Butler v. Exxon Corp. (559 S.W.2d 410, 1977)

OPINION

OSBORN, Justice.

This case involves the question of whether or not additional royalties are due to the lessors under gas royalty provisions of four oil and gas leases which were executed in 1966. The trial Court denied any additional recovery. We affirm in part and in part reverse and remand.

The basic dispute results from the fact that the price of natural gas in the intrastate market in Texas rapidly escalated from the time the gas discovered under these leases was sold for less than 20 >>

W. R. Davis, Inc. v. State, 142 Tex. 637, 180 S.W.2d 429 (1944). The Supreme Court, without a dissenting vote, held:

“ * * * When this definition is read as a whole it is reasonably clear that it contemplates that ‘market value’ is the price for which the producer sells his gas. * * * »

W. R. Davis, Inc. v. State, supra at 432. The phrase “market value” was again held to mean the price for which the producer sells the gas in Calvert v. Union Producing Co., 258 S.W.2d 176 (Tex.Civ.App.—Austin 1953, no writ); Calvert v. Union Producing Co., 269 S.W.2d 525 (Tex.Civ.App.—Austin 1954), aff’d, 154 Tex. 479, 280 S.W.2d 241 (1955). Article 7047b has been supplanted by Tex.Tax. — Gen.Ann. arts. 3.01 and 3.02. Like the predecessor Statute, Article 3.01 provides that the tax on the business of producing gas be computed “on the amount of gas produced and saved * * * equivalent to seven and one-half per cent (7½%) of the market value thereof as and when produced.” Article 3.02 provides “market value of gas produced in this State shall be the value thereof at the mouth of the well; however, in case gas is sold for cash only, the tax shall be computed on the producer’s gross cash receipts.”

As late as 1970, the Supreme Court has construed the new tax Statute:

“ * * * We hold that the market value of gas at the mouth of the well in cases such as this is measured, as to all ownership interests, by the total proceeds of the sale of the component parts of the gas after processing, less transportation and processing costs * *

Mobil Oil Corporation v. Calvert, 451 S.W.2d 889 (Tex.1970). If, then, we are to decide the issue under the rule that the parties intended to use the phrase “market value” in its usual and ordinary sense, we have been told quite clearly what that meaning is.

I would hold that the intent of the parties to this lease is controlling of its construction. I find it completely unrealistic to assume that there was ever an intention by these parties that one of them would receive one price for his gas and the other a different price. The oil and gas lease is distinguished from other contracts in that it has a share provision, that is, that the parties will share in any oil or gas that may be found. As noted by Summers, supra at Sec. 590 entitled “Oil Royalties — A Share of the Production”:

“The consideration most usually given for the privilege of producing oil is a share, ordinarily one-eighth, or the value of such share, of the oil produced and saved from the premises, free of cost to the lessor. * * * ”

That the lessor’s share is ordinarily ⅛⅛ is so common that the Courts take judicial knowledge of it. Cheek v. Metzer, 116 Tex. 356, 291 S.W. 860 (1927); Gibson v. Turner, 156 Tex. 289, 294 S.W.2d 781 (1956). The purpose of both lessor and lessee was to find and produce the minerals for their mutual benefit. As is usual in such leases, everything to be done is left to the lessee; everything from exploration to production to sale, including compliance with all necessary governmental regulations, is left entirely to the lessee. It is the lessee who must bear the high cost of drilling, developing and operating, and he needs all the oil and gas he can produce in order to make a profit. The lessor, of course, has no expense but is vitally interested in the end results — the income from the production. Thus, the interests of the lessor and the lessee are identical in the desire to produce all of the oil and gas and sell it for the best price possible. There is nothing in this lease to even suggest that the parties intended anything but that they would share in the production and the proceeds thereof. I would give attention to the fact that they did not prepare this lease; rather, they simply selected a form. As material here, that form is common to the oil and gas industry. In selecting that form, the parties must have intended to give it the meaning that it had been given through wide use through the many years — that the proceeds of the gas production would be shared by them. I cannot agree with the holding that these people had a different intent from all of the other thousands of people who have executed the same or similar form.

The parties to the lease are charged with knowledge of the law and governmental regulations. In fact, such laws and regulations are held to be a part of their contract as if they were written therein. Under such rules and regulations, a long term contract for the sale of gas is a necessity. Gas cannot be carried in buckets; pipelines are required to market it. Before one can operate a pipeline, he must have a permit. Before he can obtain a permit, there must be a sufficient reserve of gas in the field to merit it. The pipeline carrier must have sufficient long term contracts for that gas to merit an award of the permit. This is an oversimplification of the law, but it is a body of law presumably known to the parties at the time of entering into their contract. Hence, the lessors knew when they entered into this oil and gas lease that the gas would be marketed by long term contract, and most importantly, they knew that the “market value” would be fixed by such long term contract. The Court has found, and the lessors admit in their briefs, that the only market for this gas was by long term contract. Clearly, the intent of the parties is established by the above. The amount received for the gas (the proceeds) is the market value.

While, as stated, I am of the opinion that on its face this oil and gas lease means that the lessee’s obligation is to pay the lessors their fractional share of the proceeds, any doubt as to this is resolved by the practical construction of the parties. Lone Star Gas Co. v. X-Ray Gas Co., 139 Tex. 546, 164 S.W.2d 504 (1942); Superior Oil Co. v. Stanolind Oil & Gas Co., 230 S.W.2d 346 (Tex.Civ.App.—Eastland 1950), aff’d, 150 Tex. 317, 240 S.W.2d 281 (1951); Livingston Oil Corporation v. Waggoner, 273 S.W. 903 (Tex.Civ.App.—Amarillo 1925, writ ref’d). The facts which show this construction are: (1) From the beginning of production in 1970 until October, 1975, lessee paid and the lessors accepted royalty payments based upon the amount realized from the gas sales under the 20-year contract. (2) Prior to receiving such royalty payments under these leases, the lessors executed “division orders” which, though modified slightly in 1973, remained in effect until they were revoked by the Appellants in April, 1975. These division orders stated: “Settlements for gas sold at wells or at a central point in or near the field where produced shall be based on the net proceeds at the wells.” This construction of the lease placed thereon by the parties themselves is evidence of their intent and should be given controlling effect. In distinguishing this case from the Vela case, it should be noticed that division orders were not executed by the Velas.

Another aspect of the division orders is that they should be held to be binding contracts until revoked. This is of no consequence under my interpretation of the lease, but under the majority construction of the lease, it would prevent any recovery for additional royalties prior to the revocation of the division orders in April, 1975. Contrary to the federal case relied on by the majority, Texas Courts have held division orders to be binding contracts until revoked. Chicago Corporation v. Wall, supra; Le Cuno Oil Company v. Smith, 306 S.W.2d 190 (Tex.Civ.App.—Texarkana 1957, writ ref’d n. r. e.), cert. denied, 356 U.S. 974, 78 S.Ct. 1137, 2 L.Ed.2d 1147 (1958).

I would affirm the judgment of the trial Court as to all four leases.