Court Opinion

ID: 9772799
Source: CourtListenerOpinion
Date Created: 2023-08-29 17:30:21.237507+00
Date Added: 2024-06-11T07:31:48.561483
License: Public Domain

Robert H. Dudley, Justice. The sole issue presented by this appeal is whether appellant, Hanna Oil and Gas Company, is entitled to deduct a pro rata share of its compression costs from appellee’s, David Taylor’s, royalties. The chancellor held that appellant was not entitled to deduct the costs. We affirm. . In 1975, appellee, David Taylor, entered into an oil and gas lease with appellant, Hanna Oil and Gas Company. The leased land was pooled with other land to form a production unit. In 1976, appellant completed a producing natural gas well. Gas from the well was sold to Arkansas Louisiana Gas Company pursuant to a gas purchase contract between appellant and Arkansas Louisiana Gas Company. The gas purchase contract was entered after the lease agreement and required appellant to deliver the gas at a pressure of 500 pounds per square inch. During the first eight (8) years, from 1976 to April 1984, it was not necessary to compress the gas in order to deliver it at the required pressure. Beginning in April 1984, however, appellant had to compress the gas. Yet, compression costs were not deducted from the royalty paid to appellee until October 1986. On May 5, 1987, appellee filed his petition in chancery court challenging the deduction of the compression costs. In determining whether appellant is entitled to deduct compression costs, we must first examine the language of the oil and gas lease. Compression costs are not specifically mentioned in the lease; however, the pertinent portion of the lease provides: Lessee shall pay Lessor one-eighth of the proceeds received by Lessee at the well for all gas (including all substances contained in such gas) produced from the leased premises and sold by Lessee. We have not had an opportunity before now to consider a proceeds royalty clause such as this.  Unless something in the context of an agreement provides otherwise, “proceeds” generally means total proceeds. Warfield Natural Gas Co. v. Allen, 261 Ky. 840, 88 S.W.2d 989 (1935). Webster’s New World Dictionary’s first definition of “proceeds” provides: “what is produced by or derived from something (as a sale, investment, levy, business) by way of total revenue: the total amount brought in: yield, returns.” Thus, we find it unnecessary to go beyond the clear language of the agreement between the parties to hold that appellant is not entitled to deduct compression costs. If it had been their intention to do so, they would have made some reference to costs, or “net” proceeds.  Further, even if we found this lease provision to be ambiguous, we would be compelled to construe it in favor of appellee. Ambiguities in an oil and gas lease should be construed in favor of the lessor and against the lessee. Bodcaw Oil Co., Inc. v. Atlantic Refining Co., 217 Ark. 50, 61, 228 S.W.2d 626, 633 (1950).  Finally, perhaps the most compelling support for our conclusion that the compression costs are not deductible lies in the construction the parties themselves placed upon their agreement for more than two years. Compression became necessary in April 1984; however, the costs associated with compression were not deducted from the royalty paid to appellee until October 1986. Thus, for over two years appellant’s construction of the lease was consistent with that urged by appellee. The construction placed upon an agreement by the parties is an important, and often decisive factor in construing an instrument. Skaggs v. Heard, 172 F. Supp. 813 (S.D. Tex. 1959). Hays, J., dissents.