Panhandle Eastern Pipeline Co. v. Oklahoma ex rel. Commissioners of the Land Office

83 F.3d 1219
CourtCourt of Appeals for the Tenth Circuit
DecidedMay 6, 1996
DocketNo. 94-6325
StatusPublished
Cited by11 cases

This text of 83 F.3d 1219 (Panhandle Eastern Pipeline Co. v. Oklahoma ex rel. Commissioners of the Land Office) is published on Counsel Stack Legal Research, covering Court of Appeals for the Tenth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Panhandle Eastern Pipeline Co. v. Oklahoma ex rel. Commissioners of the Land Office, 83 F.3d 1219 (10th Cir. 1996).

Opinion

EBEL, Circuit Judge.

This appeal concerns the constitutionality of an Oklahoma law, Senate Bill 160 (“SB 160”), that amended Oklahoma statutory obligations owed by purchasers and producers of oil and natural gas to owners of royalty interests. SB 160 became effective in 1985 and remained so until July 1, 1993, when it was effectively repealed and replaced by legislation that is not challenged by these parties. The district court, exercising jurisdiction under 28 U.S.C. § 1331, ruled, on summary judgment, that SB 160 violated the Supremacy Clause, the Contracts Clause, and the Fourteenth Amendment.1 The district court also held that the Oklahoma legislature intended SB 160 to apply prospectively only. The Oklahoma Mineral Owners’ Association (“OMOA”) and Jess Stratton, Jr., a mineral owner (collectively, “Mineral Owners”), appeal. They also ask this court to certify certain questions to the Oklahoma Supreme Court, and contend that issues of material fact precluded summary judgment below. We DENY the motion for certification, and conclude that SB 160 is preempted by federal law insofar as it burdens interstate purchasers of natural gas. We further conclude that the invalid provisions of SB 160 are not severable from the remainder of the statute, and thus we conclude that SB 160 is unconstitutional in its entirety. Consequently, we AFFIRM the judgment of the district court.

Background

The Appellee pipeline companies (“Purchasers”) are natural gas companies and interstate pipelines, as defined by the Natural Gas Act, 15 U.S.C. § 717a(6) and the Natural Gas Policy Act, 15 U.S.C. § 3301(15).2 During the times relevant to this appeal, Purchasers have purchased, sold and transported gas in interstate commerce. They each purchase natural gas from producers under gas purchase contracts covering wells throughout Oklahoma, most of which are located on “drilling and spacing units” created by orders of the Oklahoma Corporation Com[1222]*1222mission. The Appellee-Intervenor producers (“Producers”) own interests in oil and gas leases within these drilling and spacing units. Producers primarily produce and market oil and gas, but occasionally they purchase gas from other producers, thus assuming the role of first purchasers.

Until 1985, Oklahoma statutory law imposed the following obligation on oil and gas producers:

In the event a producing well or wells are completed upon a unit where there are ... two or more separately owned tracts, any royalty owner holding the royalty interest [in a tract in the unit] shall share in the one-eighth (1/8) of all production from the well or wells drilled within the unit ... in the proportion that the acreage of their separately owned tract or interest bears to the entire acreage of the unit; provided, where a lease covering any such separately owned tract or interest included within a spacing unit stipulates a royalty in excess of one-eighth (1/8) of the production ... then the lessee of said lease out of his share of the working interests ... shall sustain and pay said excess royalty....

Okla. Stat. tit. 52, § 87.1(e) (Supp.1984). In 1963, the Oklahoma Supreme Court interpreted this provision to mean that a royalty owner whose own lessee is not selling gas is nonetheless entitled to a proportionate share of the statutory one-eighth royalty from all production in the unit. Accordingly, the court held that when a well is producing from a drilling and spacing unit established under the Oklahoma Corporation Commission, each producer-lessee selling production from a well must account to all royalty owners in the unit (as opposed to only its own lessor) for the owners’ proportionate shares of the statutory one-eighth royalty share of production proceeds. Shell Oil Co. v. Corporation Comm’n, 389 P.2d 951 (Okla.1963) (the “Blanchard ” case). According to Producers, standard industry practice before the Blanchard decision was to include in leases a minimum 1/8 royalty interest payment. See Richard W. Hemingway, The Law of Oil and Gas § 7.1, at 381 (3d ed. 1991) (“The then-customary provisions [in the earliest leases] were that the lessor was entitled to a fractional portion, usually 1/8, of the oil ....”) (footnote omitted). Thus, the Blanchard decision did not alter the burden on producer-lessees; they still paid 1/8 of their proceeds to royalty owners. Any amount in excess of 1/8 was paid only by an individual lessee, out of its own working interest, to its own lessor pursuant to specific lease provisions.

The duties of oil and gas purchasers were not at issue in the Blanchard ease. These Purchasers, pursuant to most of their oil and gas contracts, were obligated to pay the full sales price to producers, who in turn were independently responsible for royalty payments and any other obligations due under the oil and gas leases between lessee-producers and lessor-owners.3

During the early 1980s there was an oversupply of natural gas. As a result, royalty owners experienced difficulty in obtaining their royalty payments. The Oklahoma Legislature responded by enacting Senate Bill 160 (“SB 160”) in 1985, amending two existing statutes to provide greater rights to royalty owners. Okla. Stat. tit. 52, § 87.1(e) was amended to provide in relevant part:

In the event a producing well or wells are completed upon a unit where there are ... two or more separately owned tracts, the first purchaser or purchasers shall he liable to any royalty owner ... holding the royalty interest under a separately owned tract included in such drilling and spacing unit for the payment of proceeds from the sale of production from the drilling and spacing unit. Each royalty interest owner shall share in all production from the well or wells drilled within the unit ... to [1223]*1223the extent of such royalty interest owner’s interest in the unit. Each royalty interest owner’s interest in the unit shall be defined as the percentage of royalty, including the normal one-eighth (1/8) royalty, overriding royalties or other excess royalties owned in each separate tract by the royalty owner, multiplied by the proportion that the acreage [owned] bears to the entire acreage of the unit. The first purchaser or purchasers shall also■ be jointly and severally liable for the payment to each royalty interest owner of any production payments or other obligations for the payment of monies contained within the leases covering any lands lying within the drilling and spacing unit. Nothing in this act shall relieve a lessee or his assignees from any obligations imposed by the lease.

(Supp.1985) (emphasized language added by SB 160).

Also challenged is SB 160’s amendment of Okla. Stat. tit. 52, § 540. The challenged portion of that statute read:

B.

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Bluebook (online)
83 F.3d 1219, Counsel Stack Legal Research, https://law.counselstack.com/opinion/panhandle-eastern-pipeline-co-v-oklahoma-ex-rel-commissioners-of-the-ca10-1996.