Opinion ID: 1862385
Heading Depth: 2
Heading Rank: 2

Heading: Right to Take-or-Pay Proceeds Derived from Lease

Text: Further support is found in Article 122 of the Mineral Code. See LA.REV.STAT. ง 31:122. Amoco is bound to market diligently minerals discovered and capable of producing in paying quantities with due regard for Frey's interests. See id.; Shell Oil Co. v. Williams, Inc. 428 So.2d 798, 803 (La.1983); Harrell, 30 Inst. on Oil & Gas L. & Tax'n at 334. Upon segregation and conveyance of his right of ownership in the minerals to Amoco, Frey assumed a passive role, and presently possesses merely an accessorial right dependent upon the continued existence of the lease. In contrast, Amoco's superior position accords it exclusive control over the development and management of the property for the production of minerals. Cognizant the majority of commentators urge the courts to defer to lessee marketing decisions, we do not take lightly our duty to scrutinize the lessee's implied covenant to market diligently in light of the practical, economic, and environmental concerns. See Martin, 27th Oil and Gas Inst. at 177; McCollam, 50 Tul.L.Rev. at 810; 5 Williams and Meyers at ง 856.3. After careful consideration, we find Article 122 of the Mineral Code, which governed and sanctioned Amoco's decision to secure a market for natural gas via a long-term gas contract under the then-existing conditions, likewise governs Amoco's royalty obligations regarding take-or-pay payments made in settlement of the gas contract litigation. See Henry, supra . In so doing, we recognize the virtually perfect alignment of interests existing among the lessee, lessors, and society regarding certain limited aspects of the lease, including resolution of the pipeline-purchaser's financial inability to comply with the take-or-pay provisions in the long term gas contract. See, e.g., Pierce, Lessor/Lessee Relations in a Turbulent Gas Market, Oil and Gas Law and Taxation, ง 8.02[1] (1987) (regarding the decision to produce or defer). But see Donohoe, Implied Covenants in Oil & Gas Leases & Conservation Practice, 33 Inst. on Oil & Gas L. & Tax'n 97, 98 (1982) (lessor/lessee relationship is complex one of mutual interest mingled with antagonism.) More specifically, were a producer to force a pipeline-purchaser to comply with the long-term gas contract, despite the decline in price and market, it is not unlikely the pipeline would be faced with insurmountable financial problems and, eventually, forced into insolvency. See, e.g., Comment, 47 La.L.Rev. at 615. The producer who forces compliance with the contract in the face of the pipeline's financial ruin, would ultimately frustrate its own primary objective of assuring a market for the gas. A financially insolvent pipeline will not purchase any gas, and a royalty interest is worthless if no gas is sold. See id. Confronted with the potential loss of its market for gas, the prudent producer consents to settlement and is thus assured an uninterrupted market for gas. Indeed, in brief to this Court, Amoco acknowledges the failure to renegotiate the gas purchase contract would have resulted in a fire-sale disposition of the Morganza gas on the spot market. Because the duty to market is a continuing one, Amoco should not be able to enjoy the benefits of the settlement while refusing to share the benefits with Frey. Assuming Amoco acted reasonably in settling the Morganza Contract litigation, and there is no evidence to suggest otherwise, the take-or-pay payments received by Amoco as a result of the settlement inure to the mutual benefit of Amoco and Frey. The practical considerations sustain our position. For example, 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. Frey, 943 F.2d at 585 (citations omitted). See Pierce, 38 Inst. on Oil & Gas L. & Tax'n at ง 803[2] (If producers are allowed to retain all of one part of the settlement (the lump sum payment), but must share with royalty owners another part of the settlement (proceeds from future sales under the contract), producers have an artificial incentive to maximize the lump sum settlement and minimize the future price.). See also Mineral Code art. 109, comment, for an analogous situation involving the owner of the executive right's exercise of his rights vis a vis the royalty, or non-executive holder. Accordingly, we find justice best served by the decision we reach today.