Transcontinental Gas Pipeline Corp. v. State Oil and Gas Bd. of Mississippi, 55071

• Decision Date: 05 September 1984
• Docket Number: No. 55071,55071
• Citation: Transcontinental Gas Pipeline Corp. v. State Oil and Gas Bd. of Mississippi, 457 So.2d 1298 (Miss. 1984)
• Parties: TRANSCONTINENTAL GAS PIPELINE CORPORATION v. The STATE OIL AND GAS BOARD OF MISSISSIPPI and Coastal Exploration, Inc., et al.
• Court: Mississippi Supreme Court

Page 1298

457 So.2d 1298

63 P.U.R.4th 39

TRANSCONTINENTAL GAS PIPELINE CORPORATION v.The STATE OIL AND GAS BOARD OF MISSISSIPPI and Coastal Exploration, Inc., et al.

No. 55071.

Supreme Court of Mississippi.

Sept. 5, 1984.

Rehearing Denied Oct. 3, 1984.

John M. Grower, Jefferson D. Stewart, R. Wilson Montjoy, II, Brunini, Grantham, Grower & Hewes, Jackson, for appellant.

John Land McDavid, W. Eric West, McDavid & Noblin, Kenneth I. Franks, Glenn Gates Taylor, James Russell Tucker, Heidelberg, Woodliff & Franks, Jackson, Vernon L. Terrell, Jr., New Orleans, La., Walker L. Watters, William R. Presson, Gerald, Brand, Watters, Cox & Hemleben, Bill Allain, Atty. Gen., by P.L. Douglas, First Asst. Atty. Gen., Jackson, for appellees.

Before ROY NOBLE LEE, P.J., and ROBERTSON and SULLIVAN, JJ.

ROBERTSON, Justice, for the Court:

I.Introduction

This appeal arises out of a controversy regarding well head sales of natural gas produced in Marion County, Mississippi.This litigation has been conducted in the vortex of tensions created by collisions among basic principles of geology, economics and law when applied in a context where each litigant pursues self-interest.

The geological phenomenon of drainage necessitates, if considerations of fairness undergird our law, a rule that requires that a purchaser of natural gas (generally an interstate pipeline) take ratably from a common source of supply.That purchaser must market that gas, and the advent of deregulation has presented him with new and largely unanticipated difficulties in that regard.The natural gas market has become glutted.Prices consumers are willing to pay have fallen sharply.

Overlaid upon these tensions are those inherent within our federal system.Until 1978 the federal sovereign indisputably had preempted all state regulation of wellhead sales of natural gas.Today we are presented a question of first impression: whether the Natural Gas Policy Act of 1978 (NGPA)15 U.S.C. Secs. 3301, et seq., continues in effect this federal preemption with respect to wellhead sales of deregulated natural gas.A complementary proposition suggests that the regulatory efforts of the State Oil and Gas Board constitute an impermissible burden on interstate commerce proscribed under long-established Commerce Clause jurisprudence.

Below we reject these and other claims advanced under federal law.We find, furthermore, that the State Oil and Gas Board has acted well within its statutory authority in requiring that an interstate pipeline take ratably (if it takes at all) the natural gas produced from a common source of supply.

The State Oil and Gas Board has acted beyond its authority, however, insofar as it has proscribed differentials in wellhead prices.No act of the Legislature of this state authorizes regulation or control of the price paid for natural gas at the wellhead.More specifically, no enactment of the Legislature vests in the State Oil and Gas Board any authority to regulate such prices.

OrderNo. 409-82 of the State Oil and Gas Board is affirmed in part and reversed in part.

II.

A.The Cast of Characters

The dominant characters, corporate all, before the Court today include:

Transcontinental Gas Pipe Line Corporation(Transco) is a Delaware corporation doing business in Mississippi.Transco is an interstate pipeline company which purchases natural gas from fields in Texas, Louisiana and Mississippi and the federal off-shore domain.Transco transports this gas from these fields and sells it to customers along its pipeline which extends from southern Texas, through Mississippi, and up the east coast as far as New York.Transco was the principal Respondent before the Oil and Gas Board and is the Appellant here.

Coastal Exploration, Inc.(Coastal) is a Delaware corporation doing business in Mississippi.Coastal is a relatively small in-state oil and gas producer ¹ and owns leasehold interests in gas-producing units in Mississippi.Coastal was the lead Petitioner below and is the lead Appellee here.

Tomlinson Interests, Inc.(Tomlinson) is a Texas corporation doing business in Mississippi.Tomlinson is an independent oil and gas producer which operates ² one of the wells here involved.Tomlinson was one of two Respondents-turned-Petitioner below and is one of the Appellees here.

Getty Oil Company(Getty) is a Delaware corporation doing business in Mississippi.Getty is an oil and gas producer which operates three of the wells here involved.Getty was the other Respondent-turned-Petitioner below and is one of the Appellees here.

Supporting actors, all Petitioners before the Board, include:

Wiley Fairchild and Rodney Fairchild(Fairchilds) are adult resident citizens of Forrest County, Mississippi, each of whom owns an individual working interest in one of the wells here involved.

W.R. Fairchild Construction Company, Ltd.(Fairchilds) is a Mississippi corporation domiciled in Forrest County, Mississippi, and owns an undivided working interest in one of the wells here involved.

Susan W. Clements Lay(Lay) is an adult resident citizen of Hinds County, Mississippi, who owns an undivided working interest in one of the wells here involved.

Lane Petroleum Corporation(Lane) is a Mississippi corporation which owns an undivided working interest in one of the wells here involved.

Louis E. Ridgway, Jr., (Ridgway) is an adult resident citizen of Hinds County, Mississippi, who owns an undivided working interest in one of the wells here involved.

Daniel E. Herlihy(Herlihy) is an adult resident citizen of Hinds County, Mississippi, who owns an undivided working interest in one of the wells here involved.

Bryant M. Allen(Allen) is an adult resident citizen of Hinds County, Mississippi, who owns an undivided working interest in one of the wells here involved.

Inexco Oil Company(Inexco) is a Delaware corporation doing business in Mississippi.Inexco is a small interest owner in four wells here involved.

Of these supporting characters, only the Fairchilds and Inexco took any part in the formal hearing held by the State Oil and Gas Board, and only Inexco has entered its appearance and filed a brief before this Court.The others are listed because each filed with the Board an informal complaint charging Transco with failure to take ratably.

The State Oil and Gas Board(the Board) is a party to this appeal.The Board is an administrative agency of the State of Mississippi created by virtue of Chapter 256, Miss. Laws of 1948, now codified as Miss.Code Ann. Sec. 53-1-5(Supp.1983), authorized, inter alia, part to make and enforce reasonable rules, regulations and orders protecting against abuse of the correlative rights and opportunities of each owner of oil or gas in a common source of supply and charged with the conduct of hearings such as that held September 14-16, 1982, which has generated OrderNo. 409-82, the Circuit Court's affirmance of which is here under attack.The Board is an Appellee here.

B.The Drainage Phenomenon

At the core of this case is the geological phenomenon of drainage.That phenomenon has been described by this Court in Shell Oil Company v. James, 257 So.2d 488(Miss.1971).

When the pool of oil has been penetrated by a recovery well the oil and gas located in the pool move from a high pressure area to a low pressure area so that the oil and gas migrate from the property of one landowner to another.This exodus is called drainage.257 So.2d at 494-495.

The phenomenon has been similarly described by the Supreme Court of Kansas in Northern Natural Gas Company v. State Corporation Commission, 188 Kan. 355, 362 P.2d 599(1961):

While the members of this court make no claim to be experts in the science of the production of natural gas, we believe that the court may take judicial notice of the fact that where natural gas is within the earth in one common source and is under pressure, if one gas well is allowed to take gas, this will result in the pressure being lowered around the vicinity of this gas well so that the gas in the common source will tend to drain or rush to the vicinity of the well taking gas.The result will be that the other wells in the common field or source will be able to produce much less gas and the owners of such wells will have suffered a definite loss.188 Kan. at 358, 362 P.2d at 602

In recognition of the relatively helpless position of the party whose gas is being drained, our law has moved to ameliorate the injustice produced by drainage.Such is the genesis of Statewide Rule 48 promulgated by the State Oil and Gas Board over 30 years ago on November 19, 1951.That rule provides

RULE 48.Ratable Take.

Each person now or hereafter engaged in the business of purchasing oil or gas from owners, operators, or producers shall purchase without discrimination in favor of one owner, operator, or producer against another in the same common source of supply.

Questions regarding the meaning, validity and enforceability of Rule 48 are at the center of this case.

Drainage has spawned much litigation in this state.All prior litigation appears to have arisen in the context of one owner of an undivided interest suing another such owner with the plaintiff claiming that the defendant was taking, i.e., draining, the plaintiff's gas.Shell Oil Company v. James, 257 So.2d 488, 490(Miss.1971);see generally, Comment, Implied Covenant To Protect Leased Premises From Drainage, Etc., 35 Miss.L.J. 280, 280-95(1964)(basis for suits between individuals);Kuntz, Correlative Rights In Oil and Gas, 30 Miss.L.J. 1, 1-9(1958)(same).Insofar as we can ascertain, this is the first time a court of this state has been called upon to consider Rule 48 or in any other context to grant relief against a purchaser of natural gas for drainage loss.SeeIn re Petition of Cenard Oil and Gas Co., Docket No 60-64-92, OrderNo. 81-64, dated April 16, 1964, (Board cited Southern Natural Gas Co. for refusal to take ratably from owners of all...