Schwartz v. Prairie Producing Co., Inc.

727 S.W.2d 289, 93 Oil & Gas Rep. 578, 1987 Tex. App. LEXIS 6306
CourtCourt of Appeals of Texas
DecidedJanuary 29, 1987
Docket01-86-0256-CV
StatusPublished
Cited by5 cases

This text of 727 S.W.2d 289 (Schwartz v. Prairie Producing Co., Inc.) is published on Counsel Stack Legal Research, covering Court of Appeals of Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Schwartz v. Prairie Producing Co., Inc., 727 S.W.2d 289, 93 Oil & Gas Rep. 578, 1987 Tex. App. LEXIS 6306 (Tex. Ct. App. 1987).

Opinions

OPINION

COHEN, Justice.

This is an appeal from a summary judgment construing oil, gas, and mineral leases.

Appellants own mineral interests in two tracts of land on which they executed eight leases that were assigned to appellee. Ap-pellee pooled the tracts into two separate gas units that include three producing gas wells. Each well produces sour gas, which is gas that contains hydrogen sulfide.

Appellee contracted with Cities Service Co. for delivery of sour gas at the wellhead. Cities Service would transport the sour gas to its processing facility, where sulphur was recovered from the hydrogen sulfide gas. Cities Service would keep 15-20% of the sulphur produced and return the remaining sulphur to appellee, which would sell it to third parties.

Appellee tendered to appellants one dollar per long ton of sulphur extracted from the gas, the royalty provided in the lease for sulphur. However, appellants refused the payments and sued, claiming that under the gas clause of the lease, they were entitled to recover a greater amount, namely, one-fourth of appellee’s net proceeds from the sales of sulphur recovered from the hydrogen sulfide gas.

Both parties contend that the leases are unambiguous, but they disagree on which royalty provision applies. The sole issue on appeal is which subsection applies, 3(b)(1) or 3(c). Appellants contend that they are entitled to royalties on hydrogen sulfide gas under subsection 3(b)(1), the gas clause, because hydrogen sulfide is a gas that was sold to Cities Service. Appel-lee contends that subsection 3(c), the sul-phur clause, applies because it was “sul-phur mined and marketed” that was sold to Cities Service and to third parties.

The disputed provision of each lease is identical. It refers to appellants as “lessor” and to appellee as “lessee” and provides:

3. As royalty, lessee covenants and agrees: ... (b) To pay lessor on gas and casinghead gas produced from said land (1) when sold by lessee, ¼ of the amount realized by lessee, computed at the mouth of the well, or (2) when used by lessee off said land or in the manufacture of gasoline or other products, the market value, at the mouth of the well, [291]*291of Vi of such gas and casinghead gas; (c) To pay lessor on all other minerals mined and marketed or utilized by lessee from said land, one-tenth either in kind or value at the well or mine at lessee’s election, except that on sulphur mined and marketed the royalty shall be one dollar ($1.00) per long ton. (Emphasis supplied.)

In construing the leases, this Court must seek the intention of the parties, as expressed in each lease. Ordinarily, the lease alone is deemed to express the parties’ intent. City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515 (Tex.1968). Their intent is found by considering all of the lease’s provisions and by harmonizing, if possible, those that conflict. If such a conflict or ambiguity makes the lease susceptible of two reasonable meanings, extrinsic evidence is admissible to resolve the conflict or ambiguity. McMahon v. Christmann, 157 Tex. 403, 303 S.W.2d 341 (1957). However, extrinsic evidence cannot be considered if the lease clearly discloses the parties’ intention, or if the lease is susceptible of only one legal meaning. Sun Oil Co. (Delaware) v. Madeley, 626 S.W.2d 726 (Tex.1981). Moreover, a mineral lease is to be strictly construed against the lessee and in favor of the lessor, the appellants. Clark v. Perez, 679 S.W.2d 710 (Tex.App.—San Antonio 1984, no writ); 3 H. Williams, Oil and Gas Law sec. 628 (1981).

Appellants maintain that hydrogen sulfide gas is not “sulphur” within the meaning of 3(c), and that only elemental sulphur, i.e., sulphur existing as an uncombined chemical element, is covered by that section. They argue that, under Exxon v. Middleton, 613 S.W.2d 240 (Tex.1981), the hydrogen sulfide gas is “sold” by appellee to Cities Service upon delivery “at the mouth of the well,” and that the price received is 80-85% of the elemental sulphur later recovered. They contend that this constitutes a sale, even though the consideration paid by Cities Service to appellee is sulphur rather than cash. Thus, they say . that they are entitled to ¼ of the value of the sulphur returned to appellee, pursuant to section 3(b)(1). See Tex.Bus. & Comm. Code Ann. arts. 2.106(a), 2.304(a) (Vernon 1968).

Appellee responds that hydrogen sulfide gas is a dangerous corrosive poison, a degrading impurity that has no value at the wellhead, except for the potential to extract sulphur from it, and that the lease’s references to sulphur show that the parties intended to treat sulphur differently from gas or other minerals by naming it specifically and repeatedly, throughout each lease. They argue that this intent is apparent from reading each lease as a whole, and therefore, that the specific sulphur royalty in subsection 3(c) controls over the general reference to “gas,” which would impliedly include hydrogen sulfide gas, within the “gas” royalties of section 3(b)(1).

The question of whether royalties on sul-phur extracted from sour gas should be paid under the gas clause or the sulphur clause has aroused controversy recently in the United States Court of Appeals for the Fifth Circuit. First National Bank v. Pursue Energy Corp., 784 F.2d 659 (5th Cir.1986) (“Pursue /”), vacated by, 799 F.2d 149 (5th Cir.1986) (“Pursue II”). Pursue.involved the same legal issue and construed a royalty provision identical to that in the instant case.

In Pursue, the federal district court had granted a summary judgment for the lessor and held that the lease unambiguously entitled the lessor to royalties under the gas clause for sulphur manufactured from sour gas. In Pursue I, the appellate court reversed that judgment and held that the lease was ambiguous. To show the ambiguity, the court set out arguments favoring royalty payments under either of the two clauses. 784 F.2d at 662-63. The court distinguished its prior decision in Scott Paper Co. v. Taslog, Inc., 638 F.2d 790 (5th Cir.1981), where it had affirmed a summary judgment for the lessor holding that royalties for sulphur produced from sour gas were to be paid under the gas clause. The court in Pursue I held that Taslog was not controlling because it differed in three significant ways: (1) the Taslog lease had no specific royalty provision for “sulphur”; [292]*292(2) the Taslog lease provided a royalty for gas that also included “other gaseous substance produced from the premises”; (3) the lessee in Taslog stipulated that industry practice supported payment for sulphur produced from sour gas under the gas clause, while in Pursue,

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Schwartz v. Prairie Producing Co., Inc.
727 S.W.2d 289 (Court of Appeals of Texas, 1987)

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Bluebook (online)
727 S.W.2d 289, 93 Oil & Gas Rep. 578, 1987 Tex. App. LEXIS 6306, Counsel Stack Legal Research, https://law.counselstack.com/opinion/schwartz-v-prairie-producing-co-inc-texapp-1987.