Title: State v. Davis Oil Co.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

State v. Davis Oil Co.1986 WY 204728 P.2d 1107Case Number: 86-70, 86-71Decided: 11/25/1986Supreme Court of Wyoming
The STATE of Wyoming, Ed 
Herschler, Thyra Thomson, James B. Griffith, Stan Smith and Lynn Simons, as 
members of the Board of Land Commissioners, and James B. Griffith, as State 
Auditor, and Howard Schrinar, as Commissioner of Public Lands, Appellants 
(Defendants),

v.

DAVIS OIL COMPANY, 
Appellee (Plaintiff).

DAVIS OIL COMPANY, 
Appellant (Plaintiff),

v.

The STATE of Wyoming, Ed 
Herschler, Thyra Thomson, James B. Griffith, Stan Smith and Lynn Simons, as 
members of the Board of Land Commissioners, and James B. Griffith, as State 
Auditor, and Howard Schrinar, as Commissioner of Public Lands, Appellees 
(Defendants).

Appeal from District 
Court, LaramieCounty, Gary P. Hartman, 
J.

A.G. McClintock, 
Atty. Gen., Michael L. Hubbard, Senior Asst. Atty. Gen., and Vicci M. Colgan and 
Clinton D. Beaver, Asst. Attys. Gen., and Michael R. O'Donnell, Sp. Asst. Atty. 
Gen., for appellants in Case 

No. 86-70 and 
appellees in Case No. 86-71.

Jack D. Palma, 
II and Donald I. Schultz of Holland & Hart, Cheyenne, and James P. Regan and 
Patrick B. Seferovich of Davis Oil Co., Denver, Colo., for appellee in Case No. 
86-70 and appellant in Case No. 86-71.

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

MACY, 
Justice.

[¶1.]     These are the second 
and third in a series of cases before this Court involving the interpretation of 
the royalty clauses contained in State of Wyoming oil and gas leases. The district court 
granted partial summary judgment in favor of the State, and both parties have 
appealed.

[¶2.]     We reverse in part and 
affirm in part.

[¶3.]     Davis Oil Company is 
the leasehold owner of certain oil and gas interests owned by the State of 
Wyoming in Converse County, Wyoming. Davis produces oil from two wells on the leased 
premises, Concamp State No. 1 and Concamp State No. 2. Associated with the 
production of oil from the wells is the production of casinghead gas, which is 
the subject of this appeal. As it is produced, the gas is transported by 
Davis to a 
separator on the leased premises where water and other impurities are removed. 
Then, pursuant to gas purchase contracts with Davis, Phillips Petroleum Company 
transports the gas from the separator via pipeline to a processing plant near 
Douglas, Wyoming. Both the pipeline system and the 
processing plant are owned by Phillips. Before the gas leaves the leased 
premises, it is metered and tested by Phillips. It then enters the pipeline 
where it is commingled with gas produced from other nearby fields. At the plant, 
natural gas liquid is separated and transported by Phillips to its refinery in 
Texas. The 
remaining gas is sold by Phillips at its Douglas plant.

[¶4.]     Phillips pays Davis for the gas by first calculating the amount of gas 
contributed to the pipeline system by Davis according to the measurements taken on 
the leased premises. That amount is then multiplied by a percentage of the price 
received by Phillips for the sale. Using the resulting figure, Phillips computes 
the royalty due the State and deducts it from the a amounts paid to Davis.

[¶5.]     Royalties from the sale 
of casinghead gas produced under the Concamp lease have been paid to the State 
on the basis of the amount realized from such sales. When the State advised 
Davis that it believed the royalty payments to be 
inadequate, Davis filed a complaint in district court 
seeking a declaratory judgment that royalties due the State for production under 
the Concamp lease had been properly calculated in accordance with the lease 
terms. The pertinent portion of the lease provides as 
follows:

"(d) ROYALTIES. The 
royalties to be paid by lessee are: * * * (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." 
(Emphasis added.)

[¶6.]     Applying this language, 
Davis' position 
before the district court was that the sale of casinghead gas from the Concamp 
wells is a sale "at the wells." On that basis, Davis argued that the royalty should be 
calculated according to "the amount realized." The State asserted that the sale 
of gas from the Concamp lease is not a sale at the wells; rather, the gas is 
"sold * * * off the premises," "used off the premises," and "used * * * in the 
manufacture of gasoline or other products." Thus, the State argued that the 
proper standard for calculating royalties is market value. In addition, the 
State argued that, regardless of the point of sale or the standard for 
calculating royalties, the lessor-approval and federal-floor provisions of the 
lease must be satisfied.1 The parties stipulated to the 
facts, and both filed motions for summary judgment.

[¶7.]     The district court 
denied Davis' 
motion and granted partial summary judgment for the State. In its final 
declaratory judgment order, the district court found generally that the gas 
produced from the Concamp lease is not sold "at the wells" for purposes of 
calculating royalties but is instead "saved and sold or used off the premises or 
in the manufacture of gasoline or other products." On that basis, the district 
court found that the royalties are to be calculated according to market value. 
The district court also found that the lessor-approval and federal-floor 
provisions of the lease have been supplanted by the market-value/amount-realized 
provisions. 

[¶8.]     In its appeal before 
this Court, the State asserts the following claims:

"I. Must all parts of the 
royalty clause in this case be reconciled and construed in harmony and thereby 
avoid rendering the `Lessor approval' and `federal minimum' provisions 
meaningless?

"II. Did the district 
court misconstrue the nature of the school land trust and its effect upon the 
royalty clause in this case?"

[¶9.]     Our holding in State v. 
Moncrief, Wyo., 720 P.2d 470 (1986), is dispositive of 
these claims. In accordance with that opinion, we reverse the district court's 
order to the extent that it held the lessor-approval and federal-floor 
provisions are superseded by the market-value/amount-realized 
provision.

[¶10.]  We are left to consider the single issue 
raised by Davis 
in its appeal from the district court's order:

"DID THE DISTRICT COURT 
ERR IN FINDING DAVIS OIL COMPANY'S CASINGHEAD GAS SALES WERE NOT `AT THE WELLS' 
WITHIN THE MEANING OF THE STATE OF WYOMING OIL AND GAS 
LEASE?"

[¶11.]  As indicated by the lease language quoted 
earlier, the standard used for calculating royalties is dependent upon whether 
the gas is sold "at the wells" or "saved and sold or used off the premises or in 
the manufacture of gasoline or other products." In claiming that the gas from 
the Concamp lease is sold "at the wells," Davis relies in part on the following provision 
of its gas purchase contracts with Phillips:

"Gas shall be delivered 
at the inlet of Buyer's facilities at the point or points of separation of oil 
and gas * * *. Upon delivery, title to 
the gas and all components thereof shall pass to and vest in Buyer without 
regard to the purposes for which it may thereafter be sold or used by Buyer." 
(Emphasis added.)

[¶12.]  According to Davis, a sale necessarily 
occurs when title to the gas passes to Phillips. Because the contracts provide 
that title passes upon delivery and delivery occurs on the leased premises, 
Davis asserts 
that the sale is "at the wells." We do not agree.

[¶13.]  As the district court stated in its 
decision letter, there is no question that title to the gas passes from 
Davis to 
Phillips at the separator on the leased premises. However, the passage of title 
does not determine whether gas is sold "at the wells" nor does it trigger the 
amount-realized provision.

[¶14.]  In Piney Woods Country Life School v. 
Shell Oil Company, 726 F.2d 225, reh. denied 750 F.2d 69 (5th Cir. 1984), cert. 
denied 471 U.S. 1005, 105 S. Ct. 1868, 85 L. Ed. 2d 161 (1985), Shell Oil Company 
leased certain oil and gas interests from Piney Woods pursuant to leases 
containing royalty provisions identical in all relevant respects to the 
provision in dispute here. Shell Oil Company thereafter entered into a contract 
for the sale of gas with MisCoa, which contract provided that title to the gas 
passes in the field. Despite this provision, the Fifth Circuit Court of Appeals 
found that the gas was not sold at the well and consequently that the royalties 
due must be computed on the basis of "market value at the well" rather than the 
amount realized. In reaching this result, the court reasoned 
that:

"[T]he purpose of the 
distinction between gas sold at the well and gas sold off the lease * * * is to 
distinguish between gas sold in the form in which it emerges from the well, and 
gas to which value is added by transportation away from the well or by 
processing after the gas is produced. The royalty compensates the lessor for the 
value of the gas at the well: that is, the value of the gas after the lessee 
fulfills its obligation under the lease to produce gas at the surface, but 
before the lessee adds to the value of this gas by processing or transporting 
it. When the gas is sold at the well, the parties to the lease accept a 
good-faith sale price as the measure of value at the well. But when the gas is 
sold for a price that reflects value added to the gas after production, the sale 
price will not necessarily reflect the market value of the gas at the well. 
Accordingly, the lease bases royalty for this gas not on actual proceeds but on 
market value.

"`At the well' therefore 
describes not only location but quality as well. Market value at the well means 
market value before processing and transportation, and gas is sold at the well 
if the price paid is consideration for the gas as produced but not for 
processing and transportation." 726 F.2d  at 231.

[¶15.]  Applying that reasoning to the facts 
before it, the court concluded

"that the gas sold by 
Shell was not `sold at the well', within the meaning of the lease, even though 
the sale contracts provide that title to the gas passes on or near the leased 
premises. Under the MisCoa contract, * * * title passes in the field but the 
sale price is not determined until after the gas is processed and transported to 
YazooCity. The sour gas is 
metered in the fields, but this measurement appears to be of little 
significance. MisCoa effectively pays only for the amount of sweet gas delivered 
at YazooCity, and pays a price 
commensurate with the value of sweet gas at the time the contract was made." 
Id. at 
231.

[¶16.]  Davis 
attempts to distinguish between PineyWoodsCountryLifeSchool and the present case by 
asserting that the focus of inquiry established in PineyWoodsCountryLifeSchool is the activity of the lessee. That 
is, Davis contends that the Fifth Circuit Court of Appeals reached the result it 
did because in that case the lessee transported the gas off the leased premises, 
processed it, and thereby added value to it prior to sale, whereas in the 
present case the buyer, Phillips, did the transporting and processing after 
taking custody and control of the gas from the lessee, Davis, on the leased 
premises. We are not persuaded by Davis' claim.

[¶17.]  The focus of inquiry established in 
PineyWoodsCountryLifeSchool is quite clearly the 
quality and location of the gas when it is sold. In that case, the lessee was 
paid for sweet gas in YazooCity, not sour gas at the well. For that 
reason, the Fifth Circuit Court of Appeals determined that market value, rather 
than the amount realized, was the proper standard for calculating royalties. In 
the present case, Davis is paid for processed gas 
in Douglas, not casinghead gas at the wells. 
Accordingly, we find that market value, not the amount realized, is the proper 
standard for calculating royalties due the State. As the district court 
concluded:

"[T]he royalty to be 
received by the lessor is not finally determined, and in fact cannot be so 
determined, until the gas has been processed. Under the facts of the instant 
case, the State of Wyoming as lessor does not receive a royalty on gas sold `in 
the form in which it emerges from the well' * * * but receives a royalty based 
upon a percentage of the proceeds of products extracted from the gas through 
processing."

[¶18.]  Under these circumstances, we agree that 
these do not constitute sales "at the wells" within the meaning of the lease 
language.

[¶19.]  Despite our agreement as to the point of 
sale, we do not incorporate entirely in our decision the reasoning given by the 
district court in support of its holding. The district court, like the Fifth 
Circuit Court of Appeals in PineyWoodsCountryLifeSchool, was motivated in part by a concern 
that a finding that the point of sale rests entirely on the passage of title 
would lead to manipulation by lessees. While we recognize the potential for such 
manipulation, we find the lease language itself to be sufficiently clear and 
unambiguous to support our finding that the sale of gas produced by Davis from the Concamp 
wells constitutes a sale off the premises, invoking the market-value standard 
for calculating royalties.

[¶20.]  For the reasons stated, the district 
court's order is affirmed with respect to the point of sale and reversed in 
accordance with State v. Moncrief with respect to the lessor-approval and 
federal-floor provisions of the lease.

FOOTNOTES

1 See State v. Moncrief, Wyo., 720 P.2d 470 (1986), for a discussion of 
these provisions of the lease. 

URBIGKIT, Justice, concurring in 
part and dissenting in part, with whom CARDINE, Justice, 
joins.

[¶21.]  I concur with the court's conclusion that 
State v. Moncrief, Wyo., 720 P.2d 470 (1986) is determinative of the issues 
raised in the State appeal requiring reversal, but would also reverse on the 
Davis Oil appeal involving interpretation of the lease royalty payment pricing 
provision where product sale occurs at the wellhead.

[¶22.]  The two-fold issue presented is whether 
the word "sold" as used in an oil and gas lease should be given its usual 
business deal interpretation as established by the Uniform Commercial Code, or 
if the involvement of a state lease leads to a different 
interpretation.

[¶23.]  Technically, the producer of casing-head 
gas produced in conjunction with oil claims an "amount realized" royalty value, 
while the State claims a "market value" standard tied to both the processed 
natural gas and stripped hydrocarbons, determined after processing and resale by 
an independent third party.

[¶24.]  The lease provision is specific and 
unambiguous:

"* * * [P]rovided that on gas sold at the wells the 
royalty shall be one-eighth of the amount realized from such sale." 
(Emphasis added.)

[¶25.]  Consequently, the dispositive 
royalty-valuation inquiry is whether the gas was "sold at the wells" pursuant to 
the lease terminology.

[¶26.]  The sales agreement between producer 
Davis Oil, and buyer Phillips Petroleum is also before the court for 
construction, and is similarly uncomplicated in 
terminology:

"Gas shall be delivered 
at the inlet of Buyer's facilities at the point or points of separation of oil 
and gas * * *. Upon delivery, title to 
the gas and all components thereof shall pass to and vest in Buyer without 
regard to the purposes for which it may thereafter be sold or used by Buyer." 
(Emphasis added.)

Davis maintained a separator 
near the wellsite to remove oil, water and other components not deliverable with 
natural gas. The separator was attached to the pipeline facilities owned and 
operated by Phillips Petroleum to transport gas from the field to its processing 
plant and gas collection system.

[¶27.]  From two documents, the State lease and 
the Phillips sales agreement, the State contends and the majority apparently 
adopt a new principle that, even though title passes at the well, with the 
rights and responsibilities of possession and ownership, a sale has not then 
occurred for royalty pricing purposes.

[¶28.]  Lacking the logical justification to 
differentiate sale ("sold") from passage of title with assumption of concurrent 
possessory rights and obligations by the buyer, I respectfully dissent.1

I. FACTS AND GENERAL 
AUTHORITIES

[¶29.]  The specific sales status requires 
factual clarification for legal analysis. The buyer, by the purchase contract, 
accepted right, title and interest for the metered gas at the wellsite 
separator. This gas, together with product from other suppliers, is collected 
for piping to a processing plant, including the processed product disposition 
facilities and customer sales arrangements. Wellhead quality of the gas was a 
matter of periodic analysis, and volumetric computations were continuously 
maintained. Based on the metered gas volume at wellhead, and adjusted by a 
quality factor, the price was determined on a unit basis by applying a formula 
to what the processor, Phillips, received upon resale. Succinctly, the 
purchase-pricing obligation of Phillips was determined by subsequent resale 
value as determined by the posted field price in Texas and gas sales contracts at the Wyoming plant 
site.

[¶30.]  The pricing system is accurately 
described by appellant Davis Oil:

"In general, the pricing 
mechanism is established to allow Phillips to 1) pay each producer a raw gas 
price calculated as a specified proportion of the tailgate value of the products 
produced from that producer's gas. Phillips retains the balance of any `tailgate 
proceeds' to cover its processing costs and profit."2

[¶31.]  It is apparently the fact that the buyer 
used a percentage of the resale value as a pricing index that accommodates the 
majority's position that the status of a sale at wellhead is changed when the 
price is determined by subsequent events.

[¶32.]  Initially we are concerned whether the 
general rule now invoked by this court has only a peculiarly specified 
application to transactions with the State or is intended to reflect general 
rules and standards intrinsically involved in the law merchant, and more 
particularly in interpretation of the Wyoming Uniform Commercial Code, § 
34-21-101 et seq., W.S. 1977.

[¶33.]  The product in this case was "sold at the 
well" by fact and definition, and we ought to determine whether, as a matter of 
contractual construction with the State or as a matter of business law, a 
fiction of nonsale at the well should now be created. Cognitive reasoning and 
logical result should satisfy fairness obligations to the State and its citizens 
for operational necessities while also accommodating the sale provisions of the 
Uniform Commercial Code and general standards of the law of commercial 
sales.

"* * * It is true that in 
a technical sense, and where a due regard to the intention of the parties using 
the word `sold' is had, it may mean a transfer of the title of property for a 
money consideration. Yet, it has other meanings which would include the present 
transaction, when it is obvious that such was the intent of the party using the 
phrase." Culver v. Uthe, 133 U.S. 655, 659, 10 S. Ct. 415, 417, 33 L. Ed. 776 (1890).

[¶34.]  I would find PineyWoodsCountryLifeSchool v. Shell Oil Company, 726 F.2d 225 
(5th Cir. 1984), reh. denied 750 F.2d 69, cert. denied 471 U.S. 1005, 105 S. Ct. 1868, 85 L. Ed. 2d 161 (1985) neither controlling nor logically persuasive. 
In Piney Woods, Shell as the producer did not sell at wellhead, whether or not 
one construes title to have changed at that point for regulatory authority 
purposes, since Shell retained possession, control and utilization through 
processing for future tailgate sale of processed gas at its plant. The only 
delivery of possession and relinquishment of incidents of ownership occurred 
downstream after processing. The determination that title passed at the wellhead 
was in itself really fictional, since it was done to determine nonregulatory 
jurisdiction of a federal agency and not as a bona fide criterion for 
determining actual sale.

[¶35.]  In this case, to the contrary, title was 
transferred, possession delivered, and responsibility assumed at wellhead. The 
only similarity is pricing, in that Shell in Piney Woods paid an amount based on 
what it got after processing, while in this case the variable pricing system 
arranged for purchase as an arm's length transaction between Davis and Phillips, 
was determined by application of the variable price to the volumetric amount of 
raw gas. In Piney Woods, Shell agreed to pay its raw gas royalty obligation 
based on processed revenue to Shell, which was based on inopportune long-term 
contracts at a time of increasing gas prices. See the excellent discussion on 
the interpretation of a gas-royalty clause found in First National Bank of 
Jackson v. Pursue Energy Corporation, 799 F.2d 149 (5th Cir. 
1986).

[¶36.]  This case can be factually distinguished 
from Kingery v. Continental Oil Co., 434 F. Supp. 349 (W.D.Tex. 1977), reversed 
on other grounds 626 F.2d 1261 (5th Cir. 1980), cert. denied sub nom. Brent v. 
Natural Gas Pipeline Company of America, 454 U.S. 1148, 102 S. Ct. 1012, 71 L. Ed. 2d 302 (1982), where the producer pooled and delivered gas to the pipeline 
company buyer approximately three and one-half miles off the lease premises, and 
from Exxon Corporation v. Middleton, Tex., 613 S.W.2d 240, 10 A.L.R.4th 712 
(1981), where a construction of the lease clause determined whether the modifier 
"off the premises" applied to both "sold" and "used." The converse of the 
decision finding "used or sold off the leased premises" is involved in Skaggs v. 
Heard, 172 F. Supp. 813 (S.D.Tex. 1959), where the buyer contended 
unsuccessfully for the off-the-premises construction in order to charge back 
proportionate repressuring costs. In that case, the court held that the buyer's 
repressuring equipment system arrangement did not change the site-of-sale fact, 
since the gas was sold and delivered to the pipeline on the lease. Similarly, in 
Matzen v. Cities Service Oil Co., 233 Kan. 846, 667 P.2d 337 (1983), cert. 
dismissed sub nom. Mobil Oil Corp. v. Batchelder, 468 U.S. 1222, 105 S. Ct. 17, 
82 L. Ed. 2d 912 (1984), the trial court determination of sale off the premises as 
to Ashland Oil was affirmed based upon the producer maintaining the gathering 
system with delivery to the buyer at a central delivery point. See also Shamrock 
Oil & Gas Corporation v. Coffee, 140 F.2d 409 (5th Cir.), cert. denied 323 U.S. 737, 65 S. Ct. 42, 89 L. Ed. 591 
(1944).

[¶37.]  Here, the wellhead price for Davis, as vendor, was 
determined by value determinative process sales receipts obtained by Phillips at 
plant tailgate. A more nearly comparable case, although not similar in facts, is 
Waechter v. Amoco Production Co., 217 Kan. 489, 537 P.2d 228, 546 P.2d 1320 
(1975) (see also Waechter v. Amoco Production Co., 219 Kan. 41, 546 P.2d 1320 
(1976)), wherein the Kansas Supreme Court found a sale at wellhead. See also 
Pierce v. Texas Pacific Oil Co., Inc., 547 F.2d 519 (10th Cir. 1976) 
interpreting Oklahoma law; Skaggs v. Heard, supra; and 
Exxon Corporation v. Middleton, supra.3 

II. INTERPRETATION OF 
STATE CONTRACTS

[¶38.]  In this analysis of the State oil and gas 
lease form, we construe a document entered into between two negotiating 
participants. The rules should not differ in logic and principle as normally 
applied to any bilateral contract, with particular recognition that the lease 
form is "take it or leave it" for oil companies who do business with the 
State.

[¶39.]  This is a contract case involving a 
product sale, and legal interpretations and conclusions should not be different 
from the result had two private parties been involved, or were a private royalty 
interest holder the present plaintiff. The law does not accept different 
standards of contractual interpretation for the government in business 
enterprise than afforded citizens who enter into identical relationships. The 
State of Wyoming wrote and required the lease form; 
there were no bilateral negotiations of any provision. As such, no greater 
benefit than linguistically justified should be afforded by judicial 
construction and interpretation. Trustees of DartmouthCollege v. Woodward, 4 Wheat. 518, 17 U.S. 518, 4 L. Ed. 629 
(1819).

[¶40.]  Even before Trustees of Dartmouth 
College, the United States Supreme Court said:

"This is a contract; and 
although a state is a party, it ought to be construed according to those well 
established principles which regulate contracts generally." Huidekoper's Lessee 
v. Douglass, 3 Cranch 1, 70, 7 U.S. 1, 70, 2 L. Ed. 347, 369 
(1805).

[¶41.]  Consistent with this position, the 
Supreme Court again enunciated in Ohio Life Insurance and Trust Company v. 
DeBolt, 16 Howard 416, 429, 57 U.S. 416, 429, 14 L. Ed. 997 
(1853):

"* * * If the contract 
[made by the state] was within the scope of the authority conferred by the 
constitution of the State, it is like any other contract made by competent 
authority, binding upon the parties. Nor can the people or their 
representatives, by any act of theirs afterwards, impair its obligation. When 
the contract is made, the Constitution of the United States 
acts upon it, and declares it shall not be impaired, and makes it the duty of 
this court to carry it into execution. That duty must be 
performed."

[¶42.]  In Davis v. Gray, 16 Wall. 203, 233, 83 U.S. 203, 233, 21 L. Ed. 447 (1872), 
the Court again stated:

"That the Act of 
incorporation and the land grant here in question were contracts, is too well 
settled in this court to require discussion. Fletcher v. Peck, 6 Cranch, 137 [3 L. Ed. 162]; N.J. v. Wilson, 7 Cranch, 166 [3 L. Ed. 303]; Dartmouth Coll. v. Woodward, 4 Wheat., 518 [4 L. Ed. 629]; Bk v. Knoop, 16 How., 369 [14 L. Ed. 977]. As such, they were within 
the protection of that clause of the Constitution of the United States 
which declares that no State shall pass any law impairing the obligation of 
contracts."

[¶43.]  United States v. Diamond Coal & 
Coke Co., 254 Fed. 266, 268 (C.C.A.Wyo.), rev'd on other grounds 255 U.S. 323, 41 S. Ct. 335, 65 L. Ed. 660 
(1918), involved an appeal from the United States District Court, District of 
Wyoming, wherein the Court of Appeals discerned:

"* * * The equitable 
claims of a nation or a state appeal to the conscience of a chancellor with the 
same, but with no greater or less force, than would those of a private citizen 
under like circumstances, and, barring the effect of mere delay, they are 
judicable in a court of chancery, to whose jurisdiction the nation or state 
voluntarily submits them, by every principle and rule of equity applicable to 
the rights of a private citizen under similar 
circumstances."

[¶44.]  The general rule is similarly 
stated:

"As to its contract, the 
state should be held to the same rules and principles of construction and 
application of contract provisions as govern private persons and corporations in 
contracting with each other." 72 Am.Jur.2d States, Territories, and Dependencies 
§ 73, p. 468.

See also 81A 
C.J.S. States § 168, p. 632. Wyoming cases, although not specifically 
directed to an exception criterion are not inapposite. Wyoming Game & Fish 
Commission v. Mills Company, Wyo., 701 P.2d 819 (1985); State Highway Commission 
of Wyoming v. Brasel & Sims Construction Co., Inc., Wyo., 688 P.2d 871 
(1984); National Surety Co. v. Morris, 34 Wyo. 134, 241 P. 1063 (1925); State ex 
rel. Fitch v. State Board of School Land Commissioners of Wyoming, 27 Wyo. 54, 
191 P. 1073 (1920).

III. APPLICATION OF 
UNIFORM COMMERCIAL CODE

[¶45.]  My difference with the majority in 
reasoning invokes the contractual provisions and the law of sales under the 
Uniform Commercial Code as applied to the wellhead sale criteria of the state 
lease. The provisions of the Phillips purchase agreement to be analyzed are (a) 
designated point of sale; (b) title change; (c) delivery of possession and 
custody; and (d) purchase price determined by value added factors upon use by 
the purchaser. The critical inquiry is whether under general business law the 
price-determination factor changes the point of sale where all other 
determinative factors for a "sale" do exist. Extensive authorities uniformly 
answer in the negative. Franklin Fibre-Lamitex Corp. v. Director of Revenue, 
Del.Supr., 42 U.C.C.Rep. 1205, 505 A.2d 1296 (1985), where the U.C.C. is used to 
define "sold within the state for tax within the state" for tax purposes; Mari 
v. Wagner Equipment Co., Inc., Colo. App., 42 U.C.C.Rep. 1634, 721 P.2d 1208 
(1986), where conversion of a scraper after "sale" was required; IUE AFL-CIO 
Pension Fund v. Barker & Williamson, Inc., 1 U.C.C.Rep.2d 205, 788 F.2d 118 
(3d Cir. 1986), "the parties if they so intend can conclude a sale even though 
the price is not settled"; Bornstein v. Somerson, Fla.App., 21 U.C.C.Rep. 36, 
341 So. 2d 1043 (1977), sale of citrus crops; Columbus Milk Producers' 
Cooperative v. Department of Agriculture, 8 U.C.C.Rep. 481, 48 Wis.2d 451, 180 N.W.2d 617 (1970), executory sale of milk; Schmieder v. Standard Oil Co. of 
Indiana, 17 U.C.C.Rep. 360, 69 Wis.2d 419, 230 N.W.2d 732 (1975), filling 
station equipment price subject to negotiation; Barker v. Allied Supermarket, 
Okla. App., 20 U.C.C.Rep. 6 (1976), injury from store merchandise before 
reaching checkout counter constituted a sale upon pickup with intent to 
purchase. See also Fender v. Colonial Stores, 138 Ga. App. 31, 225 S.E.2d 691 (1976); Desbien v. Penokee 
Farmers Union Cooperative Association, 220 Kan. 358, 20 U.C.C.Rep. 102, 552 P.2d 917 
(1976), sale of wheat completed upon delivery to elevator; First National Bank 
of Elkhart County v. Smoker, 153 Ind. App. 71, 11 U.C.C.Rep. 10, 286 N.E.2d 203, 
reh. denied 153 Ind. App. 71, 287 N.E.2d 788 (1972), possession of cattle 
determinative although grade and weight after slaughter would determine the 
price; American Petrofina, Inc. v. PPG Industries, Inc., Tex. App., 40 
U.C.C.Rep. 816, 679 S.W.2d 740 (1984), three million gallons of deisel fuel had 
been "sold" by designation in storage tank; Salinas v. Flores, Tex.Civ.App., 583 S.W.2d 813 
(1979), sale of watermelons; Georgia Power Co. v. East Tennessee Fuel, Inc., 496 F. Supp. 626 (E.D.Tenn. 1980), coal price determined by delivery point b.t.u. 
testing. This listing may be belabored, but the authorities are multi-faceted, 
numerous, and consistent.

[¶46.]  In Piney Woods, as in many similar 
authorities on the marketprice time-determination questions, consistent 
application of the Uniform Commercial Code exists. The decision here must be 
justified by application of Wyoming statutes 
and the U.C.C. principles, since no exclusion or exception for the State or its 
instrumentalities was provided in either the generally adopted Uniform 
Commercial Code or the specific Wyoming statutes.

IV. WYOMING STATUTES ON 
SALES

[¶47.]  Appropriate sections of the Wyoming code include § 
34-21-206 (U.C.C. 2-106(a)), defining sale:

"(a) In this article 
unless the context otherwise requires `contract' and `agreement' are limited to 
those relating to the present or future sale of goods. `Contract for sale' 
includes both a present sale of goods and a contract to sell goods at a future 
time. A `sale' consists in the passing of title from the seller to the buyer for 
a price (section 2-401 [§ 34-21-246]). A `present sale' means a sale which is 
accomplished by the making of the contract."

§ 34-21-246 
(U.C.C. 2-401), passing of title:

"(a) Each provision of 
this article with regard to the rights, obligations and remedies of the seller, 
the buyer, purchasers or other third parties applies irrespective of title to 
the goods except where the provision refers to such title. Insofar as situations 
are not covered by the other provisions of this article and matters concerning 
title become material the following rules apply:

"(i) Title to goods 
cannot pass under a contract for sale prior to their identification to the 
contract (section 2-501 [§ 34-21-249]), and unless otherwise explicitly agreed 
the buyer acquires by their identification a special property as limited by this 
act [§§ 34-21-101 to 34-21-1002]. Any retention or reservation by the seller of 
the title (property) in goods shipped or delivered to the buyer is limited in 
effect to a reservation of a security interest. Subject to these provisions * * 
*, title to goods passes from the seller to the buyer in any manner and on any 
conditions explicitly agreed on by the parties;

"(ii) Unless otherwise 
explicitly agreed title passes to the buyer at the time and place at which the 
seller completes his performance with reference to the physical delivery of the 
goods, despite any reservation of a security interest and even though a document 
of title is to be delivered at a different time or place; and in particular and 
despite any reservation of a security interest by the bill of lading: * * 
*,"

and § 34-21-222 
(U.C.C. 2-305), open price:

"(a) The parties if they 
so intend can conclude a contract for sale even though the price is not settled. 
In such a case the price is a reasonable price at the time for delivery 
if:

"(i) Nothing is said as 
to price; or

(ii) The price is left to 
be agreed by the parties and they fail to agree; or

"(iii) The price is to be 
fixed in terms of some agreed market or other standard as set or recorded by a 
third person or agency and it is not so set or recorded.

"(b) A price to be fixed 
by the seller or by the buyer means a price for him to fix in good 
faith."

[¶48.]  Many years ago, Justice Blume made a 
succinct and expressive comment in terminology not really changed by U.C.C. 
provisions of present law:

"It would seem to us that 
the term `sales' or `when sold' are terms too plain to be construed away by a 
court. Thus we find in * * * In re Frank's Estate, 154 Misc. 472, 277 N.Y.S. 573, where it is stated that `a "sale" in legal nomenclature, is a term of 
precise legal import, both at law and in equity, and has well defined legal 
signification, and has been said to mean at all times a contract between parties 
to give and to pass rights of property.' * * * There must be, it is stated, a 
consideration or price, a seller, a purchaser and a delivery of the thing sold." 
State v. Yellowstone Park Co., 57 Wyo. 502, 121 P.2d 170, 171, cert. denied 316 U.S. 689, 62 S. Ct. 1280, 86 L. Ed. 1760 (1942).

 

V. CIRCUMSTANCE DELIVERY 
CONCLUSION

[¶49.]  The "dependent upon the circumstance" 
rule as the essence of the transaction was clearly defined in the early case of 
Hathaway v. Burr, 8 Me. 567, 570-571 (1842):

"* * * The meaning will 
usually be clearly ascertained by the words used in connexion with it, or by the 
circumstances developed. * * *

"* * * [T]here can be 
little safety in attaching a legal meaning to the word, when separated from the 
connexion or circumstances in which it is used. It is necessary therefore to 
advert to the facts disclosed in the case * * *."

See Morris v. 
Perkins Chevrolet, Inc., Mo. App., 663 S.W.2d 785 (1984); Jackson v. Meadows, 153 Ga. App. 1, 264 S.E.2d 503 (1980). See also Radloff v. Bragmus, 214 Minn. 130, 7 N.W.2d 491 (1943); Uniform 
Commercial Code Section, The Passage of Title, 14 Wyo.L.J. 17, 25 (1959); Note, 
Failure to Include All Material Terms Under the Uniform Commercial Code "The 
Open Terms Contract", 19 Wyo.L.J. 80, 83 (1964).

[¶50.]  In the nature of things, all gas is 
generally both used and sold off the premises in disassociated home or factory. 
Clearly the State, in drafting the lease form, contemplated two alternatives: 
(1) the producer sells gas at the well to a marketer, distributor or user; or 
(2) the producer moves the gas off the premises to the point of use or to be 
sold to someone else.

[¶51.]  It seems clear that in this case 
Davis sold to 
Phillips at the well for shipment of the raw product to its off-lease processing 
plant.

[¶52.]  The effect of the new rule created by the 
majority opinion is that if the formula for determining the original purchase 
price includes the buyer's resale value, then the legal status of the 
transaction as a sale at the wellhead becomes discombobulated. The majority 
create a new and unusual rule in the law of sales that a subsequent event 
pricing index is relevant to the status of the sale, even where, in accord with 
the agreement, (a) title is transferred; (b) possession is transferred; and (c) 
right and responsibility for the product is assumed by the buyer. The majority's 
erroneous conclusion stems from their failure to differentiate the legal sale 
from a pricing function embodied in the sale agreement.

"* * * In short, the 
court looks to the language of the contract and its commercial (or in this case, 
regulatory) context. U.C.C. § 1-205, Official Comment 1, § 2-202 & Official 
Comment 1 & 2." Pennzoil Company v. Federal Energy Regulatory Commission, 
645 F.2d 360, 388 (5th Cir. 1981) cert. denied 454 U.S. 1142, 102 S. Ct. 1000, 71 L. Ed. 2d 293 (1982).

See also Amoco 
Pipeline Co. v. Admiral Crude Oil Corp., 490 F.2d 114 (10th Cir. 1974); Shamrock 
Oil & Gas Corporation v. Coffee, supra.

[¶53.]  It is absolutely clear from the 
terminology of the Code and the case law that has followed that the commercial 
law requires consideration of the essence of the transaction to determine 
whether a sale has occurred, as differentiated from the passage of title as the 
only determinate. United 
States v. Balanovski, 236 F.2d 298 (2d Cir. 
1956), cert. denied 352 U.S. 968, 77 S. Ct. 357, 1 L. Ed. 2d 322 (1957). The 
Wyoming Supreme Court specifically recognized this rule in Park County Implement 
Co. v. Craig, Wyo., 397 P.2d 800 (1964).

[¶54.]  If a sale can be accomplished with open 
price terms, in accord with § 34-21-222, W.S. 1977, then surely a sale can be 
accomplished with a factored price by formula. The volume of cases is 
considerable in number in commodity transactions when the price determinates may 
be subject to subsequent events after the contractual sale is consummated. As a 
matter of fact, the transaction is similar to a course of business of extended 
nature in Wyoming wherein barley growers contract to 
sell their product to brewers with the ultimate price to be varied by quality 
conditions determinable after delivery and by final test conducted either at 
buyer's delivery point or plant site in other states. Turkeys are 
graded; eggs are candled; wheat is tested for moisture content; grass seed is 
delivered by percentage of purity; oil is sometimes valued by viscosity and 
impurities; and, perhaps not totally irrelevant, even legal services are valued 
at their conclusion upon results obtained. Friedsam v. Sawan Inc., 103 
Ga. App. 500, 119 S.E.2d 707 (1961); Pittsburgh, C., C. & 
St. L. Ry. Co. v. Knox, 177 Ind. 344, 98 N.E. 295 (1912).

[¶55.]  The State of Wyoming offered and 
required a lease form which determined the measure of royalty payments based 
upon a status well recognized as determinable from the events and agreement. 
This dissent is not based only on the technical title status, but rather on the 
totality of incidents in the sales transaction, including title, possession and 
assumption of ownership functions as clearly defined in the sales agreement, and 
general standards of business practice.

[¶56.]  I would reverse since the trial court 
erred in applying an amount-realized standard contrary to both the lease and the 
product sales agreement.

FOOTNOTES

1 In terms of practical 
oil-field operation in this case, the effort to differentiate market value at 
well from amount realized is similar to a number being six or only half a dozen. 
Since Davis then, or its successor Apache now, had a much greater interest as 
owner than the State as royalty holder, value and realized price encompass a 
much greater sophistication in bargaining capacity than the State process will 
ever afford in audit contemplation. A product is not worth more than you can get 
for it. Willing buyers and available sellers of gas production are presently 
limited in the oil patch, and the available market in this time of gas surplus 
and shut-in gas wells makes this economic fact particularly 
notable.

2 Two assumptions seem to 
spring from the State's brief and the trial court's 
decision.

The first is that a 
constructive reinterpretation of the State lease is justified in order to assure 
protection to the State in adequate receipt of royalty payments. In other words, 
what was inopportunely included in lease terminology should be reconstituted in 
order that, for example, "the producer could not determine the place of 
sale."

The second assumption is 
even more austere or unusual. It seems to be contended that somehow a 
market-value factor will favor the State economically under present 
circumstances. Obviously this can only be true if the State had the capacity and 
the time to determine that the operation of Phillips in result was so 
inefficient that the market value was diminished by inefficiency of operation. 
None of this seems to make any sense in the practical world of the limited 
auditing capacity of the State, the relatively small amount of dollars actually 
involved, and the singular interest of Davis in the greatest return possible for 
itself.

The motivating economic 
factor of Piney Woods, infra, as a method to escape from market value at 
contract date to market value at time of sale, is simply not reflected as a 
viable goal in the Phillips operation in the present period of national market 
conditions. By the time the nation gets back to a gas shortage, for a 
time-differential factor, even under the Phillips marketing process, 
recomputation would unlikely involve any dollar differences that would justify 
per diem and time for one State employee to drive one time to the Phillips 
facility in Campbell County from Cheyenne. Obviously, however, the fact that the 
State's position probably does not make any sense fiscally is no rational basis 
for an adverse resolution of language in their lease, but conversely the 
anticipation of something worthwhile in the State's demand and litigative effort 
does not per se justify a reconstituted interpretation of a relatively normal 
business transaction. Consideration of Crosby-Mississippi Resources, Ltd. v. 
Saga Petroleum U.S., Inc., 767 F.2d 143 (5th Cir. 
1985), would cause question where any implication of benefit from the position 
of the State would be realized. That case teaches that the amount realized (from 
the raw gas) could be significantly less if determined after deduction of 
processor cost and profit in real-world, gas market terms of 
today.

3 Minimal consideration 
was given in Piney Woods to the point-of-sale issue, since obviously the real 
sale occurred off-premises. The economic issue of the case was time-factor 
determination of market value in consideration of long-term contracts with 
escalating normal market price conditions. In adopting the time of production 
rule, the decision was not based on a unanimous precedent. See also Hillard v. 
Stephens, 276 Ark. 545, 637 S.W.2d 581 (1982); Texas Oil & Gas Corporation 
v. Vela, Tex., 429 S.W.2d 866 (1968); Tara Petroleum Corp. v. Hughey, Okla., 630 P.2d 1269 (1981), cert. denied sub nom. Shell Oil Company v. Piney Woods Country 
Life School, 471 U.S. 1005, 105 S. Ct. 1868, 85 L. Ed. 2d 161 (1985); Henry v. 
Ballard & Cordell Corp., La., 418 So. 2d 1334 (1982), cert. denied sub nom. 
Shell Oil Company v. Piney Woods Country Life School, supra. In Henry v. Ballard 
& Cordell Corp., Louisiana chooses a point in time in the 
market value gas royalty controversy. Note, Henry v. Ballard & Cordell 
Corp.: Louisiana Chooses A Point in Time in the 
Market Value Gas Royalty Controversy, 43 La.L. Rev. 1257 (1983). An analysis of 
the issue of Piney Woods market price versus market value is found in Harris, 
Gas Royalties - LeadingState and Federal Cases Reviewed: Alice's Adventures in 
"Royalty-Land", 37 Okla.L.Rev. 699 (1984).