Cabot Corp. v. Brown

754 S.W.2d 104, 99 Oil & Gas Rep. 154, 31 Tex. Sup. Ct. J. 116, 1987 Tex. LEXIS 401, 1987 WL 35838
CourtTexas Supreme Court
DecidedDecember 9, 1987
DocketC-5995
StatusPublished
Cited by34 cases

This text of 754 S.W.2d 104 (Cabot Corp. v. Brown) is published on Counsel Stack Legal Research, covering Texas Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Cabot Corp. v. Brown, 754 S.W.2d 104, 99 Oil & Gas Rep. 154, 31 Tex. Sup. Ct. J. 116, 1987 Tex. LEXIS 401, 1987 WL 35838 (Tex. 1987).

Opinions

OPINION

CAMPBELL, Justice.

This oil and gas case determines the implied duty of Cabot Corporation, lessee-operator, to reasonably market gas under a lease from Martha Brown and others, lessors. Based on a jury verdict, the trial court rendered judgment for Brown awarding damages of $424,083.14 and attorney’s fees. The court of appeals affirmed the judgment of the trial court. 716 S.W.2d 656. We reverse and render in part and remand in part.

Cabot is the lessee-operator of the Cabot Kelln Gas Well No. 1 (the “Kelln Well”) located in Lipscomb County, Texas. Brown is one of several lessor-royalty owners under a 1967 oil and gas lease to Cabot. The lease required Cabot to pay royalties based on the market value of the gas at the well in the event gas was used or sold off the premises. The Kelln Well began production in 1968. In January 1968, the lessors signed division orders which obligated Cabot to pay royalties based on the price determined by the Federal Power Commission “if such sale be subject to the Federal Power Commission.”1

In August 1967, Cabot and Transwestem Pipeline Company entered into a contract labeled “Exchange of Gas, Texas Panhandle.” Under the contract, the Kelln gas is transported by Cabot through its pipeline to Transwestem’s pipeline, which is part of an interstate gas transmission system extending from Texas to California. The Kelln gas is delivered into Transwestem’s system in Roberts County, Texas, where it is measured and commingled with Tran-swestem gas to be sold in the interstate market. At that point, title to the Kelln Gas passes to Transwestern. The delivery point of the exchange gas received by Cabot from Transwestern is located in Gray County, Texas. There, Cabot takes title to an equivalent volume of gas transmitted from Transwestem’s interstate pipeline. Under the exchange agreement, Cabot pays Transwestem 2<t per MCF (thousand cubic feet) for transporting and exchanging the Kelln gas.

Under the Natural Gas Act, the FPC has jurisdiction over two broad categories of natural gas: gas being sold for resale in interstate commerce and gas being transported in interstate commerce. 15 U.S.C. § 717(b); see 15 U.S.C. § 3431. In September 1967, Cabot and Transwestem applied for and obtained a Certificate of Public Convenience and Necessity from the FPC under the Natural Gas Act of 1938, 15 U.S.C. §§ 717-717w. This certification was required for the construction of facilities and for the transportation of natural gas between the two companies.

From 1968 to 1974, Cabot used the exchange gas from Transwestem for its own use at its plant in Skellytown, Texas. However, this plant was permanently closed in 1974, and the exchange gas was rerouted to Cabot’s Kingsmill Plant in Pampa. There, the exchange gas was commingled with gas produced or purchased by Cabot from the intrastate market. The majority of this commingled gas which re[106]*106mained after processing was sold on the intrastate market at prices higher than the ceiling established by federal regulations. Because this sale of commingled gases provided a basis for assertion of FPC pricing jurisdiction, Cabot sought and obtained a “Henshaw exemption.” See 15 U.S.C. § 717(c). Under this exemption, federal jurisdiction does not attach if the gas is received at the state boundary; is ultimately consumed within the state; and, is subject to regulation by a state commission, i.e. the Railroad Commission. Id. Under the Henshaw exemption, Cabot sold approximately 67% of the commingled gas at the Kingsmill Plant, for $1.35 per MCF.

Because this price exceeded the price upon which royalties were paid, Brown, in March 1981, sued Cabot claiming that Cabot had breached its duty to reasonably market the gas for the four years before the suit. Cabot had paid royalties on 38e per MCF from March 1977 to October 1980 and on 80c per MCF from October 1980 to the date of trial.

Brown alleged the Kelln Gas had not been dedicated to interstate commerce, that the FPC pricing jurisdiction had not been invoked, and that Cabot had paid royalties based on a price less than market value. Alternatively, Brown alleged that, even if the exchange amounted to a sale into interstate commerce, Cabot had an obligation under its duty to market to seek an abandonment of the exchange agreement from the FPC. By an abandonment, Cabot could have made the gas available for marketing in the intrastate market.

Based on a jury finding that Cabot had failed to reasonably market the Kelln Gas, the trial court rendered judgment for Brown. The court of appeals affirmed that judgment, holding the gas had not been dedicated to interstate commerce and the division orders signed by Brown did not alleviate Cabot’s implied duty to reasonably market. 716 S.W.2d at 659-61. Our analysis begins with a brief review of Texas law regarding duties implied in oil and gas leases.

In Texas, there are three broad categories of covenants implied in all oil and gas leases. Amoco Production Co. v. Alexander, 622 S.W.2d 563, 567 (Tex.1981). These implied covenants obligate the lessee to: (1) reasonably develop the premises, (2) protect the leasehold, and (3) manage and administer the lease. Id. Included within the covenant to manage and administer the lease is the duty to reasonably market the oil and gas produced from the premises. Amoco Production Co. v. First Baptist Church ofPyote, 579 S.W.2d 280 (Tex.Civ. App. — El Paso 1979), writ refd n.r.e per curiam, 611 S.W.2d 610 (Tex.1980); Le Cuno Oil Co. v. Smith, 306 S.W.2d 190 (Tex.Civ.App. — Texarkana 1957, writ refd n.r.e.), cert, denied, 356 U.S. 974, 78 S.Ct. 1137, 2 L.Ed.2d 1147 (1958). This duty is also two-pronged: the lessee must market the production with due diligence and obtain the best price reasonably possible. Under a gas royalty clause providing for royalties based on market value, the lessee has an obligation to obtain the best current price reasonably available. See R. Hemingway, Law of Oil and Gas, § 8.9(C) p. 442 (2d ed. 1983). The standard of care applied to test the performance of the lessee in marketing the gas is that of a reasonably prudent operator under the same or similar circumstances. Alexander, 622 S.W.2d at 567-68; Shell Oil Co. v. Stansbury, 410 S.W.2d 187, 188 (Tex.1966).

As previously mentioned, Brown first alleges that the Kelln gas had not been dedicated to interstate commerce. As such, the FPC pricing jurisdiction had not been invoked and Cabot’s royalty payments to Brown were based on a price less than market value. It is unnecessary for us to confront the legal question involving dedication to interstate commerce.

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Bluebook (online)
754 S.W.2d 104, 99 Oil & Gas Rep. 154, 31 Tex. Sup. Ct. J. 116, 1987 Tex. LEXIS 401, 1987 WL 35838, Counsel Stack Legal Research, https://law.counselstack.com/opinion/cabot-corp-v-brown-tex-1987.