Opinion ID: 1732153
Heading Depth: 1
Heading Rank: 4

Heading: gas sold on the unit

Text: Portions of the Middleton leases belong to the Anahuac Main Frio Gas Unit No. 1. Gas produced from this unit is sold at the Anahuac Gas Plant which is located within the boundaries of Unit No. 1. Amici Curiae argue that we should hold, as a matter of law, that gas sold anywhere within Unit No. 1 is a sale at the well because the creation of a unit obliterates all lease lines and that the unit becomes, in effect, one amalgamated lease. The unit lines rather than the lease lines limit or define the scope of each royalty standard. This argument ignores the express wording of the Unit No. 1 Agreement. Article 3.4 which deals with the effect of the Agreement provides: Operations, including drilling operations, conducted with respect to the Unitized Formation on any part of the Unit Area, or production from any part of the Unitized Formation, except for the purpose of determining payments to Royalty Owners, shall be considered as operations upon or production from each Tract, and such operations or production shall continue in effect each lease or term royalty or term mineral interest as to all of the lands covered thereby just as if such operations had been conducted and a well had been drilled on and was producing from each Tract. Article 8 provides: For the purpose of determining the royalties to which Royalty Owners are entitled on the gas produced from the Unitized Formation, the following method shall be used, to-wit:       The volume of gas from said Tracts remaining and not used for injection operations, lost or used in handling or consumed or lost in plant operations in connection with extraction of liquids or liquid hydrocarbons therefrom or flared, shall be deemed to be dissolved gas to the extent of the total volume of dissolved gas produced from said Unitized Formation from all Tracts after deducting from such total dissolved gas produced a volume equal to the calculated volume of dissolved gas which was used or consumed in plant operations; and the remainder of said volume of gas so remaining, if any, shall be deemed to be free gas. The total dissolved gas so remaining shall be prorated among and deemed attributable to each Tract in the Unit Area in the ratio or production that the dissolved gas produced from such Tract bears to the total dissolved gas produced from all such Tracts. In like manner, the total free gas, if any, so remaining shall be apportioned among and allocated to the several Tracts within the Unit Area in accordance with the respective Tract Participations effective hereunder. From the gas so attributable to each Tract, there shall be deducted the volume of gas returned to the Tract for operations thereon or supplied to the Lessor under the terms of the lease covering such Tract; and after all such computations and deductions have been accomplished, settlement shall be made for royalties on the remaining volume of gas, or so much thereof as if sold or used off the premises, in accordance with the terms and provisions of each lease or other instrument creating Royalty Owners' interests. (emphasis added) We construe these provisions to mean that in determining each lessee's royalty obligation the terms of the leases are considered. Under the Middleton leases, the scope of each royalty standard is determined by the lease lines. The Unit Agreement does not substitute the Unit lines for the lease lines. Article 8, in fact, expressly provides that the gas attributable to each unitized tract shall for royalty purposes be considered as sold or used off the premises.