Case Title: Texaco, Inc. v. Vermilion Parish School Board

Citation: 152 So. 2d 541, 244 La. 408

Docket Number: 

State: louisiana

Court: Louisiana Supreme Court

Date: 1963-04-29T00:00:00Z

Document:
152 So. 2d 541 (1963) 244 La. 408 TEXACO INC., et al. v. VERMILION PARISH SCHOOL BOARD et al. Nos. 46442, 46444, 46446, 46447, 46450. Supreme Court of Louisiana. April 29, 1963. *542 Richard S. Lake, William J. Conrad, New Orleans, Bailey & Mouton, Lafayette, Stone, Pigman & Benjamin, Paul O. H. Pigman, P. R. Monrose, Jr., W. J. McAnelly, Jr., New Orleans, Vinson, Elkins, Weems & Searls, Joseph H. Stephens, Jack Pierce Brook, Houston, Tex., Liskow & Lewis, New Orleans, for plaintiffs-applicants. Heller & Heller, New Orleans, Davidson, Meaux, Onebane & Donohoe, Lafayette, Broussard & Broussard, Abbeville, for respondents. HAMLIN, Justice. In the exercise of our supervisory jurisdiction (Art. VII, Sec. 11, La.Const. of 1921) we directed limited certiorari to the Court of Appeal, Third Circuit, in order that we might review its judgment affirming a judgment of the trial court which fixed and adjudged the rights of plaintiffs and defendants under certain agreements designated as the "Erath Agreements."[1] Texaco Inc., Operator of the Erath Unit of the Erath Field, Vermilion Parish, instituted the present declaratory judgment proceedings (LSA-R.S. 13:4231-4246, now incorporated in Arts. 1871-1883, LSA-C. C.P.); it prayed for a judicial interpretation of the Erath Agreements, infra, and asked that such interpretation decree that a certain sand known as the "School Board Sand," infra, was covered by the agreements. Defendants, approximately six hundred persons, were all parties having an interest in the royalties, leases, minerals, and lands included in the Erath Unit; it comprised some eighty-three tracts of land with a surface area of over four thousand acres. The matter involved concerned the Erath Field; it contained tremendous quantities of oil and gas bearing sands. The original discoverers holding leases in the unit area concluded that the best method of developing these resources would be through a recycling plant, and the Erath Agreements were formulated by a committee of geologists, petroleum engineers, experts in the oil industry, and attorneys representing the operators, royalty owners, and land owners in order to carry out the project. The Erath Unit was established in 1942 by two agreements which constituted the Erath Agreements; one was known as the "Royalty Owners Unitization Agreement" and was *543 executed by the owners of royalty and other interests, and the other was termed the "Unit Operating Agreement" and was executed by the owners of operating interests and working interests. Both agreements were executed and became effective at the same time, their purposes were the same, and they were interrelated and complementary to each other. As provided in the agreements, the recycling unit was established by January 1, 1944, at an alleged cost of between $3,500,000.00 and $4,000,000.00.[2] The Erath Agreement unitized eighteen producing sands encountered in twenty-nine wells, eleven being pre-unit wells and eighteen being drilled before 1944 below 8,000 feet. The agreements adopted the acre-foot formula as a basis for the participation of each tract in unit production and costs and in unit operation and management. By this method the hydrocarbons in place under the unit as a whole are calculated as well as the hydrocarbons in place under each tract, and each tract is allocated an equity which its underlying hydrocarbon content bears to the total hydrocarbons in place under the entire unit. A final calculation of equities had to be made at a date not later than June 1, 1944.[3] The equities were calculated (Revised Exhibit D), and the Erath Unit operated within the eighteen producing sands for approximately twelve years. In 1956 one of the existing unit wells on the Vermilion Parish School Board Tract (part of the Erath Field and north of the Fault Line) was deepened and completed in a sand known as the "School Board Sand" at an interval of 11,784 to 11,822 feet, Schlumberger measurements. This sand is sometimes referred to as the "Nineteenth Sand." The Department of Conservation, State of Louisiana, issued clarification orders with respect to the exploration for and production of gas and condensate from the School Board Sand of the Erath Field (Order 34-F). The Vermilion Parish School Board and other parties owning interests in the tracts overlying the School Board Sand would not recognize the sand as included in the Erath Agreements, and they declined to accept payment on account of production from that sand on a unitized basis. Texaco Inc., as stated supra, instituted the present suit; after hearing and submission of the matter on briefs, the trial court interpreted the Erath Agreements on the issues presented and held in part: After the Court of Appeal affirmed the foregoing judgment, Texaco Inc., Tidewater Oil Company, Grace Goldston Barber, et al., Humble Oil & Refining Company, and Phillips Petroleum Company separately applied to this Court for Certiorari. Writs were granted, limited to a review of these two questions: The following specification of errors was assigned in this Court by Texaco Inc. and those parties alligned with it: Vermilion Parish School Board, et al. urge in this Court that the manner of distributing the School Board Sand production ordered by the Court of Appeal is fair and equitable and conforms with the intent of the parties to the unit agreements, and that it should be confirmed.[4] *546 Because of our limited review, the only matters for determination before this Court are the basis of payment of royalties and the effect of such determination on the payment of royalties on reservoirs discovered in the future from sands now unknown. Bearing the above matters in mind, we cannot help but observe the following insoluble problems that counsel for Texaco Inc. have set forth in brief and which they state would not have gone unanswered if the contracting parties had intended to segregate certain sands of the agreements as decreed by the Court of Appeal The above problems or questions are serious beyond doubt; to ignore all of them, and to allow the judgment of the Court of Appeal to stand, would lead to an unreasonable, inequitable, or absurd result. Guided by the above jurisprudence and codal interpretations, as well as a study of the Erath Agreements (the pertinent articles of which are set out in the opinion of the Court of Appeal, 145 So.2d 383), it becomes obvious that the trial court and the Court of Appeal were correct in finding that: From the foregoing finding, it follows that the parties to the Erath Agreements intended that production from any sand, whether it be then existent or discovered in the future, was to be attributed to the whole of the Unit Area; otherwise, the interpretation of the agreements would be unreasonable and the intentions of the parties would be negated. It is manifest from a study of the record that the parties to the Erath Agreements were experienced and informed persons who contemplated justice and fair dealing with one another; they did not, and could not have contemplated independent units within a unitized area such as the Erath Field. To interpret the agreements as providing that production should be attributed to anything other than the whole would lead to absurd and inequitable consequences never intended. Production and costs are interrelated and must be determined by experts in those fields; costs are allocated to and associated with production. Where as in the present case a unitized field exists and production is general and cumulative, costs are to be proportionate according to formulas adopted by experts and agreed upon by the parties. As to the division of royalties, an examination of the agreements (set forth in the Court of Appeal Decision) discloses that the parties thereto intended that each would receive his fair and equitable share of the products recovered. It is pertinent here to observe that Relator Texaco Inc. states in brief: "Alternatively. It is also pertinent to note that Vermilion Parish School Board states in brief:[5] "ALTERNATIVE SUGGESTION AS TO DISTRIBUTION OF SCHOOL BOARD LAND PRODUCTION The adoption of the alternate plan seems to be the equitable and reasonable solution to this controversy without working a hardship upon the parties. We therefore find that a reasonable distribution for the equities derived from the School Board Sand would be a recalculation of all equities by using the percentages shown on Revised Exhibit D, and making such unit-wide adjustments as would result from adding the value of the School Board Sand to the total unit value and crediting the overlying tracts with the increased equity represented by that sand. For the reasons assigned, the judgment of the Court of Appeal, Third Circuit, is reversed and set aside, insofar as it affirms the judgment of the trial court with respect to the royalties herein concerned; insofar as it pertains to matters not treated herein because of our limited review, the judgment of the Court of Appeal is not disturbed. It is now ordered and decreed that the equities for the entire Recycling Unit are to be determined in accordance with the alternate plan, supra, by adding the School Board Sand to the equities shown on Revised Exhibit D, and making such adjustment in the tract equities for the field as will result from allocating to the tracts overlying the School Board Sand the increased equity in the unit represented thereby. It is further ordered that this same method of recalculation apply to any other *550 unitized sand as may hereafter be encountered within the Unit Area. All costs to be paid by petitioner, Texaco Inc., Unit Operator of the Erath Unit. SUMMERS, J., recused. [1] La.App., 145 So. 2d 383. [2] The record discloses that by the recycling process gas is produced from the unitized sands, the desirable hydrocarbon fractions are extracted therefrom, and the residue gas is then returned to such of the unitized formations as the operator may select for the purpose. This enables the operator to store gas awaiting a favorable market, and it also maintains reservoir pressures near their original values, thereby preventing loss from condensation and from water intrusion in the sands which would result from diminishing pressures. It is alleged that at the time the unit was created, the expert opinion was that the recycling operation would result in the recovery of 133 million barrels of plant product, 50% of which would otherwise be lost, and in the saving of 1.5 trillion cubic feet of gas for the day when a favorable market would be available. [3] From a statement of the case of Relator, Texaco Inc. See, also, Art. IV, "Royalty Owners Unitization Agreement." [4] On March 27, 1963, counsel for Vermilion Parish School Board filed a motion asking that this Court issue an order limiting the argument to be presented by plaintiffs-appellants in this matter to Specification of Errors Nos. 6 and 7, and to the limited questions specified by this Court to be presented on this writ of review. They further requested that Specification of Errors Nos. 1, 2, 3, 4 and 5 be stricken from Texaco Inc.'s brief. [5] Phillips Petroleum Company (Applicant in No. 46,444), Humble Oil & Refining Company (Applicant in No. 46,446), Grace Goldston Barber, et al. (Applicants in No. 46,447), and Tidewater Oil Company (Applicant in No. 46,450) have joined with Texaco Inc.; John L. Abercrombie, et al., have joined with Vermilion Parish School Board, et al. In view of the foregoing, one decree will suffice.