Cabot Corp. v. Brown (754 S.W.2d 104, 1987)

OPINION

CAMPBELL, Justice.

This oil and gas case determines the implied duty of Cabot Corporation, lessee-operator, to reasonably market gas under a lease from Martha Brown and others, lessors. Based on a jury verdict, the trial court rendered judgment for Brown awarding damages of $424,083.14 and attorney’s fees. The court of appeals affirmed the judgment of the trial court. 716 S.W.2d 656. We reverse and render in part and remand in part.

Cabot is the lessee-operator of the Cabot Kelln Gas Well No. 1 (the “Kelln Well”) located in Lipscomb County, Texas. Brown is one of several lessor-royalty owners under a 1967 oil and gas lease to Cabot. The lease required Cabot to pay royalties based on the market value of the gas at the well in the event gas was used or sold off the premises. The Kelln Well began production in 1968. In January 1968, the lessors signed division orders which obligated Cabot to pay royalties based on the price determined by the Federal Power Commission “if such sale be subject to the Federal Power Commission.”

In August 1967, Cabot and Transwestem Pipeline Company entered into a contract labeled “Exchange of Gas, Texas Panhandle.” Under the contract, the Kelln gas is transported by Cabot through its pipeline to Transwestem’s pipeline, which is part of an interstate gas transmission system extending from Texas to California. The Kelln gas is delivered into Transwestem’s system in Roberts County, Texas, where it is measured and commingled with Tran-swestem gas to be sold in the interstate market. At that point, title to the Kelln Gas passes to Transwestern. The delivery point of the exchange gas received by Cabot from Transwestern is located in Gray County, Texas. There, Cabot takes title to an equivalent volume of gas transmitted from Transwestem’s interstate pipeline. Under the exchange agreement, Cabot pays Transwestem 2