Opinion ID: 1829970
Heading Depth: 1
Heading Rank: 1

Heading: Unpaid Volumes Fuel Gas

Text: Exxon argues that it is entitled to a judgment as a matter of law on the State's fuel-gas claim because traditionally oil and gas leases allow the lessee free use of gas to develop and operate the leased area. Exxon therefore contends that it rightfully did not pay a royalty on gas used for the operation of its offshore production platforms located on the leased areas or for the operation of its onshore treatment facility. The State argues to the contrary that the leases do not allow the free use of gas except for two purposes  flaring and lift purposes. The main opinion upholds the judgment in favor of the State on the fuel-gas claim, concluding that [t]he lease language is clear on the matter of the fuel-gas claim. 986 So.2d at 1106. I agree with that holding, but I disagree that the terms of the leases on the matter of fuel gas are clear, that is, unambiguous, and with the consequent implication that Exxon's interpretation is not reasonable. Paragraph 5(b) of the leases provides: If gas, of whatever nature or kind ... is used, on or off the leased area, by [Exxon] for purposes ... other than solely in the development and operation of the leased area as provided herein, [Exxon] shall pay [X]% of the net value realized by [Exxon] or affiliate from the sale or disposition of the manufactured or extracted products and [X]% of the best price realizable in the exercise of reasonable diligence for all gas used and not sold. According to Exxon, this language on its face grants it royalty-free use of gas in operating the offshore production platforms because, it argues, it is using the gas in the operation of the leased area. Exxon argues further that under standard gas-accounting guidelines the exemption extends to the gas fuel used off the leased areas at the onshore treatment facility. Such an interpretation does not appear unreasonable. The language that requires the payment of a royalty when gas is used for purposes ... other than solely in the development and operation of the leased area as provided herein does suggest that the leases permit the royalty-free use of gas in the development and operation of the leased area. However, I believe that the lease provision also can reasonably be read as the State reads it  to require Exxon to pay a royalty on gas produced from any well that is drilled, except in two limited circumstances: (1) when gas is flared for well-testing (paragraph 5(a)), and (2) when gas is recycled for lift purposes (paragraph 5(d)). [21] The requirement of paragraph 5(b), that a royalty must be paid on all gas used on or off the leased areas except for gas used solely in the development and operation of the leased area as provided herein, may reasonably be read to refer only to those two exceptions. As the State correctly notes, the leases contain a provision, in paragraph 27, which requires that, [i]n the case of ambiguity, this lease always shall be construed in favor of [the State] and against [Exxon]. A term in a contract is ambiguous only if, when given the context, the term can reasonably be open to different interpretations by people of ordinary intelligence. Lambert v. Coregis Ins. Co., 950 So.2d 1156, 1162 (Ala.2006). Thus, if the leases reasonably can be read in the State's favor, we must adopt that understanding. Because I believe that we may reasonably construe the leases in the State's favor, I agree that the trial court did not err in denying Exxon's motion for a judgment as a matter of law as to the fuel-gas claim.