Opinion ID: 391883
Heading Depth: 1
Heading Rank: 3

Heading: Violation of the NGA

Text: 19 The concept of dedication of gas production to interstate commerce is grounded in NGA § 7, which requires that natural gas companies obtain certificates of public convenience and necessity prior to commencing interstate deliveries of natural gas, and that Commission authorization is necessary before deliveries of gas can be abandoned. Obtaining a certificate of public convenience and necessity, however, did not alone constitute dedication. Gas reserves under the certificate became dedicated to interstate commerce when physical delivery of gas commenced pursuant to the certificate. Tenneco Exploration, Ltd. v. FERC, 649 F.2d 376, 379-80 (5th Cir. 1981); Falcon Petroleum v. FERC, 642 F.2d 780, 784 (5th Cir. 1981); Conoco, Inc. v. FERC, 622 F.2d 796, 797 (5th Cir. 1980); Wessely Energy Corp. v. Arkansas Louisiana Gas Co., 593 F.2d 917, 920 (10th Cir. 1979) (per curiam). 20 One of the most controversial decisions concerning the scope of the dedication obligation is California v. Southland Royalty Co., 436 U.S. 519, 98 S.Ct. 1955, 56 L.Ed.2d 505 (1978) (4-3 decision). In that case, a producer acquired a fifty-year oil and gas lease, entered into a gas purchase contract with an interstate pipeline, obtained a certificate from the FPC, and initiated deliveries of gas. When the lease expired, the producer-lessee's interest in the remaining reserves reverted to the owners of the reversionary mineral interest. The reversioner contracted to sell its share of production to an intrastate pipeline, but the FPC held that the previous interstate sales dedicated all the gas covered by the original lease, including the gas remaining at the termination of the lease, and therefore the gas could not be diverted to the intrastate market without Commission abandonment authorization. On appeal, the Fifth Circuit held that under Texas property law the producer-lessee could not dedicate the portion that the reversioners would own upon termination of the lease. Southland Royalty Co. v. FPC, 543 F.2d 1134 (5th Cir. 1976). The Supreme Court reversed. It held that the earlier dedication covered all the natural gas reserves beneath the tract, and that diversion of the gas had to be authorized by the Commission. The majority relied on two alternative rationales to hold that the reversioners' interest remained dedicated. 436 U.S. at 525-31, 98 S.Ct. at 1958-61. The first rationale is the successor in interest doctrine: if a lessee initiated an interstate sale pursuant to a certificate, all subsequent owners of the mineral rights, including leasehold reversioners, are bound by the dedication obligation of the original lessee as successors in interest to the working interest of the dedicating lessee. Alternatively, because the gas continued to flow in interstate commerce at the termination of the lease, that flow constituted a service that the reversioner can withdraw only with Commission approval. 21 The Southland decision was handed down while this case was still under submission in the district court. Consequently, the outcome of this case changed as the complexion of the law changed. After digesting the Southland decision, and on the basis of that case, the district court concluded that the deep gas was subject to the original dedication obligation. 2 The court then determined which of the defendants had actually abandoned the interstate service without Commission authorization. It is only this latter portion of the determination that the NGA was violated that is challenged in this appeal. 22 The district court held that the Moffett Group and Mid-Continent were not required to seek FPC approval prior to release of the leaseholds and thus were not in violation of the NGA. The court, in reliance on language in the Southland decision, distinguished between conduct constituting an abandonment and conduct that would only shift responsibility for carrying out services dedicated to interstate commerce. 3 The district court accordingly concluded that by their contractual arrangements the Moffett Group and Mid-Continent only shifted control of dedicated facilities, and thereby the obligation to continue the dedicated service, to the Wylie Heirs. The district court further found that because the Moffett Group and Mid-Continent released their interest in the deep gas in an effort to compromise the lease cancellation suit, their sole interest in making the release was to protect their leasehold interest in the reserves above 10,600 feet subsea and not to divert the dedicated reserves to intrastate commerce. 470 F.Supp. at 547. 23 FERC, which participated in this appeal as amicus curiae, joins with Columbia to argue that it is improper to draw a distinction between shifting control of service, by a contractual conveyance of the pre-existing obligation to sell gas in interstate commerce, and abandonment of service. The Commission first argues that the Moffett Group and Mid-Continent could not limit the dedication obligation to gas only above 10,600 feet without applying for partial abandonment or a change in the certificate since the certificate was without any limitation on depth or duration. That argument misses the point, however, since the obligation is not limited but instead continues, and is merely shifted to another party to bear. 24 The Commission also argues that the surrender of the lower depths withdrew a portion of the dedicated area from the certificate without Commission approval. Again, the surrender did not withdraw the gas from the dedication obligation, but merely shifted the obligation to another party. Abandonment within the meaning of NGA § 7 is an act that permanently reduces a significant portion of a particular service dedicated to interstate markets. Reynolds Metal Co. v. FPC, 534 F.2d 379, 384 (D.C.Cir.1976). As long as the surrender by the Moffett Group and Mid-Continent was not taken for the purpose of terminating the service obligation without the Commission's approval, their surrender did not permanently reduce a significant portion of service. This Court concludes that the district court's findings that there was no understanding on the part of the Moffett Group and Mid-Continent that the release of their leasehold interests was for the purpose of terminating the service obligation, and that the surrender was undertaken solely to compromise the lease cancellation suit, are not clearly erroneous. 4 The surrender was therefore not an act of abandonment, even though it may have been a necessary step before the Wylie Heirs, Toce, and the Allied Chemical Group could effectuate an abandonment, but instead simply shifted responsibility for honoring the dedication obligation to those who later did fail in that obligation. 25 Columbia and FERC also point to 18 C.F.R. § 2.64(a), which deals with transfers of certificated acreage by independent producers. This regulation provides: 26 A natural gas producer who transfers all or part of his producing acreage to another does not have to apply for an amendment to his existing certificate of public convenience and necessity authorizing the sale if the new producer is required to obtain a certificate to sell gas from the property, i. e., in those cases where gas is being produced from the assigned acreage or, if the acreage is nonproductive at the time of transfer if the assignee initiates a sale for resale in interstate commerce. In those cases where the assigned acreage is not productive at the time of transfer, the assignor must obtain Commission authorization to delete such acreage, either pursuant to an application to amend his existing certificate to delete the assigned acreage or by filing an application under section 7(b) of the Natural Gas Act to abandon service from the acreage, unless, within one year from the date of the assignment the successor in interest files an application for certificate authorization to sell the gas for resale in interstate commerce. 27 The Commission contends that, while the regulation is drafted in terms of assignment rather than surrender of a lease, it nonetheless applies to this case because, it argues, the surrender of a leasehold is the equivalent of an assignment of the leasehold. Section 2.64(a) is under this view applicable and was accordingly violated since the Moffett Group and Mid-Continent did not seek Commission approval for the change resulting from the surrender and the Allied Chemical Group never filed for a certificate within one year from the surrender. We are unpersuaded, however. 28 Section 2.64(a) deals with farmouts, that is, when a lessee who does not desire to drill assigns the working interest, or some portion thereof, to another operator who finds commercial quantities of oil or gas. 5 Therefore, the regulation expressly deals only with assignments, as its language provides, and not with surrenders of a leasehold interest. Because an assignment and a surrender both cause a transfer of a leasehold interest, the Commission argues that the surrender is not legally different from an assignment and should be within the regulation's scope, in reliance on Southland. The Southland decision held that reversioners succeed to the original lessee's service obligation as successors in interest, the same as any assignee of the original lessee. That a reversioner is within the successor in interest doctrine does not answer the question here, however. The issue is not whether the gas remains dedicated in the hands of the successor in interest, for clearly it does, but instead, whether the event by which the gas, with its dedication obligation, is placed in the hands of the successor in interest is an act of abandonment. The passing of the contractual right of control of dedicated service and facilities itself does not constitute an abandonment, since by itself it does not permanently reduce a significant portion of the dedicated service. While knowing participation in a scheme to divert dedicated gas that involves the shifting of control over such service can be an act of abandonment, the district court found that the Moffett Group and Mid-Continent did not knowingly so participate. 6 29 This Court concludes that the district court properly found that the Moffett Group and Mid-Continent did not violate the NGA by the surrender of their leases. The next question is whether the district court properly held that the Wylie Heirs, Toce, and the Allied Chemical Group violated the NGA by diverting the dedicated gas into the intrastate market without prior Commission authorization of abandonment. 30 The district court held that the actions of the Wylie Heirs, Toce, and the Allied Chemical Group were taken with the clear intention to place the reserves below 10,600 feet subsea into the intrastate market. The effect of their acts was to terminate the service obligation without the Commission's permission. The Allied Chemical Group does not contest the district court's initial finding that they violated the Natural Gas Act when they made the actual diversion of deep gas to the intrastate market. This Court accordingly affirms the district court's finding that the Allied Chemical Group violated the NGA. 31 With regard to the Wylie Heirs and Toce, they participated in the transfer of the interests in the deep gas to Allied Chemical. Similar to the surrender of the leasehold interest by the Moffett Group and Mid-Continent to the Wylie Heirs, the grant of a new leasehold interest to Allied Chemical also shifted control of dedicated facilities, and thus the obligation to continue interstate service, to Allied Chemical. But the district court found that the grant of a new leasehold interest in the deep gas to Allied Chemical was made with full knowledge and intention that the gas would be sold in intrastate commerce. Therefore, the Wylie Heirs and Toce knowingly participated in the abandonment. The Wylie Heirs and Toce do not cross appeal on this finding of fact, and only argue that the Southland decision should be limited to its facts. Accordingly, this Court deems that they have waived any objection to being included with the Allied Chemical Group in the district court's finding that they participated in the diversion of gas. 32 The Wylie Heirs and Toce argue that the Southland decision should be limited to its facts, and thus argue that they did not wrongfully divert the gas from interstate commerce in violation of the NGA since the gas was not dedicated. More specifically, they argue that the Southland decision should be limited to the alternative flowing gas rationale of the Court's opinion. This Court rejects such an attempt to limit the Southland decision. In United Gas Pipe Line Co. v. McCombs, 442 U.S. 529, 99 S.Ct. 2461, 61 L.Ed.2d 54 (1979), the Court held that the requirement to sell dedicated gas into interstate commerce continued even after the interstate pipeline had abandoned its facilities for receipt of the gas and even though the well at issue had not produced for several years. Therefore, the Supreme Court has indicated that it will not limit the Southland decision to the flowing gas rationale. This Court has also indicated that it will not limit the Southland decision. See Texas Oil & Gas Corp. v. Valley Gas Transmission, Inc., 608 F.2d 231 (5th Cir. 1979). 33 The Wylie Heirs and Toce also argue, relying on the so-called Southland exclusion in NGPA § 2(18)(B)(iii), that the NGPA authorizes further judicial limitations on the Southland decision. Although the Southland exclusion does modify the continued application of the Southland decision, it also has the effect of making the Southland decision, as modified, a permanent part of the natural gas regulatory landscape. Note, The Meaning of the Southland Exclusion Complexity and Ambiguity in the Natural Gas Policy Act, 58 Texas L.Rev. 435, 459, 461 (1980). This Court is not willing to go beyond the limitations on the Southland decision already placed on it by Congress. This brings us to the next major issue in this case: the effect and impact of the NGPA's Southland exclusion on the liability of the Wylie Heirs, Toce, and the Allied Chemical Group for having violated the NGA.