Opinion ID: 567657
Heading Depth: 3
Heading Rank: 2

Heading: Cooperative Ventures and Louisiana Law

Text: 22 Because Amoco and F & L did not specifically address whether take-or-pay payments are part of the amount realized from the sale of gas and because the Lease does not base gas royalties on production, we interpret the Lease's gas royalty clause in a manner consistent with the Lease's object and nature. LA.CIV.CODE ANN. arts. 2048, 2053 (West 1987); Henry v. Ballard & Cordell Corp., 418 So.2d 1334, 1339 (La.1982). We glean the nature and objective of a gas lease from Louisiana's Supreme Court: 23 Where the mineral lease provides for payment to the lessor of a fractional royalty interest, the lease arrangement is in the nature of a cooperative venture: the lessor contributes the land and the lessee the capital and expertise necessary to develop the minerals for the mutual benefit of both parties .... 24 ... The ultimate objective of the royalty provisions of a lease is to fix the division between the lessor and lessee of the economic benefits anticipated from the development of the minerals. 25 Id. at 1338 (emphasis added). The court cites with approval Professor Harrell's statement that 26 any determination of the market value of gas which ... permits either the lessor or lessee to receive a part of the gross revenues from the property greater than the fractional division contemplated by the lease, should be considered inherently contrary to the basic nature of the lease and be sustained only in the clearest of cases. 27 Id., at 1338 n. 10, quoting Harrell, Developments in Non Regulatory Oil & Gas Law, The 30th Annual Institute on Oil & Gas Law & Taxation, Southwestern Legal Foundation, 336 (1979) (emphasis added). 28 We think that Louisiana's Supreme Court would hold take-or-pay payments to be part of the amount realized from the sale of gas under the Lease. Amoco secured the right to take-or-pay payments only by executing a contract to sell the gas that Amoco acquired pursuant to the Lease. The payments, like the market price paid for gas taken, constitute economic benefits that Amoco received from granting Columbia the right to take gas from the leased premises, a right that Amoco got through the Lease. 5 It would be contrary to the nature of the lease as a cooperative venture to allow a benefit by any name that is attributable to the gas under the leased premises to inure exclusively to the lessee. 6 29 Although Louisiana courts have not decided the take-or-pay question presented by this case, our interpretation of the Lease accords with several aspects of Louisiana mineral jurisprudence in addition to Henry. In Louisiana, 30 [a] mineral lessee ... is bound to perform the contract in good faith and to develop and operate the property leased as a reasonably prudent operator for the mutual benefit of himself and his lessor. 31 LA.REV.STAT.ANN. § 31:122 (West 1989) (emphasis added). This statute obligates Amoco to exercise reasonable diligence to secure a market for gas that it discovers under leased property. See Shell Oil Co. v. Williams, Inc., 428 So.2d 798, 803 (La.1983). 32 If lessors did not share in take-or-pay payments, lessees would have an incentive to compromise volume gas prices under their contracts or settlements with pipelines in exchange for favorable take-or-pay terms. White, The Right To Recover Royalties on Natural Gas Take-Or-Pay Settlements, 41 OKLA.L.REV. at 670-72; Comment, Royalty on Take-or-Pay Payments and Related Considerations Accruing to Producers, 27 HOUSTON L.REV. 105, 134 n. 225 (1990); see also Amoco Production Co. v. First Baptist Church of Pyote, 579 S.W.2d 280, 287 (Tex.Civ.App.--El Paso 1979, writ ref'd n.r.e.) (lessee who compromises volume gas price for benefits that did not accrue to lessors is accountable to lessors). No law or typical lease term assures royalty owners of representation in negotiations between lessees and pipelines; Frey was not represented in negotiations between Amoco and Columbia. Given the duty imposed on lessees by R.S. 31:122, we will not countenance a conflict-of-interest in a lease as to marketing strategy, especially where the lease's language is equivocal or supports a reading that does not countenance a conflict. 33 The Louisiana Supreme Court's decision in Wemple v. Producers' Oil Co., 145 La. 1031, 83 So. 232 (1919) also supports our interpretation of the Lease. The lease at issue in Wemple provided a royalty of one-eighth of oil saved and produced and $200 per well per year for gas if any is used off of the leased premises. After the Wemple lease's execution, the lessee became aware of and employed a new oil production technology that indisputably produced more oil than any other available process. The new pumping method also efficiently drew casinghead gas from the well, which the lessee condensed to produce natural gasoline, a product not addressed in the Wemple lease. The lessee cited its right to produce oil under the lease and the efficiency of its chosen method in contending that it owned all rights to the natural gasoline by-product of its production process. The Wemple court disagreed. It applied equity principles to decide that the lessor cannot be presumed to have given away a valuable right arising from the leased premises for nothing in return and that both the lessor and the owner [are] entitled to be benefited by the lucrative, new production technology not addressed in the lease. Id. at 1045-48, 83 So. at 237-38; see also LA.CIV.CODE ANN. arts. 2053, 2055 (West 1987) (vague contracts subject to equitable interpretation). 34 If not covered by the Lease's amount realized language, take-or-pay payments, like the casinghead gas at issue in Wemple, would constitute a benefit derived from the leased premises that the parties did not explicitly allocate in the Lease, but which Amoco would inequitably keep for itself. Finally, our interpretation of the Lease against Amoco accords with LA.CIV.CODE ANN. art. 2056 (West 1987): [i]n case of doubt that cannot be otherwise resolved, a provision in a contract must be interpreted against the party who furnished its text. 35 We reverse the district court's summary judgment for Amoco on take-or-pay issues and hold that the plaintiffs are entitled to their share of one-fifth of all take-or-pay payments received by Amoco that are attributable to the leased premises. On remand, the district court will calculate the amounts due. 36