Court Opinion

ID: 9444091
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:40:59.17381+00
Date Added: 2024-06-11T17:29:42.640883
License: Public Domain

PICKETT, Circuit Judge
(dissenting).
Prior to March 10, 1944, Cabot owned oil and gas leases on certain lands and unleased gas rights in other lands in the Hugoton Gas Field in Texas County, Oklahoma, and Hansford County, Texas. Approximately thirty-nine thousand acres were in Oklahoma. On March 10, 1944, a contract was entered into wherein Cabot assigned and transferred its interests to Phillips. The consideration for such transfer and assignment was $530,673.50 in cash, the customary one-eighth royalty of all gas produced and one-fourth of the remaining seven-eighths of all gas produced. It is this last provision that prompted this action as it provided that: “Phillips shall become the owner of the gas when produced and will account to Cabot for said one-fourth of seven-eighths of the gas produced at a value of four cents (40) per MCF.” The trial court held that this amounted to a sale of the gas as it was produced and that the sale was subject to the Commission’s conservation orders of December 9, 1946 and July 29, 1952. The majority of this court agrees. It is my view that the reservation of one-fourth of seven-eighths of the gas produced to be paid for by Phillips at four cents per MCF was part of the consideration for the acquisition of the leases and gas rights, and that the orders, if applied to this transaction, had no relation to conservation purposes contemplated by the Oklahoma statute and are not within the power of the Commission.
There are relevant questions of law which are well settled in Oklahoma. The State of Oklahoma, in the exercise of its police powers, has the authority in the public interest and to protect correlative rights, to regulate the taking of natural gas from the ground and the Commission’s orders are a valid exercise of that power. Natural Gas Pipe Line Co. of America v. Panoma Corp., Okl., ___ P.2d ___, decided September 15, 1953; Cities Service Gas Co. v. Peerless Oil & Gas Co., 203 Okl. 35, 220 P.2d 279, affirmed 340 U.S. 179, 71 S.Ct. 215, 95 L.Ed. 190; Phillips Petroleum Co. v. Oklahoma, 340 U.S. 190, 71 S.Ct. 221, 95 L.Ed. 204. The police power referred to may be exercised, “to prevent waste, protect the interests of the public, and of all those having a right to produce therefrom, and to prevent unreasonable discrimination in favor of any one such common source of supply as against another.” Cities Service Gas Co. v. Peerless Oil & Gas Co., supra, 340 U.S. at *846page 185, 71 S.Ct. at page 219. Oil and gas in Oklahoma are not subject to ownership in place. Title may be obtained only upon production and reduction to possession.2 The Oklahoma courts have held in a number of cases that payments for oil and gas leases, including royalties in the oil and gas produced therefrom, constitute the consideration for the acquisition of the leases or rights and are not the purchase price of oil and gas. In other words, such royalties are compensation provided for in the lease or contract to be paid to the owner for the privilege of prospecting for and producing oil and gas from the lands.3
Under the contract in this case Cabot, as part of the consideration, expressly granted and assigned to Phillips the described leases and gas rights subject to the reservation of one-fourth of seven-eighths of the gas underlying and produced therefrom by Phillips, which was required to account to Cabot for such production on the basis of four cents per MCF. Phillips then became the owner of the leases and other rights conveyed. It acquired the exclusive right to explore, develop and operate the property. It was to be the sole producer of the gas and it had the sole and exclusive right to take and market or otherwise dispose of all gas produced. Cabot had no right to enter upon, explore, develop or otherwise operate the property. It was to have no voice in the management and it was to pay no part of the cost of development and production. It had no right under the terms of the contract to take in kind, handle, market or otherwise dispose of any part of the production. The contract specifically provided that upon production Phillips would be the owner of the gas. So long as the contract was in effect the only right that Cabot had was to receive the consideration provided for in the contract which included the payment of money measured by one-fourth of seven-eighths of the gas produced at four cents per MCF. Upon payment of those sums, Cabot received the consideration for which it bargained.
The Commission derives its power from the statute which authorizes and directs it “to regulate the taking of natural gas from any or all such common sources of supply within the state, so as to prevent waste, protect the interests of the public, and of all those having a right to produce therefrom, and to prevent unreasonable discrimination in favor of any one such common source of supply as against another.” 52 Okl.St. Ann. § 239. The provisions of the statute are the guide posts for the Commission to follow to accomplish its purposes. The power of the Commission does not extend beyond the statutory provisions. Cities Service Gas Co. v. Peerless, 220 P.2d at page 288. If the Commission had the statutory authority to make an order modifying the rate of payment to Cabot, it could do so only if its action were a valid and reasonable exercise of the state’s police power. In order to constitute a valid and reasonable exercise of that power, a statute, rule or regulation which affects private contracts or property rights may be upheld only when it relates to the public welfare or is in the public interest.4 A statute, *847rule or regulation may not, under the guise of police power or public interest, impair or interfere with private contracts or property rights.5 This rule was discussed at length in Oklahoma Nat. Gas Co. v. Choctaw Gas Co., supra [205 Okl. 255, 236 P.2d 977], where it was said, “The police power must at all times be exercised with scrupulous regard for private rights guaranteed by the constitution, and then only in the public interest and not for the benefit of a private company.” When Phillips obtains the minimum price for the gas at the wellhead, the conservation purposes of the orders are accomplished. The orders cannot be extended to affect the payments due to Cabot when those payments have no relation to the purposes of the statute or the orders. Such an application of the order in no way benefits the public welfare or the public in-i terest but only provides a benefit to Cabot not anticipated by its contract and increases the amount which Cabot agreed to accept for its interests.
If the Commission has the power to increase the payments required under this particular provision of the contract, is there any reason why it could not increase the cash payment and also find that the customary one-eighth royalty is not enough and order the payment of a larger royalty? This is not what the Commission was trying to accomplish or what it had the power to do. It sought for conservation purposes to regulate the price for which gas could be taken from the ground and be sold at the wellhead and it did not undertake to alter royalty provisions in existing contracts. In doing this, the Commission recognized that generally royalty owners would benefit but the purpose of its orders was to prevent waste, conserve the natural resources of Oklahoma, and protect the interest of the public and of those having a right to produce from a common source of supply. This it has the right to do. For these purposes only it has the power to fix a minimum price for which gas may be sold at the wellhead. Phillips is bound by the orders when it sells the gas, but the State has no right to say what a person shall pay for the acquiring of oil and gas leases or gas rights. I would reverse the judgment.

. Replogle v. Indian Territory Illuminating Oil Co., 193 Okl. 361, 143 P.2d 1002; Harmon v. Oklahoma Tax Commission, 189 Okl. 475, 118 P.2d 205; Sunray Oil Co. v. Cortez Oil Co., 188 Okl. 690, 112 P.2d 792; Rich v. Doneghey, 71 Okl. 204, 177 P. 86, 3 A.L.R. 352; United States v. Stanolind Crude Oil Purchasing Co., 10 Cir., 113 F.2d 194.

. Hinkle v. Gauntt, 201 Okl. 432, 206 P.2d 1001; McCullough v. Almach, 188 Okl. 434, 110 P.2d 295; McCullough v. Burks, 185 Okl. 502, 94 P.2d 541; Carroll v. Bowen, 180 Okl. 215, 68 P.2d 773; Wright v. Brush, 10 Cir., 115 F.2d 265; Alexander v. King, 10 Cir., 46 F.2d 235, 74 A.L.R. 174, certiorari denied 283 U. S. 845, 51 S.Ct. 492, 75 L.Ed. 1455.

. Thompson v. Consolidated Gas Utilities Corp., 300 U.S. 55, 57 S.Ct. 364, 81 L.Ed. 510; Rindge Co. v. Los Angeles County, 262 U.S. 700, 43 S.Ct. 689, 67 L.Ed. 1186; Great Northern Railway Co. v. Cahill, 253 U.S. 71, 40 S.Ct. 457, 64 L.Ed. 787; Myles Salt Co. v. Board of Com’rs of Iberia Drainage District, 239 U.S. 478, *84736 S.Ct. 204, 60 L.Ed. 392; Great Northern Railway Co. v. Minnesota, 238 U.S. 340, 35 S.Ct. 753, 59 L.Ed. 1337; Missouri Pacific Railway Co. v. Nebraska, 217 U.S. 196, 30 S.Ct. 461, 54 L.Ed. 727; Hairston v. Danville & W. Ry. Co., 208 U.S. 598, 28 S.Ct. 331, 52 L.Ed. 637; Cole v. La Grange, 113 U.S. 1, 5 S.Ct. 416, 28 L.Ed. 896; Citizens’ Savings & Loan Association v. Topeka, 20 Wall. 655, 87 U.S. 655, 22 L.Ed. 455.

. New State Ice Co. v. Liebmann, 285 U.S. 262, 52 S.Ct. 371, 76 L.Ed. 747; State of Washington ex rel. Seattle Title Trust Co. v. Roberge, 278 U.S. 116, 49 S.Ct. 50, 73 L.Ed. 210; Burns Baking Co. v. Bryan, 264 U.S. 504, 513, 44 S.Ct. 412, 68 L.Ed. 813; Oklahoma Natural Gas Co. v. Choctaw Gas Co., 205 Okl. 255, 236 P.2d 970.