Court Opinion

ID: 9790634
Source: CourtListenerOpinion
Date Created: 2023-08-31 01:56:27.594671+00
Date Added: 2024-06-11T07:37:30.642317
License: Public Domain

BLACKBIRD, Justice.
Early in 1949 a certain half-section of land now included in the Elk City Field of Western Oklahoma, was unexplored and undeveloped for oil and gas mining purposes, but M. G. Martin and others owned an oil and gas lease thereon. Instead of performing the exploration and development contemplated in said lease, said lessees *661decided to assign it to E. Constantin, Jr., and reserve unto themselves what is termed an overriding royalty in the oil and gas and other minerals that said land might produce. Accordingly, they entered into a contract with Constantin whereby they agreed to execute such assignments to him, subject to the following reservation:
“First parties shall exempt from such assignments and reserve unto themselves, their heirs, successors, and assigns, an undivided 5/14ths of the leasehold estate (being equivalent to 5/16ths of the 8/8ths gross production), and all of the oil, gas and other minerals produced, saved, and sold from said premises and creditable to the interest reserved shall be delivered by the Assignee to the Assignors free and clear of all costs of developing, equipping and operating said properties, so that said reserved interest shall be in the nature of a perpetual overriding royalty; but there shall he deducted from the sale of production to said reserved interest all gross production taxes and other taxes assessed or assessable by proper governing authorities except as hereafter provided.
“Assignee shall have the right to deliver Assignor’s share of said products to the pipeline or lines to which it may ■connect the wells located upon said leasehold tracts. Assignors shall be entitled to receive direct payment for their share of the products sold, and joint division orders or contracts of sale shall ibe executed by each of the parties. Provided that upon reasonable notice (not less than thirty days) to Assignee, Assignor shall have the right to receive in 'kind or to separately dispose of their share of such production and receive the proceeds therefor, if proper facilities are provided by Assignors in which to receive such production.”
.‘Said contract was filed of record, and in .June, 1949, the assignment contemplated ^therein was executed, delivered and recorded. The above-described reservation was incorporated in the assignment by reference.
Thereafter, oil and gas having been discovered in the area, and the State Corporation Commission having, by a previous well-spacing order, included 120 acres of the half section of land above referred to, in what was designated as the Hoxbar Sand-Conglomerate Common Source of Supply of the Elk City Field, on October 27, 1950, entered in its Cause CD No. 2846, its original Order No. 23249, unitizing the majority of the area and creating of it a unit designated and known as the “Elk City Hoxbar-Sand-Conglomerate Unit”, in accord with and subject to the terms, provisions and conditions of a Plan of Unitization presented in said cause, and amended, and modified by said order. Other acreages have been included within said unit by subsequent orders of the Commission numbered 24158, 24402, 26021, 27218 and 28533, respectively, amending the original order and Plan of Unitization. The particular 120 acres of land above mentioned now has 3 wells thereon that produce “wet” or casinghead gas in conjunction with their crude oil production.
Since the Unit began effective existence, an operating committee, in accord with provisions of the Plan of Unitization, has been in charge of operating the leases and wells within the unit, and, in addition, has constructed, and is operating, a plant situated on the unitized area, whereto all raw or wet gas, after being separated from the crude oil produced by the Unit wells, is piped in “one stream” to be “processed.” By the so-called processing performed in this plant, gasoline and other hydrocarbons later sold as pentanes, butanes and pro-panes to Shell Oil Company, are extracted from said gas, and the residue, or dry, gas returned to the Field’s reservoir or common source of supply, to repressure its producing sand as an aid to the ultimate maximum recovery of oil therefrom.
The present controversy as to how the owners of overriding royalty in land includ*662ed within the Unit shall be paid for their share of the gas production from said land had its inception in, and would never have arisen, except for his system of processing, installed and paid for at a cost of several millions of dollars to the lessees of the unit, whereunder none of the gas from the Unit wells is sold in its natural, “raw” or “wet” state; and, the only sales that occur, are of the above-mentioned derivatives or by-products. Concededly, those processed commodities bring a much higher price than could be derived from the sale of the unit’s gas production in its natural or “raw” state at the wellhead or elsewhere, before being put through the expensive processing above referred to. Nevertheless, all royalty owners were paid the same pro rata share of the proceeds of these by-products, that they were paid of the Units wells’ crude oil production, for the first five months after the processing plant was constructed and began operating late in 1950, without any deduction whatsoever for the cost of constructing, maintaining and operating the processing plant. Due to the fact that during the formulation and/or negotiation stages of the plan of unitization, the lessees of the unit agreed that the owners of the landowners’ one-eighth interest in the mineral rights in the land within the unit (referred to as “basic royalty owners”) should receive their pro rata share of these proceeds without deduction of such processing costs, no controversy has existed with reference to their continued right to thus participate in the proceeds of the hydrocarbons. However, for some time Constan-tin has taken the position that the overriding royalty owners, such as his assignors, Martin, et al., being the beneficiaries of no such agreement, are not entitled to participate in such proceeds without some deduction for said processing costs. Accordingly, on June 4, 1951, he prevailed upon the purchaser, Shell Oil Company, to withhold further payments of such proceeds to said overriding royalty owners.
Thereafter, the latter, including Martin, sued Shell Oil Company in the Federal District Court to recover their alleged share of said proceeds, and Constantin intervened. When that case was appealed to the Circuit Court from a judgment in favor of Constantin v. Martin, 10 Cir., 216 F.2d 312, that court, upon deciding that the appeal involved a construction of overriding royalty reservations or provisions such as hereinbefore quoted and of provisions of the Unitization Plan, and that by paragraph 7 of its Order No. 27218, the Corporation Commission had retained continuing jurisdiction to interpret the provisions of said Plan, ordered the action dismissed without prejudice, on the ground that the royalty owners had not exhausted their administrative remedy in said Commission.
Thereafter, Martin and other similarly situated owners of overriding royalty under land in the unit, applied to the Corporation Commission for an order clarifying its previous Orders Numbered 24158, 24402, 26021, 27218 and 28533, and the Plan of Unitization adopted thereby, “in so far as said orders and Plan relate to the assessment of the costs of constructing and operating the processing plant” and equipment above referred to. After a hearing and rehearing on the matter, the Corporation Commission entered its Report and Order No. 29870. The part of said Report designated as “Order” is as follows:
“It is therefore ordered by the Corporation Commission of Oklahoma,
AS FOLLOWS:
“1. That it intended and understood its Orders Nos. 24158, 24402, 26021, 27218 and 28533 to mean that each owner of interests in a leasehold included within the Plan of Unitization is entitled to receive that portion of all liquids produced by a unit operated plant represented by his fractional interest ownership of lease-hold production in the tract or tracts involved, out of that percentage of the total plant production assigned to such tract or tracts, and that in respect to participation in all of the plant production and all of the production of *663oil, liquid hydrocarbons and gas produced by said unit, after processing through a unit operated plant, the royalty owners and overriding royalty owners were to be treated on the same basis.
“2. That by said orders and Plans it was intended and understood that the overriding royalty owners would not be required primarily to bear and pay any part of the cost of building, maintaining or operating any unit operated plant, but should only be liable in the event of a failure of the leasee primarily charged with such costs to pay such costs, and that to deduct from an overriding royalty owner’s share of the plant processed liquids a portion thereof as a reí enable charge for processing the gas to obtain such liquids would in fact impose upon such overriding royalty owner a share of the cost of operating such plant, contrary to the Commission’s intention in approving such Plan.
“3. That the language which was used in such orders and Plans is pro’-perly interpreted in conformity with the Commission’s intentions as here-inabove ordered and determined.
“4. That the cross-application to amend or modify the several plans of unitization be and it is hereby denied.”
From said Order and the one of similar import entered before the rehearing, Constantin has perfected the present appeals (herein consolidated for briefing), and will hereinafter be referred to as Appellant. Martin and the other overriding royalty owners appearing herein will hereinafter be referred to as Appellees. The Corporation Commission will hereinafter be referred to merely as the “Commission”.
At the outset, we observe that the original oil and gas leases creating the leaseholds, and %ths working interests, of which a fractional part was reserved to appellees by assignments such as here-inbefore referred to, were never introduced in evidence. We will assume, however, that they were on Producers 88 forms (inferred to be “regular” in counsel’s argument) and that, among the rights of which the lessors thereby divested themselves and granted to appellant, was the right to produce and market casinghead gas (gas produced in conjunction with oil) as well as so-called “dry gas”, and oil, from the leased premises. In this connection see Hammett Oil Co. v. Gypsy Oil Co., 95 Okl. 235, 218 P. 501, 34 A.L.R. 275, and other cases discussed in Summers, Oil and Gas (Perm. Ed.) Vol. 3, sec. 595, and annotated at 82 A.L.R. 1304, and 34 A.L.R. 291. Most Producers 88 lease forms, of which there are several different types, prescribe the lessor’s royalty on casing-head gas, or gas produced from oil wells, (like the gas involved here) as a fractional part of such production at the well, the wellhead, or “at the mouth of the well”, less all costs of production. See Hopkins v. Texas Co., 10 Cir., 62 F.2d 691, 692, and Oklahoma Form Book Annotated, Kleinschmidt & Highley (8th Ed.) Secs. 1077-1089, both inclusive, and Summers, supra, Vol. 7, chap. 43. We think, by its wording, the hereinbefore quoted reservation creating appellees’ overriding royalty followed the same pattern; and that the reservation “of all oil, gas and other minerals produced, saved and sold * * * and creditable to the interest reserved * * * ” is sufficient to include casing-head gas, in the absence of any dispute concerning the matter, or evidence of a contrary intention by the parties to the contract and assignment. (The terms “other minerals” is in a different context in these instruments than it was as interpreted in Wolf v. Blackwell Oil & Gas Co., 77 Okl. 81, 186 P. 484.) We think it equally clear, however,. that the reservation contemplated nothing beyond, or in addition to, “oil, gas and other minerals produced * * * ” in their natural state; and does not give appellees the right to any portion of the proceeds of gasoline, pen-tanes, butanes, propanes or any hydrocarbons made, or manufactured from, such *664raw gas. See New Mexico and Arizona Land Co. v. Elkins, D.C.N.M. 137 F. Supp. 767, 770, 771, citing definitions of “minerals” as substances found “in nature”. Though the wording of the assignment in Danciger Oil & Refineries Co. v. Hamill Drilling Co., 141 Tex. 153, 171 S.W.2d 321, was more specific than that of the reservation and assignment form here involved, we think that, for the purpose of the present determination, there is no material difference between them, and our views here accord with those of the court in that case on the precise question here dealt with. We think such views and our conclusion that appellees’ share is to be measured, and becomes theirs, at the mouth of the well, or wellhead, is further supported by other provisions of the reservation giving appellant, the “assignee”, “ * * * the right to deliver assignors’ share of said products to the pipe line or lines to which it may connect the wells located upon said leasehold tracts”, and providing for the execution of division orders to facilitate direct payment by the purchaser to them for their share of the products, and giving them the right, upon reasonable notice, to receive their share in kind. The Plan of Unitization did not change the character of the products in which ap-pellees were thus reserved an interest. While said Plan’s Sec. 1(f) defines “Unit Production” as “all oil and gas produced from the unit area * * * ” and, opposite “(e)” in the same section, “Oil and Gas” is defined as including “casinghead gasoline, gas distillate or other hydrocarbons * * * ” (in addition to oil and gas) there is no provision specifically giving the owners of overriding royalty interests any interest in the proceeds of those types of unit “production”. The second paragraph of Sec. VII of the Plan provides:
“The unit production allocated to each separately owned tract shall be divided among the several persons entitled to share in the production from such separately owned tract, in the same manner, in the same proportions and upon the same conditions, that they would have participated and shared in the production of such separately owned tracts had not the unit been organized, and with the same legal force and effect.”
Section VI, among other things, provides:
“ * * * Property rights, leases, contracts, and all other rights and obligations in respect to the oil and gas rights in and to the several separately owned tracts within the Unit Area * * * shall be and are hereby amended and modified to the extent necessary to make the same conform to the’ provisions and requirements of this Plan of Unitization, but otherwise to remain in full force and effect.” (Emphasis ours.)
No attempt was made at the hearings before the Commission to show that the appellees’ share of the gross natural production of the unit wells could not be computed from the volume of such production as measured at the wellheads, and appellees paid therefor on the basis of the market value thereof, or that it was to any “extent necessary” to amend, modify or change the character of the production they were entitled to under their reservation to “conform to the provisions and requirements” of the Plan. Nor was there any showing that said gas then in its raw and natural state is valueless, or that there is no market therefor. In this connection notice Armstrong v. Skelly Oil Co., 5 Cir., 55 F.2d 1066, and Danciger Oil & Refineries Co. v. Hamill Drilling Co., supra. After a thorough examination of the Plan’s various provisions we find no ambiguity therein which is of any force and effect as a deterrent to our conclusion that appellees’ rights and obligations extend no further than receiving, free of cost (at least until their assignee fails to pay his share of the unit expenses, which contingency is not shown to have arisen) their share of the value of the casinghead gas, as aforesaid, and that the character of the products, to which their share applies, has not been shown to be necessarily affected by the *665Plan of Unitization. Being entitled to no more than a share of this raw, or natural, production, they are entitled to none of the hydrocarbons or other products made, manufactured or processed therefrom. Similarly, they are not obligated to pay any of the cost of deriving such commodities from such production, without their assent (unless such obligation might come into being upon the creation of a lien thereon in some one of the ways provided by law). Without the showing of modification necessity above referred to, and without any question being raised or determined, at the time the Commission approved the Plan, as to the overriding royalty owners’ rights in the by-products, how can the Commission’s subsequent expression, in the orders appealed from, of its previously unexpressed intention in entering the approval order, change the situation? To interpret the Plan in accord with that expression, is not only to do violence to the Plan’s plain provisions, it constitutes an indirect or circuitous way of changing the provisions of appellees’ reservation with no apparent consideration, adjudication or interpretation of them, or justification (under the above quoted Section VI of the Plan) for such change. We therefore, hold that the order was erroneous and without legal justification, or substantial evidence to support it. In this connection see Application of Little Nick Oil Co., 208 Okl. 695, 258 P.2d 1184, 1189. We also hold that appellees are not entitled to any share of the hydrocarbons’ proceeds, as such. However, if convenience or other considerations dictates paying them for their share of the casinghead gas by paying them a portion of such proceeds, then such payment should not be made without deduction of a reasonable charge for processing, Ludey v. Pure Oil Co., 157 Okl. 1, 11 P.2d 102; but their net receipts, in no event, should be less than their proportionate share of the market value of the Unit’s gross casinghead gas production. In this connection see the definition of overriding royalty quoted in Cities Service Oil Co., v. Geolograph Co., 208 Okl. 179, 183, 254 P.2d 775, 780. (The problem of finding a formula whereby a uniform price may be paid to owners of interests in natural gas sold in its raw state, and to other owners of like interests in gas from the same field that is not sold previous to processing, is not a new one. It has been present in ⅛⅝2 gas price-fixing cases. Notice the quotations and discussions of the Commission’s Orders Numbered 26096 and 28884 in Natural Gas Pipe Line Co. v. Corp. Comm., Okl., 272 P.2d 425 and Cabot Carbon Co. v. Phillips Pet. Co., Okl., 287 P.2d 675, 677, respectively; and Phillips Pet. Co. v. State of Oklahoma, 340 U.S. 190, 71 S.Ct. 221, 222, 95 L.Ed. 204, referring to “the determination by an integrated company of proceeds realized from gas at the wellhead” as involving “complicated problems in cost accounting.”). It would seem a simple enough matter to pay appellees for their share of this production at the wellhead, in the absence of any showing that under the unit “set up” this cannot be done. Therefore, it is neither necessary nor appropriate, if possible, for this Court, without the necessary data, to attempt to arrive at what fractional part of the total gross value of the Unit’s hydrocarbon production appel-lees might be paid. Suffice it to say, in accord with the views above expressed, the orders appealed from should be vacated. It is so ordered.
JOHNSON, C. J., and CORN, JACKSON and HUNT, JJ., concur.
WILLIAMS, V. C. J., and HALLEY, J., dissent.