Phillips Petroleum Co. v. Cabot Carbon Co.

210 F.2d 841

• Court: Court of Appeals for the Tenth Circuit
• Decided: April 12, 1954
• Docket: 4723
• Status: Published

Opinions

HUXMAN, Circuit Judge.

The controversy in this case arose out of a contract between Phillips Petroleum Company, herein referred to as Phillips, and Cabot Carbon Company, herein referred to as Cabot. The subject matter of the contract was oil and gas leases and oil and gas mineral interest owned by Cabot. In the contract Cabot agreed to assign to Phillips specified oil and gas leases owned by it and agreed to execute such leases with respect to oil and gas mineral rights of which it was the owner. The contract contained a provision reserving to' Cabot an overriding royalty. Paragraph 4 of the contract provided that Cabot should in addition to the % royalty provided in the leases “reserve an undivided interest in the natural gas underlying said lands or in any natural gas which may be produced therefrom * * * and equal to one-fourth of seven-eighths of all the gas produced. Phillips shall become the owner of the gas when produced and will account to Cabot for said one-fourth of seven-eighths of the gas produced at a value of four cents (40) per MCF.”

Phillips developed the premises and brought in numerous gas wells. It paid Cabot for the *4 overriding royalty interest in the gas produced at the rate of four cents per MCF as provided for in the contract. Subsequent to the execution of the contract and while Phillips was producing gas from the leased premises, on December 9, 1946, the Oklahoma Corporation Commission pursuant to statutory authority entered its Order No. 19514, fixing a minimum well head price for gas of seven cents per MCF for gas taken from producing structures or formations. The order provided “That no natural gas shall be taken out of the producing structures or formations * * * at a price, at the well head, of less than 70 per thousand cubic feet of natural gas * * Thereafter on July 29, 1952, the Commission issued a second Order No. 26096, raising the minimum well head price of gas to 9.8262 cents per MCF. This order provided ■“That no gas shall be produced from any well * * * at a price of not less than 9.82620 per thousand cubic feet if sold at the well head * * After the issuance of these two orders, Phillips continued to pay Cabot for the overriding royalty interest in the gas produced at the contract price of four cents.

On November 28, 1952, Cabot instituted this action alleging that Phillips was obligated to pay to it the prices fixed in the two orders by the Commission. It sought recovery of the difference between the amount due under the minimum prices fixed by the regulations and the amount received under the contract rate of four cents per MCF. Trial was had to the court. The court made findings of fact and conclusions of law. It concluded that Cabot was the owner of the % of % of all gas and agreed to sell it to Phillips at four cents per MCF; that the contract was subject to the police power of the State of Oklahoma; that the two price regulations were valid and became a part of the contract and that the price fixed therein superseded the contract price of four cents. In a memorandum opinion the court made a further finding that Phillips and Cabot were joint producers and that Cabot was a seller and Phillips a purchaser of the gas in question at the well head and that Phillips was obligated to pay the price as fixed in the two orders notwithstanding the contract price of four cents. Judgment was entered accordingly D.C., 114 F.Supp. 958. This appeal challenges the correctness of the court’s findings and conclusions and the judgment based thereon.

Phillips’ six assignments of error are grouped and argued under three points. They are, (1) the minimum price orders are not applicable to payments by Phillips to Cabot under the contract, (2) the court erred in failing to hold that if the minimum gas price orders of the Commission are interpreted as having application to or affecting the sums payable by Phillips to appellee under the contract the said orders are to that extent void for want of statutory or other lawful authority on the part of the Commission to make and enter the same, and (3) the court erred in failing to hold that if the minimum gas price orders of the Commission are interpreted as having application to the prices fixed in the contract they are to that extent void for the reason they violate Sections 7 and 15 of Article II of the Oklahoma Constitution and Section 10 of Article I and Section 1 of the fourteenth Amendment to the Constitution of the United States.

Under its first assignment Phillips argues first that the orders apply only to sales of gas by producers and second that Cabot was not the owner of any interest in the gas produced. It is argued that the overriding royalties reserved to Cabot constituted a part of the consideration for the leases; that when the gas was produced Phillips was the owner thereof, so that Phillips was the producer and seller, and not a purchaser, and that the requirements of the price orders were fully met when Phillips produced the gas and obtained the prescribed price after fractionation and sale. It is to be noted that the orders by the Commission do not refer to sales or purchases by producers. The first order made it unlawful to “take gas” from a producing structure at a price at the well head of less than 7<¡i and the second order provided that no gas shall “be produced” at a price at the well head of less than that fixed therein. The clear import of the regulations is that the first transaction involving the obligations to pay or account for gas removed from the producing horizon must be at the prices at the well head as fixed in the regulations. Thus if an operator removes its own gas it must receive the prices fixed in the order at the well head and if it acquires the interest in the gas reserved to others it must pay or account to them for the minimum prices fixed at the well head.

It is not correct to say that Cabot owned no interest in the gas in place. Much has been written with respect to title to gas and oil in place. Many cases including cases from Oklahoma state that oil and gas are not subject to ownership prior to production and reduction to possession. Yet all these cases recognize that reservations in deeds of conveyances of surface rights of an interest in oil and gas in place or such reservations under leases conveying an interest in such minerals with right to explore and reduce to possession constitute an interest in such minerals and that such reservations are valuable property rights. Furthermore, Oklahoma by statute has declared that “All natural gas under the surface of any land in this state is hereby declared to be and is the property of the owners, or gas lessees, of the surface under which gas is located in its original state.” 52 O.S.A. § 231. And this statute has been regarded as adopting the theory of ownership of gas in place, and that a well in the common source of supply reduces the gas to possession. See Conservation of Oil and Gas, a History, published by the Section of Mineral Law of the American Bar Association. And in Magnolia Petroleum Company v. Ball, 203 Okl. 514, 223 P.2d 136, 137, the court said that while oil and gas while in the earth are not subject to absolute ownership in kind until reduced to possession “the right to reduce oil and gas to possession is a valuable property right which may be conveyed.”

The contract between Phillips and Cabot recognizes a right in Cabot to an interest in the gas in place. In the contracts and leases the parties treated Cabot as the owner of the gas. The contract provided that Cabot would reserve an undivided interest in the natural gas underlying the lands or any natural gas which would be produced therefrom. In the assignment of the leases which Cabot held it reserved “unto itself and its successors and assigns an undivided interest in the natural gas underlying the lands covered by this assignment and produced therefrom equal to one-fourth (%) of seven-eights(%) of all gas produced from said lands * * *.” All the conveyances between the parties recognized such interest in the gas in place and in the production thereof. Such provisions are wholly inconsistent with the premise that Phillips became the owner of all the gas at the instance of production and that Cabot had no interest therein. The provision that “Phillips shall become the owner of the gas when produced” must be considered in context with all the rest of the provisions of the contract and the various assignments between the parties. It was no doubt inserted to make sure that Phillips should have the- right to all the production from these leases including its interest therein, as well as the interest of Cabot, upon payment therefor. When so considered, the practical effect thereof was to give Phillips the right to receive Cabot’s interest in the production by’ paying therefor the contract price of 4¡é.

Because of the conclusions we have reached as outlined above, it is not necessary to consider whether Phillips and Cabot were joint owners or whether Phillips was a joint producer and purchaser and Cabot a joint producer and seller of gas as found by the trial court.

A casual reading of the two price regulations makes it clear that they were promulgated not only to prevent physical and economic waste but also to protect the correlative rights of all having an interest in the common source of a supply of gas, including the interest of the landowner, royalty holders, as well as others who had an interest therein. That the Commission had the statutory authority to protect the correlative rights of all having an interest in a common source of supply of gas is clearly manifest from the decision of the Supreme Court of Oklahoma in Cities Service Gas Company v. Peerless Oil & Gas Company, 203 Okl. 35, 220 P.2d 279, 284. Thus the court in that case said, “Obviously, the protection of the interest of all owners of the gas is the intent of the statute and such is the standard of guidance to the Corporation Commission acting thereunder” and that the provision of the 1915 Statute¹ was not only to prevent excessive drainage and waste but also to protect the “interest of the public and the interest of all those having a right to take from a common reservoir” and the court said that the provision for the protection of the interest of all those having a right to produce gas from a common source of supply had reference “to the owners of the land overlying the gas and such interests as they have conveyed.” The court alluded to the fact that without regulatory power prices to landowners or royalty holders might be so reduced as to result in an exhaustion or dissipation of their interest without having received any reasonable compensation and each would thus suffer waste of a valuable reversion.

What has been said disposes of Phillips’ second contention that if the Commission’s orders be construed as applying to the contract price of four cents then the orders are void for want of statutory authority to promulgate them. This is just another way of saying that the statute authorized the Commission to promulgate regulations only with respect to sales by producers. Quotations from the opinion of the Supreme Court in Cities Service Gas Company v. Peerless Oil & Gas Company, supra, as set out above, as well as other statements therein, impel the conclusion that the scope of the statute under which the regulations were promulgated was not so narrowly limited.

Neither is Phillips’ final contention that, if the two orders in question are interpreted as applicable to the contractual provisions for the payment of Cabot’s overriding royalty interest in the production, they contravene the provisions of the Fourteenth Amendment to the Constitution well taken. The Supreme Court of Oklahoma held that neither the statute nor the two regulations promulgated thereunder violated either the Oklahoma Constitution or the Constitution of the United States and this construction of the statute and of the regulations was approved by the Supreme Court of the United States in Cities Service Gas Company v. Peerless Oil & Gas Company, 340 U.S. 179, 71 S. Ct. 215, 95 L.Ed. 190. While the specific question before the Oklahoma Court was as stated by Phillips the validity of the order with respect to the rights and liability of Phillips as to the gas it purchased from Peerless Oil and Gas Company, the Oklahoma Supreme Court did not there decide only that narrow question. It viewed and considered the scope and effect of the statute and the powers of the Commission thereunder in its broadest aspect and passed upon the constitutionality of all phases thereof both with respect to the State and Federal Constitutions. We think that the opinion by the Supreme Court of Oklahoma clearly holds that, both under the State and Federal Constitutions, the State has the power and authority to pass legislation regulating the production and marketing of gas to prevent physical and economic waste and to protect the correlative rights of producers, vendors, landowners, royalty owners or anyone else having an interest in a common source of supply of gas to the end not only that waste will not be committed but also to the extent that the economic interest of any owner of any interest therein will not be dissipated and destroyed without a fair return to him and that this construction was approved by the Supreme Court of the United States in Cities Service Gas Company v. Peerless Oil & Gas Company, supra.

The judgment of the trial court is affirmed.

1 . 52 O.S.A. § 239.