Republic Natural Gas Co. v. Baker

197 F.2d 647

• Court: Court of Appeals for the Tenth Circuit
• Decided: June 11, 1952
• Docket: 4403
• Status: Published

Opinions

MURRAH, Circuit Judge.

Abstractly stated, the question presented by this appeal is whether, under Kansas law, the owner or owners of mineral interests under separate tracts of land covered by one oil and gas lease, are entitled to participate pro rata in the royalty from a well drilled on one of the tracts; or whether, as the trial court held, the owner or owners of the mineral interest under the separate tract on which the well was drilled are entitled to all of the royalties from such well. The question is presented on these facts.

In 1930, T. G. Hicks and wife executed an oil and gas lease to the Argus Production Company on 640 acres of land in Township 34, Range 39 West of the 6th P. M., Stevens County, Kansas. In conventional form, the lease provided for the payment to the lessor a royalty of %th of the gas produced from each well and used off the premises. Thereafter the lessors-executed to Parker an instrument entitled “Sale of Oil and Gas Royalty”, by the terms of which they conveyed an undivided one:half interest in all the oil, gas and minerals under one of the quarter sections covered by the oil 'and gas lease. The conveyance was expressly made subject to the terms of the lease, “but covers and includes one-half of all the oil royalty, and gas rental or royalty due and to be paid under the terms of said lease.” Soon there-. after, appellant, Republic Natural Gas Company, as assignee of the lease, completed a gas well on the quarter section in which Parker held his mineral interest, and from that date until October 1, 1948, Republic recognized the owners of the mineral interest under this quarter section as entitled to all of the royalties from the oil and gas produced from this well under the lease.' In 1938, appellee, E. V. Baker, became the owner of 4/5ths of Parker’s interest, or 2/5ths of l/8th of the royalty. When Republic ceased to pay the royalties, claiming that Baker was entitled to be paid on a basis of 1 /10th instead of 2/5ths of the l/8th royalty, Baker brought this suit against it to compel the payment of the royalties on the basis of his undivided, mineral interest under the quarter section where the well was located. The case was removed to federal court on ‘diversity of citizenship and requisite amount in controversy, both, of which are admittedly present.

Republic freely concedes here, as it did in the trial court, the applicability of the rule of capture in Kansas, to the effect that absent an express covenant or supervening valid regulations, the owner of mineral interests under a portion of land subject to an' oil and gas lease is entitled to all of the rents and royalties accruing from the production of oil or gas from that land, even though the lease may cover other tracts. See Carlock v. Krug, 151 Kan. 407, 99 P.2d 858. The underlying reason for the rule is that the conveyance of a separate mineral estate carries with it the exclusive right to the oil and gas produced therefrom, the owners of which cannot be divested simply because the lease covers other undeveloped tracts of land. Summers Oil & Gas, Vol. 3, Sections 608-609, pp. 517-534. The resulting hardships from this rule prompted the so-called “entirety clause”, now in most Mid-Continent oil and gas leases, under the terms of which it is agreed that in the event the mineral interest under the leased premises shall be separately owned, the royalties shall nevertheless be treated as an entirety, the separate owners participating pro rata. See Carlock v. Krug, supra.

For purposes of this appeal at least, both parties apparently concede the indivisibility of the lessee’s covenant to drill and develop. That is to say, Republic has neither the express nor implied obligation under the lease to drill additional wells on the lease. The sole basis of this appeal is that the Kansas Corporation Commission’s basic proration order, applicable to the Hugoton Gas Field, where this lease is located, has the effect of bringing about communitization of the royalty interest under this lease by necessary implication.

This basic order, promulgated March 21, 1944, in pursuance of the Kansas Conservation Laws, - 55-701 and 55-703, General Statutes of Kansas 1949, and effective the following April 1st, provided im regulatory detail for the orderly development and production of natural gas in the Hugoton Field to prevent physical and economic waste, and to protect the correlative rights of the parties owning an interest in the common source of supply. Among other things, the Commission found that the Hugoton Field in Kansas was about 65 miles long and 40 miles wide, in which 168 of the wells were located on 640-acre tracts, while 84 were located on 160-acre tracts; that although the Field was underlaid with different gas-producing formations, they were all interconnected to constitute one common source of supply, so that the production from one well in the Field would theoretically deplete the whole reservoir. It found that by reason of pressure deferentials or gradients, there was a disproportionate production from the wells and leases in the Field, thus impairing the correlative rights of many of the owners of developed leases. The avowed purpose of the order was to adopt a formula which would enable each well to currently produce its allowable and ultimately produce the amount of gas underlying the lease upon which it was located. The Commission found that one completed well in the-formation could adequately and sufficiently drain 640 acres without causing waste, and for the purpose of arriving at a proration formula, the acreage factor for each well was declared to he “equal in number of acres held by production from the said well divided by 640”; and the term “held by production” was construed to mean that acreage which “participates in the production upon a royalty basis and does not receive delay rentals.” In no instance, should more than 640 acres be attributable to a well for the purpose of calculating the acreage factor, except “as hereinafter specifically provided.”

It was further pertinently provided that the producers and owners of gas wells completed prior to January 30, 1940; who also possessed the right to produce natural gas from other lands and leases under the order, might attribute such lands and lease, no.t exceeding 640 acres, to a unit for production thereunder for a term not exceeding one year from the date of the order; provided that within such period the owner or producer should file with the Conservation Director, satisfactory evidence that the owners of the minerals had become participants in the royalty payments -as otherwise thereinafter required; provided further that any such land not unitized within the prescribed period for the purpose of sharing the royalties from the wells should be excluded as a part of the production unit.

The order also contained a provision Jor compulsory unitization of land or minerals owned by two or more persons so as to consolidate their holdings into one production unit. But that provision was subsequently stricken by the Commission’s amendatory order of January 10, 1946. Based upon acreage, deliverability, and other relevant proration factors, the order provided a formula for detej-mining the allowable production for each well in the Field. To avoid drilling unnecessary wells, and to prevent waste, the order, also provided that no well drilled after the effective date of the order should be assigned an allowable unless the Commission first found that there was undue- and uncompensated drainage occurring beneath the tract on which the well was drilled, or that there was an actual need for additional wells to fulfill market demands.

Contemporaneously with the effective date of the basic order, Republic filed a plat with the Director of Conservation, defining the 640-acre tract covered by the original lease and the location of the;gas well thereon. On the plat was a certification “that the acreage shown thereon is held by royalty from the well of Republic Natural Gas Company located and identified hereon.” And, since April 1, 1944, Republic has been granted an allowable from the well drilled upon the lease in question based on the plat and certificate. None of the royalty owners under the lease had notice of the filing of the plat or the certification, nor have they consented to the unitization of the 640 acres as a production unit or agreed to apportion the production of the well on any basis. Instead, the royalty owners under the 160 acres where the well is located have received payment for all of the royalty from the production of the well until payments were withheld on October 1, 1948, resulting in this lawsuit.

Republic’s argument is that the Corporation Commission’s order had the effect of establishing 640-acre production units; that although the Commission did not expressly forbid the drilling of more than one well on a 640-acre lease, it had the legal effect of doing so, and inherent in that restriction was the requirement that the owners of land under the lease must be paid their pro rata share of the gas produced therefrom, no matter where the well through which the gas comes to the surface is located,. In no other way,- says Republic, can the correlative rights of the parties be safeguarded and the salient purposes of the order effectuated.

In the determination of our specific question, we assume the contiiutional power of Kansas to regulate the production of oil and gas so as to prevent waste, and to secure equitable apportionment among the owners of the migratory oil and gas underlying a common source of supply. See Hunter Co. v. McHugh, 320 U.S. 222, 227, 64 S.Ct. 19, 88 L.Ed. 5, and cases cited. And, we assume that the Commission’s basic order of April 1, 1944, is a valid and appropriate exercise of that asserted power. We may also assume without discussion or decision that Kansas may, in the exercise of its police power, appropriately provide for the compulsory unitization of property rights in a common, source of supply of oil and gas, or in a unit of production within such common source of supply. Such power has been asserted and sustained in other states; See Act No. 225 of La.Laws of 1936; Act No. 157 of La.Laws of 1940, LSA-R.S. 30:1 et seq.; Hunter Co. v. McHugh, 202 La. 97, 11 So.2d 495; Placid Oil Co. v. North Central Texas Oil Co., 206 La. 693, 19 So.2d 616; Hardy v. Union Producing Co., 207 La. 137, 20 So.2d 734; Alston v. So. Production Co., 207 La. 370, 21 So.2d 383; Crichton v. Lee, 209 La. 561, 25 So.2d 229; 52 Okl.Stat.Supp. §§ 287.1-287.15; and see Palmer Oil Corp. v. Phillips Petroleum Co., 204 Okl. 543, 231 P.2d 997.

While Kansas has not empowered its Corporation Commission to impose involuntary communitization of leaseholds or unitization of mineral rights in a common source of supply, it has upheld the power of a city to enact an ordinance having that effect. Helmerich & Payne v. Roxana Petroleum Corp., 136 Kan. 254, 14 P.2d 663; Marrs v. City of Oxford, 8 Cir., 32 F.2d 134. But, in all cases we have seen where involuntary unitization has been sustained, the power'to effectuate it has been explicit and exercised only after notice and opportunity to be heard. Indeed, wherever the power has not been expressly conferred, courts have consistently denied it to regulatory tribunals, and have refrained from exercising it as a judicial function. See Dobson v. Arkansas Oil & Gas Commission, 218 Ark. 160, 235 S.W.2d 33; Smith Petroleum Co. v. Van Mourik, 302 Mich. 131, 4 N.W.2d 495; Mueller v. Sutherland, Tex.Civ.App., 179 S.W.2d 801; Dillon v. Holcomb, 5 Cir., 110 F.2d 610; Bruce v. Ohio Oil Co., 10 Cir., 169 F.2d 709.

One of the avowed objectives of the basic order was to safeguard the correlative rights of parties owning an interest in a common source of supply. Indeed, the achievement of that objective was essential to the validity of the order. But the Commission did not propose to achieve this objective by involuntary unitization of royalty interests. In its amendatory order of January 10, 1946, it expressly disclaimed any such power and authority, expressing the view that “such far-reaching power should * * * be exercised only upon express legislative investment.” And, to further clarify the legal import of its basic order, it went on to sáy that “there is no prohibition either by the said order or by law against drilling a well upon acreage less than the 640-acre unit found in the order by the Commission to be most economical and advantageous.” From this interpretation of its own order, it is manifest that the Commission intended to safeguard the correlative and co-equal rights of the royalty owners in the common supply, not by forced unitization, but by the establishment of production units in which the “owners of the minerals have become participants in the royalty payments.” This production unit was established and the allowable granted on the representation that the interested mineral owners would become participants in the royalty payments — a prerequisite to the protection of correlative rights. • If, therefore, the creation of the production unit failed to accomplish its purr pose because all of the mineral owners did not become participants in the royalty payments, the remedy is not compulsory unit-ization as a legal consequence of its deficiencies, but a re-examination of the facts upon which the production unit was established and the allowable granted. The law does not imply a power in the regulatory bodies or the courts to take the property of one party and give it to another in order to effectuate a just result.

We agree with the trial court that the basic order does not have the effect of unitizing the royalty interests, and the judgement is affirmed.