Opinion ID: 1092090
Heading Depth: 2
Heading Rank: 1

Heading: The Unit of Measure Issue

Text: Initially, Terra argues that other oil and gas producing jurisdictions hold that a valid order of the Oil and Gas Board, or those States' functional equivalents, supersedes or amends royalty or overriding royalty agreements based on a voluntary spacing or pooling declaration. Terra cites Hladik v. Lee, 541 P.2d 196 (Okla.1975), Humble Oil & Refining Co. v. Jones, 125 So.2d 640, (La.App.1961), annulled and remanded, 241 La. 661, 130 So.2d 408, aff'd on rehearing, 157 So.2d 110 (La.App.1968), Fletcher v. Ricks Exploration, 905 F.2d 890 (5th Cir.1990), and 4 Eugene Kuntz, A Treatise on the Law of Oil and Gas § 48.3(k) (1990), in support of this contention. In response, Howell Petroleum argues the distinction between spacing and pooling. Under Alabama statutes, both spacing and pooling may be either voluntary or compulsory. See, §§ 9-17-12(b) and 9-17-13(a), Ala.Code 1975. According to Howell, compulsory spacing, or compulsorily establishing a drilling or production unit under § 9-17-12(b), Ala.Code 1975, is merely a conservation measure that has no effect on royalty payments. Howell apparently concedes, however, that compulsory pooling, or compulsorily integrating interests into a drilling or production unit under § 9-17-13(a) does affect royalty payments. After carefully reading the cited authorities, we conclude that respacing by the Board does not affect a prior royalty agreement, unless the agreement explicitly makes, or can reasonably be interpreted to make, royalty computations dependent on spacing by the Board. [3] Also, we agree with Howell that compulsory or forced pooling under § 9-17-13 does affect prior royalty agreements. See, Humble Oil & Refining, 125 So.2d at 646-47, aff'd on rehearing, 157 So.2d at 112. [4] In Jones v. Bronco Oil & Gas Co., 446 So.2d 611, 613 n. 3 (Ala.1984), this Court stated: In passing, we note our agreement with the view of the Supreme Court of Louisiana that the orders of the regulatory authority charged with the responsibility of preventing waste of the state's oil and gas `supersede, supplement, replace, and are incorporated in the provisions and obligations of contracts and leases relating to mineral development. [And,] that these orders become the law as between the parties in determining their respective rights and obligations.' Delatte v. Woods, 232 La. [341] at 357, 94 So.2d [281] at 287 (1957). We reaffirm our statement in Bronco Oil. However, implicitly, for a Board order to supersede or supplement a provision in a private contract the Board order and the contractual provision must conflict. See, Arkansas Louisiana Gas Co. v. Southwestern Natural Production Co., 221 La. 608, 609, 60 So.2d 9, 10 (1952). We conclude that the Board order at issue here does not address royalty payments, and, thus, cannot conflict with the private contractual agreement between Terra and Howell Petroleum. However, we agree with Terra's second argument that the agreement between it and Howell Petroleum, by its very terms, made computation of Howell's overriding royalty dependent on spacing by the Board. [5] We conclude that the trial court erred in making its legal determination that the agreement between Howell and Terra was not affected by the Board's order. It is well settled that two or more instruments executed contemporaneously by the same parties in reference to the same subject matter constitute one contract and should be read together in construing the contract. Haddox v. First Alabama Bank of Montgomery, N.A., 449 So.2d 1226, 1229 (Ala.1984). Whether an agreement is ambiguous is a legal question for the court. Terry Cove North, Inc. v. Baldwin County Sewer Authority, Inc., 480 So.2d 1171, 1173 (Ala.1985). If an agreement is found to be unambiguous, the court then has the duty to determine the meaning of the agreement. Id. The trial court should give the terms of the agreement their clear and plain meaning. Id. Further, the court should presume that the parties intended what the terms of the agreement clearly state. Id. We agree with the trial court that the farm out agreement, the initial unit declaration, and the assignment of leases formed a binding contract between Howell and Terra. We disagree, however, with the trial court's legal conclusion that this agreement was not affected by the Board's respacing order. The farm out agreement states, in pertinent part: V. Assignment If the Test Well, or substitute therefor, is drilled within the time and manner and to the depth specified herein, and if such well, hereinafter sometimes called the `Earning Well,' is completed as a producer of oil and/or gas in commercial quantities, and upon Terra's written request, Howell agrees to execute and deliver an assignment to Terra, without warranty of title either express or implied, of all Howell's rights, title and interest in and to the Farmout Lands subject to this agreement insofar and only insofar as such portions of the Farmout Lands are included within the geographical boundaries of the unit established for said Earning Well. (Plaintiff's Exhibit 1 at p. 2; Supp.R. at 4; emphasis supplied.) The Declaration of Unit states, in pertinent part: WHEREAS, the undersigned, having full authority in and under the oil, gas and mineral leases described in Exhibit `A' and embraced within the followingdescribed unit, consider it necessary and advisable to pool, consolidate, and combine the lands covered by said leases, and in order to comply with orders prescribed by the Oil and Gas Board of Alabama and to establish as a drilling, operating and producing unit the land hereinbelow described; NOW THEREFORE, in accordance with the power and authority granted by the leases described in Exhibit `A' and in consideration of the premises, the undersigned do hereby pool, combine and consolidate the oil, gas and mineral leases and interests described in Exhibit `A,' and the lands and acreage covered thereby so as to constitute and establish the following described lands as a drilling or production unit for the development, production and transportation of oil, gas, gas condensate and other gaseous hydrocarbons, to wit: TRI/Chadley 27-9 All Section 27-14S-11W Fayette County, Alabama There is hereby pooled and combined, into the area described above, all the leasehold, mineral, overriding royalty, and royalty interests and all other interests in the above-described unit as to which the undersigned (or any of the undersigned) have the right to pool and combine into the unit created hereby whether or not said leases and other interests are particularly described herein. Said unit is subject to the rules, regulations, and orders of the Oil and Gas Board of Alabama, and such pooled unit shall, unless sooner terminated by the parties hereto, remain in full force and effect until the leases described in Exhibit `A' have terminated by their own terms and provision. (Plaintiff's Exhibit 5 at p. 1; Supp.R. at 20; emphasis supplied.) The basic legal question that the trial court had to answer was what was meant by the unit established for said Earning Well. Neither party contests that the earning well was the Chadley 27-9. Clearly, initially the unit established for the Chadley 27-9 was the voluntarily created unit consisting of all 640 acres in Section 27. However, the declaration of unit clearly was made subject to the rules, regulations, and orders of the Oil and Gas Board of Alabama. Therefore, when the Board respaced Section 27 and created two drilling or production units, the unit established for the Chadley 27-9 became the eastern ½ of Section 27. No other reasonable interpretation can come from the clear and plain meaning of the terms of the agreement. The trial court erred in interpreting the plain language of the agreement.