as the Lopeno Field. The original lessees assigned specific portions of this acreage to various parties who have since drilled and completed six producing gas wells in the Upper Queen City sand (located at a depth of 2025 feet to 2510 feet). Appellees admit their claim is controlled by the four-year statute of limitations, and that the relevant period of ownership under consideration is from February 1, 1960, through January 31, 1964. The owners of the working interest during that period were: (1) The American-Texas Group, in which appellee Hannah M. Gaines had a 25% Interest, and Nordan & Co., a partnership of Claudia R. Eaves and appellee L. A. Nordan's two daughters and sons-in-law, had a 25% Interest; (2) the 'Venture Group' comprised of the Venture Petroleum Corporation and several individuals; (3) Delhi-Taylor Oil Corporation; and (4) Texas Oil & Gas Corp. (formerly known as Tex-Star Oil & Gas Corp.). While the case was pending Texas Oil & Gas Corp. acquired all working interest of this leasehold estate down to 4,000 feet.

The six wells and the working interest of the respective owners during the relevant period are as follows:

                                                          Ownership from February 1, 1960
                         Well and Location                   through January 31, 1964
                ------------------------------------  ---------------------------------------
                San Juana Vela No. 1 and No. 2 (now   Owned by Delhi-Taylor OilCorporation
                  Lopeno No. 20 and Lopeno No. 17),     from 2-1-60 to 4-1-63, and by Texas
                  in the northwest half of Block 6      Oil & Gas Corp. from 4-1-63 to 2-1-64
                San Juan Vela--Venture No. 1 (now     Owned by Venture Petroleum Corp
                  Lopeno No. 14) in Block No. 5,        from 2-1-60 to 6-1-63, and by Texas
                  Porcion 20                            Oil & Gas Corp. from 6-1-63 to 2-1-64
                San Juana Vela--Venture and American  Owned 1/2 by Venture PetroleumCorp
                  -Texas No. 2 (now Lopeno No.          and 1/2 by American-Texas Group
                  15) in Block 1, Porcion 20            from 2-1-60 to 6-1-63, and 1/2 by
                                                        American-Texas Group from 6-1-63
                                                        to 2-1-64
                San Juana Vela--American-Texas        Owned by American-Texas Group from
                  Group (now Lopeno No. 16) in the      2-1-60 to 2-1-64
                  southwest half of Block 6, Porcion
                Lopeno No. 25 in Block 2, Porcion 21  Completed on or about 9-1-63 and owned
                                                        since such time to 2-1-64 by Texas
                                                        Oil & Gas Corp

The royalty provision of the Vela lease in question provides: 'In consideration of the premises the said lessee covenants and agrees: * * * 2nd. To pay to lessor, as royalty for gas from each well where gas only is found, while the same is being sold or used off of the premises, one-eighth of the market price at the wells of the amount so sold or used, * * *.'

The crucial issue in this case is the determination of the 'market price at the wells.' The appellants had paid 2.3cents per mcf, as provided under a gas purchase contract entered into in 1935, to continue for the 'life of the lease.' The trial court found the market price to be 16.047cents, less a compression charge of 3cents per mcf. Judgment was accordingly entered against the respective owners of the working interest for the difference between the market price of 13.047cents and 2.3cents, for all gas sold from each Vela well during the relevant period, with interest at the rate of 6% Per annum from the dates the gas was sold. After the trial, but before the judgment was entered, a compromise settlement was entered into between all appellees and the 'Venture Group' and no appeal has been perfected in their behalf.

Appellants urge that there is no evidence to support the finding of market price of 16.047cents per mcf, or, in any event, this finding is against the overwhelming weight and great preponderance of the evidence. Briefed with these points are other points complaining of testimony relative to prices paid under other gas contracts in the Lopeno Field, and urging that there is no evidence, or insufficient evidence, of demand for gas produced from the Vela lease at this price.

At the time gas was first discovered on the leased premises in 1934, there was no pipeline into the Lopeno Field. Nordan &amp Morris, a partnership composed of appellee L . A. Nordan and John Morris, deceased husband of appellee Mrs. Gaines, as Seller, entered into a contract with the United Gas Public Service Company as Buyer, dated November 20, 1934, whereby United agreed to construct a pipeline to the Lopeno Field. Such contract gave United the exclusive right to purchase on a ratable basis all gas produced from the lands in the Lopeno Field in which Nordan & Morris had the gas rights for the life of the lease. The contract price is 3 1/2cents per mcf, which was reduced to 2.3cents with the adoption of the Standard Gas Measurement Law, Art. 6066b, Vernon's Ann.Civ.St., in 1949. Nordan & Morris subsequently entered into several gas purchase contracts with various lease owners and operators in the Lopeno Field, under similar terms, including contracts with the lessees of appellees Vela, which were entered into in 1935 and 1937.

Since 1935, royalties on all gas sold on the leased premises, as well as other leases owned by appellants and covered by Nordan & Morris gas purchase contracts, have been paid pursuant to the terms of this contract. The rights of the Buyer under these contracts have been transferred by mesne assignments to Delhi Gas Pipeline Corp., a wholly owned subsidiary of appellant Texas Oil & Gas Corp.

Prior to 1960 the only pipeline into the Lopeno Field was the one constructed by United, and it took gas only from the Queen City sands. In 1950 Wilcox production was discovered in this field at depths below 6500 feet. In December, 1960, Tennessee Gas Transmission Co. started taking deliveries by a line constructed by it, and in January, 1962, Alamo Gas Supply Co. commenced taking deliveries through a line it constructed. The Tennessee and Alamo gas purchase contracts provide for prices ranging from 13cents to 17.24cents per mcf.

The royalty to be paid for gas presents a most difficult problem because of the nature of the gas sales, and has been the subject of much litigation. 1 The Courts have recognized, and the undisputed evidence in this case confirms, that the practicalities of the gas industry require that gas be sold under long-term contracts because the pipelines must have a committed source of supply sufficient to justify financing, construction and operation. Therefore, the rules of daily sales and daily quotations have no application. Foster v. Atlantic Refining Co., 5 Cir., 329 F.2d 485; Phillips Pet. Co. v. Bynum, 5 Cir., 155 F.2d 196; Gex v. Texas Co., Tex.Civ.App., 337 S.W.2d 820, no wr. hist.

We have been cited to no Texas case and have found none, setting forth the proper rule for determination of 'market price' of gas sold under a long-term contract. The Fifth Circuit Court of Appeals in Foster v. Atlantic Refining Co., supra, recently considered the complexities presented by such a controversy and passed upon many of the points presented by this appeal. It was held in Foster that since the lessors were not parties to the gas sales contract, the terms of the contract did not change the lessee's obligation under the lease to pay the 'market price.' This obligation was fixed and unambiguous, and lessee was required to carry out same, however troublesome to ascertain or financially burdensome. This authority, although not controlling in its interpretation of Texas law, is persuasive as being the only precedent on this point. The evidence of actual market price was not controverted in Foster, and that Court did not set forth a rule for determining same.

It is elemental contract law that since the lessor is not a party to the gas purchase contract entered into between lessee and a third party, he is not bound by the terms of same, if they are in conflict with lessee's obligations under the lease. However, we must not overlook the fact that gas is only sold under long-term contracts,...

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