Revised November 9, 1998
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 97-41023
MARY DRUCILLA McGILL BURNS; KATHLEEN McGILL ENYART;
ALICE ANN McGILL ERCK; FREDERICK ERCK;
ALICE ADAMS McGILL; ESTHER D. McGILL; SCOTT McGILL;
FRANCIS CLAUDIA McGILL STEWART;
and LINDA JANE McGILL WEAKLEY,
Plaintiffs-Appellants,
FIRST CITY BANK-GULFGATE; MBANK ALAMO;
and INTERFIRST BANK HOUSTON,
Intervenor
Plaintiffs-Appellants
VERSUS
EXXON CORPORATION,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of Texas
November 4, 1998
Before KING, SMITH, and PARKER, Circuit Judges.
ROBERT M. PARKER, Circuit Judge:
Plaintiffs-appellants and intervenor plaintiffs-appellants
(“the McGills”) appeal from the district court’s grant of two
1
partial summary judgments and a subsequent, final take-nothing
judgment thereon in favor of appellee, Exxon Corporation.
Additionally, the McGills contend that the district court abused
its discretion in refusing to compel Exxon to produce certain
documents and also in denying the McGills leave to file a
supplemental complaint. For the following reasons, we affirm.
I. Background and Procedural History
The McGills are royalty interest owners under two oil and gas
leases executed with Exxon (formerly Humble Oil). The oil and gas
leases include a 1935 lease and a 1941 lease covering more than
30,000 acres of land in Brooks, Hidalgo, Jim Hogg, and Starr
Counties, Texas (hereinafter “the McGill leases”). Until 1960, the
McGill leases unquestionably governed the royalties paid to the
McGills. On June 20, 1960, however, the McGills and Exxon amended
the royalty provisions of the McGill leases to require payment of
specified royalties on residue gas and plant products extracted
from gas processed at a gas processing plant then under
construction, the King Ranch Gas Plant (hereinafter “the King Ranch
Processing Agreement”).
The royalty provisions of the two McGill leases are identical
and provide in pertinent part:
The royalties paid by the lessee are . . . (b) on
gas, including casinghead gas or other gaseous
substance, produced from said land and sold or used
off the premises or in the manufacture of gasoline
or other product therefrom, the market value at the
well of one eighth of the gas so sold or used,
provided that on gas sold at the wells the royalty
2
shall be one-eighth of the amount realized from
such sale; . . .
Under the McGill lease royalty provisions, the McGills were
entitled to receive royalties: (1) on residue gas based upon 1/8 of
the market value of the residue gas at the wells; and (2) on
volumes of gas used in the manufacture of gasoline or other plant
products based upon 1/8 of the market value of the gas at the well
before processing. The McGills were not entitled to receive
royalties based upon the value of the processed plant products.
The royalty provisions of the King Ranch Processing Agreement
supersede the royalty provisions of the McGill leases to the extent
that the two are in conflict. The agreement provides separate
royalty terms for plant products and residue gas. In determining
the royalty paid on residue gas, the agreement provides:
The price per Mcf at which the gas shall be valued in
each instance shall be the price per Mcf received during
the applicable accounting period for gas sold at the
discharge side of the plant. In the event the gas is not
sold at the discharge side of the plant but instead is
taken into Humble’s gas transmission facilities for
marketing in an area removed from the plant side, the gas
shall be valued at the fair market value. . . .
(emphasis added).
Fair market value is defined as the greater of Exxon’s field price
for gas, the price at which Exxon sells gas to major purchasers,
and the weighted average price paid in Texas Railroad Commission
District 4.
The King Ranch Processing Agreement amended the royalty
provisions of the McGill leases for a period of at least a twenty
3
year term and gave the plaintiffs the right to receive royalties
based on part of the value of the processed plant products. The
term of the agreement began on the date the King Ranch Plant was
placed in operation and continued thereafter until termination as
provided in the agreement. Termination could be triggered by any
party after the end of the nineteenth year by giving written notice
to the other party of the intent to terminate. The termination
became effective as to the terminating party one year after notice.
Furthermore, Exxon had the right to “limit or curtail, cease
entirely, or recommence its gas processing operations (or any
portion of such operations).”
From 1960 until 1965, Exxon processed the gas, fractionated
the liquid plant products, and sold the residue gas and liquid
plant products at the King Ranch Gas Plant. For these five years,
the residue gas from the McGill leases was sold in the higher
priced unregulated intrastate gas market. On January 29, 1965,
however, Exxon entered into an interstate gas sales contract with
Trunkline Gas Company (“Trunkline”).1 The contract with Trunkline
obligated Exxon to deliver all gas produced from the McGill’s
property for a period of twenty years. In order to prevent the
commingling of gas sold in the intrastate and interstate markets,
1
After the contract between Exxon and Trunkline in 1965, the gas
from the McGill leases became dedicated to interstate commerce and
subject to federal price limitations under the Natural Gas Act.
The gas remained dedicated to interstate commerce until the Federal
Energy Regulatory Commission granted permanent abandonment as of
December 1, 1987.
4
which would subject all gas produced at the King Ranch Plant to
federal pricing controls, Exxon constructed a separate gas
processing facility, the Kelsey Plant, to process gas from the
McGill properties. The Kelsey Plant was constructed on the McGill
lease after the McGills granted Exxon a surface lease and Trunkline
a right-of-way for a pipeline. From September 1966 until April
1988, the McGill’s residue gas was sold at the Kelsey Plant for
distribution in interstate commerce, and the extracted liquids were
transported by pipeline to the King Ranch Plant where the liquids
were fractionated into plant products. At all relevant times, the
liquid plant products were fractionated and sold only at the
tailgate of the King Ranch Plant or were taken and used by Exxon.
Since the Kelsey Plant closed in 1988, the gas produced on the
McGill leases has been transported to the King Ranch Plant for
processing and disposition of both the residue gas and plant
liquids.
The McGills filed suit against Exxon in 1985 for underpayment
of royalties. The suit was originally filed in state court, but
was removed to federal court based on diversity of citizenship. In
December, 1986, the McGills filed a motion to compel production of
documents reviewed by R.C. Granberry, a former Exxon employee, in
preparation for his deposition. In May 1995, the district court
denied the motion to compel. In the interim, Mr. Granberry had
died.
In January 1991, the parties filed a Joint Pretrial Order
5
containing the parties agreements, admissions and stipulations. In
November, 1991, Exxon filed two motions for partial summary
judgment on the two main issues in the case urging the court to
hold: (1) that under the market value clauses of the McGill leases,
the market value of the residue gas was limited to the regulated
interstate market in which the gas was sold; and (2) that the King
Ranch Processing Agreement was applicable to and controlled royalty
payments on the liquid plant products manufactured from the gas
produced on the McGill leases as to plaintiffs Weakley and Enyart
from January 1977 to December 1981 and as to all other plaintiffs
for all times relevant to this action. In September 1992, the
McGills filed cross-motions for summary judgment “on identical
issues.”
On March 10, 1994, the district court granted Exxon’s motion
for partial summary judgment, ruling that the “market value at the
well” under the McGill leases was limited to interstate prices when
calculating royalties on residue gas. On April 11, 1995, the
district court granted Exxon’s second motion for summary judgment,
ruling that the King Ranch Processing Agreement, and not the McGill
leases, governed the payment of royalties on liquid plant products.
On June 27, 1995, the McGills sought leave to file a
supplemental complaint. The district court denied leave on
December 29, 1995. After finding that no other issues remained,
the district court rendered final judgment in favor of Exxon on
July 6, 1997. This appeal followed.
6
II. The March 10, 1994 Partial Summary Judgment
The McGills’ first point on appeal is that the district court
erred in granting Exxon’s first motion for partial summary judgment
and holding that the King Ranch Processing Agreement governed the
payment of royalties on liquid plant products. We review a trial
court’s order granting partial summary judgment de novo. See
Landry v. Air Line Pilots Ass’n Int’l, 901 F.2d 404, 424 (5th Cir.
1990). Summary judgment is only appropriate where there is no
genuine issue as to any material fact and the moving party is
entitled to judgment as a matter of law. See FED. R. CIV. P. 56(c).
The McGills argue that the royalty provisions of the McGill
leases, and not King Ranch Processing Agreement, should have been
used to calculate royalties on gas produced from McGill land. The
King Ranch Agreement states it is applicable “to any gas produced
[from the McGill leases] which may be processed in the [King Ranch]
plant.” The plaintiffs contend that during the relevant period,
gas from the McGill leaseholds was being processed only at the
Kelsey Plant and that the fractionation of liquids, and not the
processing of gas, was occurring at the King Ranch Plant. Once
Exxon stopped shipping any of the three types of gas listed in
Article III of the King Ranch Processing Agreement from the McGill
leases to the King Ranch Plant, the McGills argue that the King
Ranch Processing Agreement ceased to govern the payment of
royalties, and thus, the royalty terms reverted to those in the
7
McGill leases.2 Exxon, however, argues that “gas processing”
continued at the King Ranch Plant because fractionation is only a
part of the gas processing procedure, and under Texas law, “gas”
includes all constituent elements, including liquid hydrocarbons
recovered therefrom. See Sowell v. Natural Gas Pipeline Co., 789
F.2d 1151, 1157 (5th Cir. 1986) (citing Lone Star Gas Co. v. Stein,
41 S.W.2d 48, 49 (Tex. Comm’n App. 1931)). Therefore, Exxon
contends the King Ranch Processing Agreement controls the
calculation of royalties on liquid plant products. We agree with
Exxon’s contentions, and thus hold that the fractionation of
liquids is part of “gas processing operations” within the meaning
of this agreement.
The dispute may be simplified as one of contract
interpretation--does the agreement permit the sale of residue gas
at the Kelsey Plant and the fractionation of plant products at the
King Ranch Plant. “Whether a written agreement is ambiguous or
whether it clearly demonstrates the intent of the parties is a
question of law.” Shelton v. Exxon Corp., 921 F.2d 595, 602 (5th
2
Article III of the King Ranch Processing Agreement provides,
in pertinent part:
It is understood that there will or may be three
types of gas entering the plant: (1) non-associated
gas or associated gas, the full well stream of which
will be taken into the plant without separation; (2)
non-associated gas or associated gas taken into the
plant after lease separation; and (3) casinghead gas
or gas produced with oil.
8
Cir. 1991). This agreement is unambiguous--it applies to any gas
produced from the McGill leases which may be processed at the King
Ranch Plant. If a contract is unambiguous, construction of the
contract is a question of law for the court to decide. See
Browning v. Navarro, 743 F.2d 1069, 1080 (5th Cir. 1984); Brown v.
Payne, 176 S.W.2d 306, 308 (Tex. 1943). Our primary concern is to
give effect to the true intentions of the parties as expressed in
the written agreement. See Deauville Corp. v. Federated Department
Stores, Inc., 756 F.2d 1183, 1193 (5th Cir. 1985); Lenape
Resources Corp. v. Tennessee Gas Pipeline Co., 925 S.W.2d 565, 574
(Tex. 1996). Absent ambiguity, the writing alone will be deemed to
express the intention of the parties, and objective intent rather
than subjective intent controls. See Sun Oil Co. (Del.) v.
Madeley, 626 S.W.2d 726, 728 (Tex. 1981). The McGills point to a
1965, so-called “smoking gun” memorandum written by B.D. O’Neal, an
Exxon engineer, to H.B. Barton, the head of Exxon gas operations,
as evidence that Exxon knew the King Ranch Agreement was void. In
the memorandum, O’Neal opines that when Exxon ceased processing
McGill gas at the King Ranch Plant, the King Ranch agreement became
void. While the memorandum may evidence an understanding on the
part of Exxon senior management of the status of the King Ranch
Agreement after the construction of the Kelsey Plant, the memo does
not assist the court with construction of the 1960 agreement. The
memorandum would only be helpful in construing the agreement if
9
there was ambiguity on the face of the document. We must therefore
enforce this agreement as written.
Because the express terms of the King Ranch Agreement state
that its royalty provisions will supersede earlier leases, the
agreement governs the royalties on all residue gas and liquid plant
products processed at the King Ranch Plant. In Article II, the
agreement states that the King Ranch Plant was built to gather gas
from the McGill leases and other leases in the Railroad Commission
District 4, and to process and market residue gas and the liquid
and liquefiable products recovered therefrom. Article II further
provides that Exxon “in its discretion may limit or curtail, cease
entirely, or recommence its gas processing operations (or any
portion of such operations).” This agreement unambiguously grants
Exxon the flexibility to cease, limit or recommence any portion of
its gas processing operations at the King Ranch Plant. This would
necessarily include the ability to cease the processing of residue
gas at the King Ranch Plant. Therefore, when Exxon made the
decision to process the residue gas at the Kelsey Plant, rather
than at the King Ranch Plant with the other gas components, it was
merely taking advantage of an express provision in the agreement.
Likewise, because Exxon maintained at all times at least a portion
of production at the King Ranch Plant, we do not agree with the
McGills’ contention that royalty payment terms had reverted back to
the McGill leases. Consequently, the district court did not err
by granting summary judgment and holding that the King Ranch
10
Agreement governed royalties on liquid plant products processed at
the King Ranch Plant.
III. The April 11, 1995 Partial Summary Judgment
The McGills’ next point on appeal is whether the district
court erred by granting Exxon’s motion for partial summary judgment
and holding that the royalties on residue gas should be determined
by the fair market value of gas sold on the interstate market.
Again, we review the order of a district court granting partial
summary judgment de novo. See Landry, 901 F.2d at 424.
Under the King Ranch Processing Agreement, royalties on
residue gas processed at the King Ranch Plant would be “valued at
the fair market value,” determined by three different formulas in
the agreement.3 The McGills argue that if the agreement applies,
then Exxon should have used the agreement to calculate royalties
for their residue gas. While Exxon paid the McGills royalties on
liquid plant products under the King Ranch Processing Agreement,
Exxon paid the McGills royalties on residue gas under the “market
value at the well” terms of the McGill leases based on the
interstate prices of gas. The plaintiffs contend that if Exxon had
uniformly applied the King Ranch Processing Agreement to both
liquids and residue gas, then Exxon would have been required to pay
3
Article III provides that fair market value would be defined as
the greater of Exxon’s field price for gas, Exxon’s sales price to
major purchasers, or the weighted average price paid in the Texas
Railroad Commission District 4.
11
the McGills the higher intrastate price for their residue gas.
Exxon counters that the royalty provisions of the McGill leases
govern the payment of royalties on the residue gas based on the
fact that the gas was neither processed nor sold at the King Ranch
Plant.
Article V of the King Ranch Processing Agreement provides that
the agreement “shall supersede the [McGill leases] . . . only to
the extent, that the provisions of [the leases] are in conflict
with the provisions of this agreement.” Therefore, matters not
covered by the agreement will revert to being governed by the
McGill leases. The agreement’s royalty provisions expressly apply
only to products that are processed or sold at the King Ranch
Plant. Because the McGill’s residue gas was processed and sold at
the Kelsey Plant and never even entered the King Ranch Plant, it
would fall outside the terms of the agreement and would be governed
instead by the original McGill leases.
By virtue of the gas royalty provisions in the governing
McGill leases, the residue gas royalties will be determined by the
market value at the well. The McGills contend that if Exxon is
obligated to pay royalties under the market value provision of the
McGill leases, then the intrastate market value of the gas should
have been used because an intrastate market was always available in
which to sell the gas. Because it was dedicated to the interstate
market, Exxon argues that the fair market value of the gas cannot
12
exceed its federally regulated price. The district court held that
the gas became dedicated to interstate commerce and subject to
federal price ceilings because the gas which Exxon sold to
Trunkline was sold in interstate commerce. In our review, we must
address the McGills’ contention that the fair market value of
intrastate, and not interstate, gas should be used because an
intrastate market in which to sell the residue gas was always
available to Exxon.
We agree with the district court’s analysis of this issue.
Under Texas law, to determine the market value of gas, the gas
should be valued as though it is free and available for sale. See
Exxon Corp. v. Middleton, 613 S.W.2d 240, 246 (Tex. 1981). Market
value may be calculated using comparable sales, which are those
sales of gas which are comparable in time, quality, quantity, and
availability of marketing outlets. See id. Comparable in quality
includes both physical and legal characteristics. See id. To
determine legal quality, the court must consider whether the gas is
sold in a regulated or unregulated market, or in one particular
category of a regulated market. See id. “Intrastate and
interstate gas prices are not comparable in [legal] quality.” Id.
at 248; see also First Nat’l. Bank in Weatherford v. Exxon Corp.,
622 S.W.2d 80, 81-82 (Tex. 1981); Kingery v. Continental Oil Co.,
626 F.2d 1261, 1264 (5th Cir. 1980). As this court held in Bowers
v. Phillips Petroleum Co., market value for royalty purposes cannot
13
exceed the maximum ceiling price imposed on the gas within that
particular federally regulated category. 692 F.2d 1015, 1021 (5th
Cir. 1982). Consequently, the “market value at the well” provision
in the McGill leases would be determined by comparable interstate
sales because the gas that Exxon sold to Trunkline became dedicated
to the federally regulated interstate market.
The McGills attempt to distinguish Weatherford and Middleton
by arguing that alternative markets were available at the time
Exxon dedicated the gas to the interstate market. Nothing in
Weatherford or Middleton, nor any of the other cases suggest that
the results would have been any different had an alternative
intrastate market been available to the producer at the time the
gas was committed to an interstate contract. The availability of
an intrastate market in which to sell the plaintiffs’ gas relates
to whether Exxon imprudently marketed the gas, and does not affect
the McGills’ claim of improper determination of market value.4
Therefore, because the existence of an alternative intrastate
market does not change the result that interstate sales are not
comparable to intrastate sales when determining market value, we
hold that the trial court was correct in granting Exxon’s second
4
The McGills have made no claim that by committing the gas to the
interstate market, Exxon breached its implied duty to prudently
market the gas. See Shelton v. Exxon Corp., 921 F.2d 595, 602 (5th
Cir. 1991); Powell v. Dancigar Oil & Refining Co., 134 S.W.2d 493,
499 (Tex. Civ. App.--Fort Worth, 1939), rev’d, 154 S.W.2d 632 (Tex
1941).
14
partial summary judgment.
IV. Plaintiff’s Motion to Compel
The McGills next assert that the district court erred in
failing to order production of documents that a former Exxon
employee used to refresh his recollection in preparation for his
deposition. We review a district court’s order overruling a motion
to compel for abuse of discretion. See Scott v. Monsanto Co., 868
F.2d 786, 793 (5th Cir. 1989).
The McGills contend that R.C. Granberry, a witness for Exxon,
used certain documents to refresh his recollection in preparation
for his 1985 deposition. The plaintiffs requested the documents
for the purpose of questioning the witness, but Exxon refused,
claiming the documents were protected by the attorney-client
privilege and the attorney work product doctrine. The McGills,
however, contend that Exxon waived immunity from discovery under
the attorney-client privilege and the work product doctrine by
making the documents available to the witness. In December 1985,
the McGills filed a motion to compel. After an in camera review,
the district court denied the plaintiffs’ motion to compel
production of the “Granberry documents” after reaching the
following conclusions: (1) the documents “have absolutely no
bearing on the court’s [partial summary judgment] on the ‘market
value’ issue”; (2) only a few of the documents appeared “to have
even an arguable relation to the ‘Processing Agreement’ issue”; and
15
(3) withholding of the documents was harmless and moot, based on
the information already available to the plaintiffs in the open
record and the court’s interpretation of the Processing Agreement.
Under Rule 612 of the Federal Rules of Evidence, if a witness
uses a writing to refresh his memory before testifying, the trial
court is authorized to compel the production of that writing “if
the court determines it is necessary in the interests of justice.”
FED. R. EVID. 612. As in most discovery matters, the district court
has broad discretion and should only be reversed in an unusual and
exceptional case. See O’Malley v. United States Fidelity & Guar.
Co., 776 F.2d 494, 499 (5th Cir. 1985). The plaintiffs have failed
to show that they have a substantial need for the documents or that
production was necessary in the interests of justice. If a party
claims that the documents contain matters not related to the
subject matter of the testimony, Rule 612 authorizes the court to
make an in camera inspection and refuse to order production of
documents not so related. See FED. R. EVID. 612. Consequently, the
district was well within its discretion to refuse to order
production of the documents after making an in camera inspection
and determining that the documents had little or no relation to the
subject matter of Granberry’s testimony.
V. Plaintiff’s Supplemental Complaint
Next, the McGills claim the district court erred in denying
them leave to file a supplemental complaint. We review the
16
district court’s denial of leave to file a supplemental complaint
for abuse of discretion. See Lowery v. Texas A&M Univ. Sys., 117
F.3d 242, 245 (5th Cir. 1997).
On June 27, 1995, after the district court had granted both of
Exxon’s motions for partial summary judgment, the McGills filed
their motion for leave to file a supplemental complaint under Rule
15(d) of the Federal Rules of Civil Procedure. The district court
denied the motion for leave without comment.
Under Rule 15(d), the court may permit a party to file a
supplemental pleading setting forth transactions or occurrences or
events which have happened since the date of the pleading sought to
be supplemented. See FED. R. CIV. P. 15(d). The McGills have
failed to show, either in its motion to compel filed with the
district court or in its briefs filed with this court, that any
transaction or occurrence or event has transpired in the ten years
since they filed their original complaint. The McGills cite to
several cases holding that leave to amend should be freely granted
under Rule 15(a).5 While the text of Rule 15(a) provides that
leave should be freely granted, the text of Rule 15(d) does not
similarly provide. Rule 15(d) is clear that the court may permit
a supplemental pleading setting forth changed circumstances. Here,
5
Rule 15(a) provides in pertinent part: “[A] party may amend the
party’s pleading only by leave of court or by written consent of
the adverse party; and leave shall be freely give when justice so
requires.” FED. R. CIV. P. 15(a).
17
as nothing has changed except for the granting of Exxon’s motions
for partial summary judgment, the court was within its discretion
to deny leave to supplement.
VI. The Final Judgment
Finally, the McGills argue that the district court erred by
rendering final judgment on the entire case when additional issues
allegedly remained unresolved.
The McGills contend that the two motions for partial summary
judgment did not resolve all the issues in the case, and therefore,
should not have served as a basis for final judgment. The McGills
argue that the following three claims remain unresolved: (1) that
after 1985, when the McGill’s gas was no longer legally required to
be dedicated to the interstate markets, Exxon failed to pay
royalties based on the best price available for the gas; (2) that
even if the King Ranch Processing Agreement applies, Exxon breached
its duty to market the gas and liquids processed at the King Ranch
prudently and in good faith; and (3) that the King Ranch Processing
Agreement terminated when the McGills filed this lawsuit. After
the plaintiffs filed a supplemental brief in the district court
describing the issues which they believe remain unresolved, the
court ruled that the first two “unresolved issues” were foreclosed
by the March 10, 1994 or April 11, 1995 orders granting partial
summary judgment, and the third “unresolved issue” was not raised
until after the district court granted Exxon’s second partial
motion for summary judgment.
18
We agree. The first two claims are indeed foreclosed by the
orders granting summary judgment. The third issue--the termination
of the King Ranch Processing Agreement upon the filing of this suit
was never raised by the McGills either in the Consolidated Amended
Appeal, the joint pretrial order, or in response to Exxon’s motions
for summary judgment. The first time the McGills pleaded this
theory was in their Motion for Leave to File Supplemental
Complaint. Because the district court did not abuse its discretion
in denying leave to file the supplemental complaint, it was
therefore not error for the court to decline to address the merits
of this argument.
Therefore, for the foregoing reasons, we AFFIRM.
19
JERRY E. SMITH, Circuit Judge, concurring in part and dissenting in
part:
I respectfully dissent from part II of the majority opinion.
That part affirms the holding that the King Ranch Processing
Agreement (the “Agreement”), rather than the McGill leases,
governed royalties on liquid plant products.
The original McGill leases provided more favorable royalty
treatment of liquid gas products than did the Agreement. The
McGills argue that those leases, and not the Agreement, should
govern the liquids that are separated from the residue gas at the
Kelsey plant but fractionated at the King Ranch plant. I agree.
The Agreement applies by its terms to “any gas produced [from
the McGill leases] which may be processed in the [King Ranch]
plant.” The McGills' argument is twofold: (1) None of their “gas”
was processed at the King Ranch plant; all that was processed at
King Ranch was liquids; and (2) what was done at King Ranch was not
“processing,” but “fractionating.” I find compelling a variant on
the “gas” argument: An examination of the Agreement shows that it
did not provide for the treatment of liquids sent to the King Ranch
plant only for fractionation.
The McGills point to language in the Agreement stating that
“there will or may be three types of gas entering the plant:” (1)
full well stream gas, (2) gas that has been run through a separator
on the lease, and (3) casing head gas. In a footnote, the majority
quotes this passage but does not deal with it in any way. To the
contrary, I believe the passage is dispositive on this issue, for,
obviously, the liquids from the McGill leases that entered the
plant were not any of the three types of gas contemplated under the
lease.
Exxon, in turn, points to caselaw that holds “gas” to include
all the component parts of that which comes out of the well. See
Sowell v. Natural Gas Pipeline Co., 789 F.2d 1151, 1157 (5th Cir.
1986). Neither Sowell nor the case upon which it is based, Lone
Star Gas Co. v. Stine, 41 S.W.2d 48, 49 (Tex. Comm'n App. 1931,
judgment adopted), provides the unmitigated support that Exxon
seems to assign to it.
The leases at issue in Sowell specifically provided for
royalties on “sulfur-free gas produced in its natural state.” See
Sowell, 789 F.2d at 1157 (emphasis added). Therefore, the royalty
owners could not claim royalties based upon the separate value of
liquid hydrocarbons that condensed downstream from meters located
on the lease. Under that agreement, “it is production that
triggers the royalty obligation.” Id. The gas as producedSSin its
“natural state”SSincluded those hydrocarbons in gaseous form, so
the royalty owners were compensated only on the basis of their
gaseous form. The Sowell court did not hold that “gas” always
includes all gas products; rather it was limited by the provisions
of the lease at issue stating that royalties would be based on gas
21
“in its natural state.”
Here, the Agreement specifically contemplated the various
manifestations of hydrocarbon molecules and set compensation levels
accordingly. It provided royalties on plant productsSSbutane,
propane, and other value-added products. Those royalties were
explicitly based on the state in which the gas arrived at the King
Ranch plant. Thus, products that are “extracted from gas delivered
to the plant without prior separation of liquids from the gas shall
be based on 100% of the value at the plant of the plant products
allocated to such gas.” On the other hand, for gas that arrived at
the King Ranch plant that “prior to delivery to the plant has been
run through a separator6 on the lease,” the royalty would be based
upon only a third or less of the plant products actually produced
from that gas.
Thus, the Agreement specifically contemplated that the full
well stream, containing all the liquids, was much more valuable
than gas that arrived at the plant with some liquids missing.
Unlike the agreement in Sowell, the agreement here did not treat
“gas” as including all the component parts of the full well stream.
Furthermore, and perhaps more importantly, there is the
specific and unambiguous language of the Agreement to which we must
give effect. The Agreement purports to cover three specific types
6
A separator removes some liquids from the well head stream but does so
incompletely. The Kelsey plant was not merely a separator, but was a bona fide
processing plant that completely removed the liquids from the gas, so that all
that was left was residue gas.
22
of gas, types that do not include the product at issue here.
Moreover, the Agreement establishes a two-tier system for treating
the different sorts of gas, and that system does not address this
product. Finally, based upon the overall scheme of the
AgreementSSwhich gives better treatment to products that contain
more liquid hydrocarbonsSSit is difficult to say that this product,
which consists purely of liquid hydrocarbons, should be treated
unfavorably in the way Exxon has done.
Exxon tries to shoehorn the treatment of liquid hydrocarbons
into an agreement that by its terms does not, and by its structure
cannot, cover those substances. The Agreement cannot govern the
fractionation of these liquid hydrocarbons. While the majority has
fashioned a fair and logical case for ruling as it has, I believe
it has given insufficient attention to the contract provisions I
have discussed. Concluding that, on this specific issue, the
result should be otherwise, I respectfully dissent on that issue
but concur in the remainder of the opinion.
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