Court Opinion

ID: 9675146
Source: CourtListenerOpinion
Date Created: 2023-08-24 04:43:13.253985+00
Date Added: 2024-06-11T18:16:31.804272
License: Public Domain

Justice Hamilton,
joined by Justices Smith and Green-hill dissenting on MOTION FOR REHEARING.
The dissenting opinion which was handed down in this cause on June 22, 1960, is withdrawn, and the following is substituted therefor:
I respectfully dissent from the majority opinion in so far as it holds that payment of shut-in gas well royalty did not serve to extend the term royalty beyond its fixed term.
In arriving- at an answer to the above question, it is necessary to construe the royalty deed and the oil and gas lease togethr, because the interest conveyed by the royalty deed is contained in the oil and gas lease. We must go to the oil and gas lease to find out what the royalty is. The royalty deed does not define “production,” nor does it define “royalty.” The lease sets out specifically of what the royalty payable under the lease consists, and in defining royalty it also defines production as it applies to a producing gas well from which gas is not being sold or used. The deed recites an agreement to convey
“an undivided % interest in and to all oil or gas royalty that may be paid under oil and gas leases or development work * * * * >9
and that the interest is to be
“subject to oil and gas leases now outstanding or that may may be hereinafter outstanding on the aforesaid land or any part *217thereof; said conveyance limited to 15 years, plus production period.” (Our emphasis.)
The lease recites:
“The royalties to be paid Lessore are: * * * where gas from a well producing gas only is not sold or used, Lessee may pay as royalty $50.00 per well per year, and upon such payment it will be considered that gas is being produced within the meaning of paragraph 2 hereof; * *
Paragraph 2 referred to provides:
“Subject to the other provisions herein contained, this lease shall be for a term of ten years from this date (called ‘primary term’) and as long thereafter as oil or gas or other mineral is produced from said land hereunder.”
The majority opinion construes the reference in the royalty provision to paragraph 2 as having the effect of restricting the definition of production to the lease itself to the exclusion of any outstanding term royalty interest. I do not think that such construction necessarily follows. All the royalty interest owned by petitioner is contained within this lease and of whatever royalty is provided therein the petitioners own an undivided one-half for a period of fifteen years “plus production period.” The royalty provision itself defines the production period in so far as gas not being sold or used from a producing well is concerned. The reference to paragraph 2 is merely to emphasize what the parties meant by this substitute production. They made it clear that it was such a production as would extend the lease beyond its primary term and that the two provisions would not be in conflict. Petitioners bought an interest in the royalty under this lease for fifteen years “plus the production period.” Petitioners received and were without question entitled to their part of the royalty paid prior to the end of the fifteen-year term. Morriss v. First National Bank of Mission, San Antonio Court of Civil Appeals, 1952, 249 S.W. 2d 269, n.r.e., wherein it was held that a shut-in gas well payment is a royalty on production and that the holder of a nonparticipating' royalty interest is entitled to his fractional part thereof. Generally a royalty deed or a royalty reservation does not specify what kind of lease the one holding the leasing rights is to make. All that a royalty owner has is the right to participate in whatever royalty is provided for in any lease.
*218The question before us is an open one. The only authority the majority opinion cites for its holding on this question is the ease of Union Producing Company v. Scott, 173 Fed. Supp. 361, affirmed in 267 Fed. 2d 469. That opinion is based squarely on Sellers v. Breidenbach, (Texas Civ. App.) 300 S.W. 2d 178, writ refused. Quoting from the Union Producing Company opinion:
“Sellers v. Breidenbach is squarely in point here. * * * The Court said: ‘Under the record here there was no production whatever from the premises. There were two completed shut-in gas wells capable of producing gas but absolutely not producing. The parties could have placed in their royalty deed a shut-in gas well provision, if they had desired to do so, but toe find no such provision in this deed. They could have provided that the royalty deed would be continued in effect if a well capable of producing was completed on the premises, if they had so desired, but they did not do so. “Paying production” does not mean the completion of a well capable of producing, it means a well which is actually producing on the significant date.’ ”
The only question that case decided was whether or not shut-in gas wells capable of producing gas but absolutely not producing was sufficient to prevent the termination of a term royalty. There was no shut-in gas well royalty provision in the lease in the Briedenbach case, and the opinion of the court does not undertake to pass- on such provision in an oil and gas lease. The statement that “the parties could have placed in their royalty deed a shut-in gas well provision if they had desired to do so” indicates that if the royalty deed had such a provision the interest would not have terminated while it was paid. This is not tantamount to saying that if the lease had contained such provision the results would not have been the same.
The Sellers case simply held that the term royalty terminated where “Under the record * * * there was no production whatever from the premises.” (Our emphasis.) It is no authority for the proposition that the payment of shut-in gas well royalty provided in a lease will not prevent the termination of term royalty. The Union Producing Company case stands alone in reaching such a conclusion. Under the circumstances we are not bound to follow it, and we ought not to do so.
With the single exception of the pooling cases, reversioners, under the majority opinion, can execute leases which define any set of circumstances as production and the effect of such lease provisions will be to extend the oil and gas lease but not to *219extend term interests. To so hold is to express a judicial policy against term interests for it requires the draftsman of the royalty deed to anticipate and seek to cover all of the various contractual provisions for substitute production which the lessee and lessor may, at some time in the future, agree upon. Term interests will necessarily be prejudiced thereby because the lesseee, by reason of lease definitions of production, is freed of the most effective incentive to accomplish actual production and certainly may be tempted to operate in such a fashion that the lease will continue but the term interests will expire. Purely from a policy standpoint, as well as a legal one, we submit that the majority opinion reaches an incorrect result.
We cannot escape the conclusion that as a matter of law and aside from questions of policy, a term royalty deed must be construed together with the oil and gas lease executed by the lessor and covering the royalty interest. Only the lease gives meaning to the royalty interest. Without the lease, the royalty is valueless. Each of the parties to the deed — both reversioners and term owners alike — necessarily contemplate that one or more leases will be executed.
A lease being within the contemplation of all parties, is it illogical to construe the two together? Is it illogical to look to the lease for definitions of production? Is it illogical to give the term interest owner the benefit of the definition of “production” that the lessor, who contracts both for himself and for the term interest owner, has accepted? This Court has twice held that the lease must be considered along with the term deeds. Southland Royalty Company v. Humble Oil & Refining Company, 151 Texas 324, 249 S.W. 2d 914, 1952; Spradley v. Finley, 157 Texas 260, 302 S.W. 2d 409, 1957. Within the last few months, it has refused a writ of error in a third case, Williamson v. Federal Land Bank of Houston, Texas Civ. App., 1959, 326 S.W. 2d 560, error refused, n.r.e., in which the Texarkana Court-said:
“We hold the trial court did not err in granting appellee’s motion for summary judgment because the royalty clause reserved in the 1935 deed in question should be construed in the light of, and together with, the subsequent instruments herein-above referred to all of which changed and modified the application of the original condition precedent with regard to production of oil, gas and minerals from ‘sail land’ * * * .” (Emphasis added.)
The effect of the majority opinion when considered with *220the Southland, Spradley and Williamson cases is that the Texas courts must consider lease provisions in pooling cases, but may not do so in shut-in royalty cases. A term owner with pooled production survives; a term owner with shut-in production does not. No tenable distinction for the purposes of this cases can be drawn between the two types of production, yet under the majority opinion they have exactly opposite effects.
The majority seeks to distinguish the Southland and Spradley decisions on the grounds that in those cases agreements existed to enlarge the area covered by the term deeds. The opinions, however, lead to a fair inference that the first any of the parties heard of any “agreement” was when the opinions of this Court were handed down. The record in the Spradley case in particular shows there was no contention that there was any agreement in fact. The opinion of the Court of Civil Appeals (294 S.W. 2d 750) shows that the two term owners individually executed separate leases to W. H. Oberthier on July 31, 1945, and May 9, 1945. The reversioner executed a third lease to a different lessee on August 13, 1945. Different lessees and different times — yet modification and agreement followed as a matter of law, since all parties had agreed (although with different lessees) that pooled production would constitute production from the leased premises.
Would a different result have followed if the interests had been royalty interests and only Spradley, the reversioner, had executed a lease with a pooling provision? This was the precise question decided in Williamson v. Federal Land Bank of Houston, in which this Court refused a writ, n.r.e.
No agreement in fact was made between the term owners and reversioners in any of these cases. No unitization was accomplished by simply executing the leases. Production under the term deeds was accomplished by the unilateral act of the lessee of pooling pursuant to lease provisions authorizing pooling. The identical situation is presented here where the lessee completes a well and, as authorized by the lease, makes payments of shut-in royalty in lieu of actually producing the well.
It is my conclusion that where a well capable of producing gas in commercial quantities is shut in and no gas is being sold or used therefrom, payment of royalty on the shut-in well constitutes “production” so as to continue a term royalty in effect beyond its fixed term. Since the precise question before us is one of first impression and not governed by any authoritative *221decision by the courts of this state, it seems that this court should give great weight to the decisions of the courts of sister states on the identical question, together with the opinions of reputable writers on the subject of oil and gas. In Louisiana all royalty interests are subject to prescription upon ten years of nonuse, and hence are similar to term interests in common law jurisdiction. Louisiana holds that payment of shut-in royalty is the equivalent of production, having the effect of interrupting or suspending prescription. LeBlanc v. Haynesville Mercantile Co., 230 La. 299, 88 So. 2d 377. The same principle of law has been forecast by an eminent Texas authority on oil and gas, Lee Jones, Jr., in an article entitled “Non-participating Royalty” in 26 Texas Law Review, pp. 569-583, where it said:
“Many exasperating questions have arisen and will continue to arise with respect to completion dates and the character of production necessary to satisfy and ‘perpetuate’ term-royalty grants and reservations. In this connection, it is suggested that the payment of per-well royalty on a shut-in gas well would be sufficient to ‘perpetuate’ or extend a term-royalty interest, since such payment is in effect a monetary substitute for production.”
In discussing the cases of Sellers v. Breidenbach, supra, and Panhandle Eastern Pipe Line Co. v. Issacson, 255 Fed. 2d 669, 10th Cir., 1958, Howard Williamson and Charles Meyers, in their recent work (1959) “Oil and Gas Law,” Sec. 334.5, p. 150, have the following to say:
“Neither opinion deals with what we regard as the crucial question with respect to shut-in wells. In our judgment, shut-in royalty is the equivalent of production. When such royalty is paid by a lessee to a lessor, the well is deemed to be a producing well for purposes of the thereafter clause of the lease, under the shut-in gas well lease clause. The same effect should be given to shut-in royalty in respect to the thereafter clause of a term instrument. If the term interest is a mineral interest, and both the reversioner and the term owner have signed the lease, they have agreed that payment of shut-in royalty will cause a shut-in well to be deemed a producing well. Similarly, a mineral owner, subject to an outstanding royalty, who has executed a lease with a shut-in royalty clause has agreed that production exists on the land when a royalty is paid on a shut-in well. If this payment of shut-in royalty is production for purposes of the lease, it should be regarded as production for purposes of of the term interest.”
*222I would hold, then that the payment of the shut-in royalty by lessee is such production as would prevent the termination of the term royalty of petitioners, and would affirm the judgment of the trial court.
Opinion delivered October 19, 1960.
Rehearing overruled October 19, 1960.