Opinion ID: 1862385
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Heading: Gas Purchase Contract As the Sale of Gas

Text: The Frey-Amoco Lease explicitly predicates Amoco's obligation to pay royalty on the sale of gas. In contrast, royalty on oil and miscellaneous minerals is triggered by production. The discrepancy in triggering events is indicative of the physical and economic dissimilarity between oil and gas, the latter incapable of being stored or transported by the lessor. See Henry, 418 So.2d at 1336 n. 3 (citing Holliman, Exxon Corp. v. Middleton: Some Answers But Additional Confusion in the Volatile Area of Market Value Gas Royalty Litigation, 13 St. Mary's L.J. 1 (1981)); L. McDougall at ง 5.1. Moreover, the variance of language supports Frey's contention production is not a prerequisite to a sale. See La.Civ.Code art. 2050. Had the parties desired to condition the payment of royalties on production of gas, the Lease could easily have so provided. See LA.REV. STAT. ง 31:3. We determine the gas purchase and sales contract between Amoco and Columbia was a sale of a specified future thing, viz., natural gas. See La.Civ.Code art. 2450. Columbia secured the right to take and pay for a minimum quantity of gas over a specified term or to pay as if it had accepted delivery of the required minimum volume. Prior to reducing the gas to possession at the wellhead, Amoco possessed only an exclusive right to explore and develop the property for the production of minerals and to reduce them to possession and ownership. See LA.REV.STAT. งง 31:6, 31:15, 31:114; Wall, supra . When the gas reached the surface of the ground, and the suspensive condition thus materialized, the executory sale of a future thing, taking place between Amoco and Columbia by virtue of the execution of the Morganza Contract, was perfected retroactive to the execution of the contract. See La.Civ.Code arts. 1767, 1775, 2450, 2471. See also Henry, supra (market value of gas is determined at the time the gas sales contract is executed although gas has not yet been delivered); Miller v. Nordan-Lawton Oil & Gas Corp. of Texas, 403 F.2d 946 (5th Cir.1968) (for purposes of shut-in royalty clause, market is obtained when the lessee executes a gas purchase contract); Callery Properties, Inc. v. Federal Power Comm'n, 335 F.2d 1004, 1021 (5th Cir. 1964), rev'd on other grounds sub. nom., United Gas Improvement Co. v. Callery Properties, Inc., 382 U.S. 223, 230, 86 S.Ct. 360, 364, 15 L.Ed.2d 284 (1965) (take-or-pay payments constitute a sale sufficient to establish FPC jurisdiction over the transaction). Consequently, the sale of gas occurred at the time the gas was committed to the pipeline, i.e., at the execution of the Morganza Contract. Despite Amoco's lack of ownership of the gas at the time the Morganza Contract was executed, LA.REV. STAT. งง 31:6, 31:7, 31:15, 31:114, the sale was nonetheless valid. See La.Civ.Code art. 2452; Wright, supra; S. Litvinoff, Obligations ง 36. [19]
Having determined the event triggering the obligation to pay royalty on gas occurred, viz. the sale of gas, we address our conclusion that the take-or-pay payments are part of the amount realized by Amoco from the sale of gas to Columbia. We interpret the amount realized by Amoco from the sale of gas to Columbia to encompass both: 1) the total price paid by Columbia for the natural gas delivered, and 2) the economic benefits derived from the lessee's right to develop and explore, a right conferred by the lease. See Henry, supra . Total revenue under a gas purchase contract is a function of quantity and price. See Comment, 47 La.L.Rev. at 590. Because the producer is willing to negotiate a lower price in exchange for the guarantee the pipeline will either take or pay for a specific minimum quantity of natural gas, the take-or-pay provision effectively lowers the price the producer charges the pipeline per unit of gas. See 4 Williams & Meyers at ง 724.5. Consequently, absent the take-or-pay provision, the price of gas, and thus the royalty owed thereon, would be higher. White, 41 Okla.L.Rev. at 671. This conclusion is also supported by the affidavit of Dr. David Johnson, Professor of Economics at Louisiana State University, submitted in evidence in conjunction with Frey's Motion for Partial Summary Judgment. Application of this theory to the case before us leads to the conclusion that the price of gas taken under the contract includes not only the contract price paid per unit of gas delivered, but also the sums paid in the form of take-or-pay payments made in settlement of the Morganza Contract litigation. To simplify the equation, the actual price paid by the pipeline per unit of gas is determined by dividing the total quantity of gas delivered by the total amount paid to the producer, the latter including take-or-pay payments. See, e.g., Comment, 47 La. L.Rev. at 600 n. 35; Comment, Take or Pay Provisions: Major Problems for the Natural Gas Industry, 18 St. Mary's L.J. 251, 274-275 (1986); Note, Production, Production: What Is Production?, 1989 B.Y.U.L.Rev. 1333, 1347 n. 102 (1989). Viewed in this light, take-or-pay payments effectively increase the price of gas actually delivered to the pipeline. Failure to characterize these payments as part of the total price paid for gas sold under the contract is to disregard the obvious economic considerations underlying the take-or-pay clause. See also Lessard v. Lessard Acres, Inc., 349 So.2d 293 (La.1977) (vendor's privilege secures additional sums payable in event of non-performance).
Although we find the take-or-pay payments in this case constitute part of the price paid by Columbia for the gas taken, we choose not to rest our decision on this conclusion alone, anticipating the theoretical difficulties inherent in classification of take-or-pay settlement proceeds as part of the price paid for gas delivered where, for instance, no gas is taken by the pipeline-purchaser. Moreover, the term amount realized connotes the sum total, the whole, or the final effect of the economic benefits obtained by Amoco in the exercise of the rights granted by the synallagmatic contract of Lease, and, is composed, in part, of the advantages flowing to Amoco by virtue of the sale of natural gas under the Morganza Contract. The parties enter into a mineral lease in expectation of making a profit, and toward that end, incur reciprocal obligations. In exchange for a royalty interest, Amoco receives the exclusive right to explore and develop the leased premises. See LA.REV. STAT. ง 31:114. Indeed, all of the rights of Amoco, in and to the Frey property and the minerals thereunder, derive from the lease executed between Frey and Amoco. By virtue of rights granted by Frey to Amoco, Amoco negotiated, and eventually renegotiated, the Morganza Contract with Columbia, allowing Amoco to sell the gas produced from Frey's property. The benefits which accrue to Amoco under the Morganza Contract are derivative of the rights transferred to Amoco by Frey. Clearly, but for the Lease there would be no Morganza Contract, no Settlement Agreement, and ultimately no take-or-pay payments made to Amoco. Henry, supra, is authority for this determination. Therefore, even if we failed to find the take-or-pay proceeds constitute part of the price received by Amoco for the sale of natural gas, the payments nonetheless are economic benefits which accrue to the lessor under the rationale of Henry, See also Wemple, supra . As we have stated, the duty before us is not to divine the intent of the royalty clause in the abstract. Rather, the process reflects our appreciation of the cooperative nature of the lease arrangement as well as an understanding of the economic and practical considerations underlying the royalty clause. Retention by Amoco of the entire take-or-pay payment would permit Amoco to receive a part of the gross revenues from the property greater than the fractional division contemplated by the Lease. See Henry at 1338 n. 10 (citing Harrell, 30 Inst. on Oil & Gas L. & Tax'n at 336). Such a result can not be countenanced by this Court.