Appendix — California v. Southland Royalty Co.
Supreme Court brief1978
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APPENDIX —
IN THE
Supreme Court uf the Ante States
Ocroser Term, 1977
No. 76-1114
Cautirornia, et al., Petitioners
V.
SovTHLAND Roratry Company, et al.
No. 76-1133
Ex Paso NATURAL Gas Company, Petitioner
V.
SouTHLAND Rovalrw Company, et al.
No. 76-1587
FeperaL Power Commission, Petitioner
V.
SouTHLAND RoraLlry Company, et al.
On Writs of Certiorari to the United States
Court of Appeals for the Fifth Circuit
PETITIONS FOR WRITS OF CERTIORARI FILED
February 12 and 16 and May 12, 1977
CERTIORARI GRANTED JUNE 27, 1977
VOLUME n
Pages 365-746
Supreme Court of the United States
Octoser TERM, 1977
Nos. 76-1114 et al.
CaLirornia, et al., Petitioners
V.
SOUTHLAND Royatry Company, et al.
On Writs of Certiorari to the United States
Court of Appeals for the Fifth Circuit
TABLE OF CONTENTS
Votume I
Pages 1-364
Votume II
Pages 365-746
Record Appendix
Item Pagination Pagination
Relevant Docket Entries 1
Gulf Oſſ Co ration Application for
Certificate of Public Convenience and
Necessity, Docket No. G-7156, re-
Ovived 11/30/54 h.. cc cece 636-643 24
Notice of Gulf Oil Corporation Ap-
— for Certificate of Public
venience and Necessity, G-7156,
issued 4/19/55, 644-652 9-22
ii Table of Contents —Continued
Findings and Order Issuing Certifi-
cate of Public Convenience and Neces-
sity to Gulf Oil Corporation, Docket
No. G-7156, issued 5/28/56 ........
The documents listed below are from
Warren Petroleum Co., A Division of
Gulf Oil Corp. FPC Gas Rate Sched-
ule No. 43:
Residue Gas Purchase —
dated 1/26/51, filed 11/30/54 .
Supplement No. 2, dated 10/30/53,
SEED le
Supplement No. 5, Agreement,
dated 9/1/55, filed 5/34/56 ......
Supplement No. 7, Agreement
dated 12/15/56, filed 1/29/58 ese
Amendatory ment, dated 10/
26/59, filed 1 Dt .seekéee6ee<
Supplement No. 17, Amendment
dated 4/17/72, filed 5/11/72 Tae
Findings and Order Issuing Certifi-
cate of Public Convenience and Nec-
essity, G-13445, issued 2/24/58 .....
Warren Petroleum Co., A Division of
Gulf Oil Corp. FPC Gas Rate Sched-
ule No. 66:
Residue Gas Purchase Agreement,
4
Exhibit 33.
Pagination Pagination
653-664
579-581
98-101
Table of Contents—Continued
Notice of Certificates of Publie Con-
venience and Necessity Issued to Pro-
ducer Respondents Pursuant to Opin-
ion No. 662 and Designation of FPC
Gas Rate Schedules — Gas Rate
Schedule Sup Phen te Accepted for
Filing, CI-72- issued 7/22/74 .
El Paso Natural Gas Company Pe.
tition for Issuance of a Declaratory
Order, CP75-209, dated 1/17/75, re-
e „
Notice of Petition for a Declaratory
Order, issued 1/30/75 ............
Ei Paso Corrections to Petition, dated
1/30/75, received 2/3/75 ..........
Southern California Gas Company
Petition for Permission to Intervene,
dated 2/5/75, received 2/6/75 ......
Mobil Oil Corp. Petition for Leave to
— dated 2/7/75, received 27
Southwest Gas Corp. Petition for
Leave to Intervene, dated 2/12/75,
received 2/ 14%
State of California Notice of Inter-
2 dated 2/13/75, received 2/
0 „L
Exxon Corporation Petition for
Lea ve to Intervene, dated 2/14/75,
—— . ——
Texaco Inc. Petition for Leave to In-
— dated 2/13/75, received 2/187
Record
Pagination
. 599-612
70-71
72-75
iii
Appendix
Pagination
102-116
117-191
192-195
196-197
198-201
202-205
206-210
211-212
213-216
217-219
iv Table of Contents—Continued
Item
El Paso Supplement to Petition filed
* dated 2/21/75, received 2/
% detesesectheekass
Mitchell Energy Corp. Petition for
Leave to Intervene, dated 2/20/75,
received 2/25/75 .......ccceceeess
Pacific Gas and Electric Co. Petition
to Intervene, dated 2/26/75, received
„70 ·˙ -
Exxon Corp. Answer to Petition for
Issuance of Declaratory Order and
Request for Briefing Schedule, dated
and received 3/3/75 ...............
Mineral Interest Owners Petition to
Intervene and Answer to Petition for
Declaratory Order, dated and re-
RR a
— dated and received 3/5
Gulf Oil Corp. Petition to Intervene
ee, dated 2/27/75, received
El Paso Answer to Petition filed last
oor, dated 3/12/75, received 3/13/
Mineral Interest Owners Answer to
Petition of Mitchell Energy Corp.
for Leave to Intervene, dated and re-
F eee
Texaco Inc. Petition for Issuance of
a Declaratory Order, CI75-594, dated
4/7/15, received 4/8/75 ...........
Notice of Petition for Declaratory
Order, issued 4/22/75 .............
Record Appendix
Pagination Pagination
80-82 220-224
83-87 225-228
88-92 229-232
93-101 233-241
102-125 242-265
126-127 266-268
128-134 269-276
135-140 277-282
141-146 283-288
147-159 289-298
160-161 298-300
Table of Contents—Continued v
Record Appendix
Item Pagination Pagination
El Paso Motion for Briefing Schedule
and Answer to Petition of Texaco for
Issuance of a Declaratory Order,
dated 4/23/75, received 4/25/75 .... 162-169 301-309
Texaco Inc. Motion to Consolidate
eedi dated 4 5, received
1/3075 — debe soos Wes 170-172 310-311
El Paso Petition 2 — —
vene and Answer to filing last above,
dated 4/23/75, received 5/6/75 ..... 173-187 312-327
Mineral 8 bg . 72 —
Motion for Briefing ule, da
and received 5/7/75 ..........0006: 188-192 328-333
Mineral Interest Owners Petition to
Intervene, dated and received 5/12/75 193-198 334-338
Gulf Oil Corp. —— to 1 —
and Response to Petition of Texaco,
dated 5/9/75, received 5/12/75 ..... 199-210 339-349
Northwest Pipeline Petition to Inter-
vene, dated —— 5/14/75 .... 211-213 350-352
Phillips 1 — Co. r* — N
tervene and nse,
and received 5/27/75 5. 214-220 353-357
Order Consolidating Proceedings,
Granting Petitions to Intervene, and
Prescribing Schedule for Filing of
Briefs, issued 6/3/5555. 221-225 358-364
Votume II
Initial Briefs Filed:
Commission Staff! 238-253 365-382
State of California .............+++. 254-263 383-394
El Paso Natural Gas Co. .......... 264-292 395-434
r !½ —ͤö:T.—· p —————eoVe-—-eae_as-s
vi Table of Contents—Continued
then pogimtion Peguation
Exxon Corporation ............... 293-305 435-451
Gulf Oil Corporation 306-315 452-465
Mineral Interest Owners .......... 316-340 466-492
Mitchell Energy Corp. ............ 341-345 493-498
rr 346-353 499-507
Reply Briefs Filed:
r 354-360 508-514
El Paso Natural Gas Co. .......... 361-376 515-536
Exxon Corporation 377-383 537-545
Mineral Interest Owners 384-404 546-567
Phillips Petroleum Corp. .......... 405-407 568-570
r 408-414 571-577
Southwest Gas Corp. Answer in Su
port of El Paso Brief, dated 6/23/75,
received 6/257 415-418 578-579
Exxon Corporation Motion for Inclu-
sion of Protective Order, dated and
SE WEEP nddeceedoceccccens 419-423 580-585
Mineral Interest Owners Response to
last above, dated and received
. 424-426 586-588
Gulf telegram supporti Exxon’s
motion, dated and recei 7/7715 .. 427 589
El Paso Answer to Exxon’s motion,
dated and received 7/10/75 ........ 428-433 590-594
Exxon Response to El Paso last
above, dated and received 7/11/75 .. 434-436 595-597
Table of Contents—Continued vii
Record Appendix
Item Pagination Pagination
Opinion No. 737, Declaratory Opinion
and Order on Termination of Long-
Term Leases, issued 7/11/75 ....... 437-447 598-611
Texaco Ine. Applicaton for Rehear-
ing, dated 8/1/75, received 8/4/75 .. 448-452 612-615
Mineral Interest Owners Application
for Rehearing, dated and received 8/
ebenes 453-501 616-674
Exxon Corporation Application for
Rehearing, dated and received 8/8/75 502-510 675-685
El Paso Application for Rehearing,
dated and received 8/11/75 ........ 511-516 686-691
Gulf Oil Corporation Application for
Rehearing, dated 8/8/75, received 8/
eee 517-523 692-700
Mobil Oil Corp. Application for Re-
hearing, dated 8/11/75, received 8/
Dantes sse ee eee 524-530 701-707
Opinion No. 737 -A, Opinion and Or-
der Denying Rehearing But Adopting
Per Curiam, issued 9/3/75 ........ 531-538 708-718
Mineral Interest Owners yo.
for Rehearing of Limited Aspects of
Opinion No. 737-A, dated 10/2/75, re-
— ß 613-623 719-729
Texaco Inc. Response to Application
filed last above, received 10/20/75 ... 624-629 730-734
Order Granting Rehearing for Pur-
ps of Further Consideration on
imited Issues Relating to Filing Re-
quirements, issued 10/31/75 ....... 630-631 735-737
viii Table of Contents Continued
Record Appendix
Item Pagination Pagination
9 1 No. 737 -B, Opinion and —
r Gran . on Limi
Issue Relating Filing Require-
ments, issued 4 12/18/75 . 632-635 738-743
Reference to the Opinion of the Court
of A for Fifth Circuit.
Da , & ae 744
Sere i detent
urt o peals for i ir-
cuit. Dated ten ft 745
Order Gran Petitions for Writs
of Certiorari. Dated June 27, 1977 .. 746
——
1238]
BEFORE THE FEDERAL POWER
COM MISSION
Docket No. CP75-209
Et Paso NATURAL Gas CoMPANY
Docket No. C1I75-594
Texaco Inc.
Brief of Commission Staff
Epwarp Ross Mark
Georce H. WiIIaus, JR.
Commission Staff Counsel
Washington, D. C.
June 20, 1975
239
[239] TABLE OF CONTENTS
I. IN TRODUCTION
II. STATEMENT OF THE CASE
A. Factual Context
B. Procedure
III. Srarr’s Posirion
TV. ARGUMENT
A. Upon Expiration Of The Fized-Term Gas
Leases Reversioners Are Subject To The
Constraints Of Section 7(b) Of The Natural
Gas Act.
B. Lessees Are Not Required To Obtain Com-
mission Permission And Approval In Order
To Cease Sales After Expiration Of A Lease.
C. Plant Operators Are Not Required To Obtain
Commission Permission And Approval In
Order To Reduce Sales To El Paso.
V. ConcLusIon
[240] BEFORE THE FEDERAL POWER
COM MISSION
Docket No. CP75-209
EL. Paso NATURAL Gas CoMPANY
Docket No. C1I75-594
Texaco Inc.
Brief of Commission Staff
I. INTRODUCTION
This case involves a legal question of first impres-
sion before the Commission. Upon expiration of a
fixed-term gas lease are the reversionary interest
holders under the lease subject to the constraints of
Section 7(b) of the National Gas Act? Seeking reso-
lution of this and related questions two separate peti-
tions for declaratory order have been filed with the
Commission.
II. SrATEMENT OF THE CASE
A. Factual Context
On January 20, 1975, El Paso Natural Gas Com-
pany (El Paso) filed in Docket No. CP75-209 a peti-
tion for a declaratory order resolving certain ques-
tions in connection with the imminent expiration of a
50-year fixed term lease currently held by Gulf Oil
Corporation and others (Gulf, et al.).“ Basically, the
facts as presented by El Paso are as follows.
On July 14, 1925, Gulf Production Company, the
corporate predecessor of Gulf Oil Corporation
(Gulf), as lessee, executed with W. N. Waddell, et al.,
as lessors, a 50-year [241] fixed term oil and gas lease.
By the terms of said lease Gulf obtained the exclusive
right to produce and sell oil and gas from 45,771
acres of land in Crane County, Texas. When Gulf, et
al.’s, leasehold expires on July 14, 1975, the mineral
rights, including the rights to natural gas production
shall revert to the reversionary mineral interest own-
ers, (hereinafter referred to as Southland, et al.).
Presently, Gulf, et al., make percentage-type sale to
Warren Petroleum Company, a Division of Gulf Oil
Corporation (Warren), of certain quantities of cas-
inghead gas produced from said Crane County acre-
age. Pursuant to two gas purchase contracts, dated
January 26, 1951, and March 1, 1972, Warren sells
to El Paso approximately 60,000 Mef per day of sur-
plus residue gas at the outlet of the Waddell Gasoline
Plant, which gas El Paso transports through its jur-
isdictional facilties for subsequent resale in interstate
Besides Gulf Oil Corporation (Gulf) lessees include B. W. P.,
Ine.; Highland Production Company, Inc.; W. Nelson Rees; G.
Dillard Anderson, Jr.; V. L. DeBolt and John L. Harlan.
The reversionary mineral interest owners include Exxon Cor-
poration, whose interest represents approximately 14% of the
term lease gas, and Southland Royalty Company (Southland),
whose own interests and those of the estate of Warren Wright and
the Penn interests (collectively Mineral Interest Owners) repre-
sent approximately 81% of the term lease gas. The remaining 5%
interest is divided among more than 100 separate interest holders.
368
commerce. Approximately 25,000 Mef per day of such
residue gas sold to El Paso is attributable to produe-
tion from wells on land leased by Gulf, et al.
El Paso has learned that Southland, et al, are so-
lieiting proposals from intrastate gas transmission
companies for the purchase of Southland, et al.’s,
shares of natural gas from the Crane County acreage
produced after July 14, 1975.“ [242] Anticipating
an attempt to divert the leasehold gas from inter-
state to intrastate markets with concomitant redue—
tions in supply to El Paso’s system, El Paso is peti-
tioning the Commission for a declaratory order re-
solving the following questions:
(1) May Southland, et al., divert natural gas
from interstate commerce to intrastate commerce
without prior permission and approval of the Com-
mission ?
(2) Must Gulf, et al., obtain abandonment per-
mission and approval in order to cease sales to
Warren and to effectuate a transfer to Southland,
et al.?
(3) May Warren reduce its sales to El Paso
to the extent such sales are attributable to produc-
tion from the subject leasehold property without
prior Commission permission and approval?
— has contracted to sell its share, approximately 47%,
question to Intratex Gas Corporation, a subsidiary
atural Gas Corporation. The contract, extending for
years after July 14, 1975, calls for a base price of
.90 per million Btu plus fixed increases of 2.5 cents per million
Btu on January 1, 1976, and each 6 months thereafter.
On April 8, 1975, Texaco Ine. (Texaco) filed in
Docket No. CI75-594 a petition for a declaratory order
to resolve a question similar to a question propounded
by El Paso in Docket No. CP75-209 (question 1, supra)
but stated differently. Texaco asks whether a lessee
by making an interstate gas sale can commit more than
its real property interest (1.e., its rights under its
lease) thereby both encumbering forever the real estate
and imposing upon the nonparticipating mineral fee
owner the obligations of Section 7 of the Natural Gas
Act.
The facts underlying Texaco’s request for declara-
tory relief are notably similar to the facts alleged in
Docket No. CP75-209. On August 7, 1925, Gulf, as
lessee, and Goldsmith, et al., as lessors, executed a 50-
year fixed term oil and gas lease by the terms of which
Gulf obtained exclusive mineral rights to some 19,840
acres of land in Ector County, Texas, until August 7,
1975, whereupon such mineral rights revert to the re-
versionary mineral interest owners [243] (hereinafter
referred to as Texaco, et al.).* Gulf sells gas from its
Ector County leasehold to Phillips Petroleum Com-
pany under a percentage-type casinghead gas sales
contract. Phillips then sells the residue gas from the
tailgate of its Goldsmith Plan to El Paso under Phil-
lips FPC Gas Rate Schedule Nos. 7, 32, 33, 483, and
497. Approximately 18,000 Mef per day of the residue
gas sold to El Paso by Phillips is attributable to pro-
duction from the Ector County lease.
* By deed executed May 4, 1929, Texaco acquired a . interest
in the reversionary mineral rights to the Ector County property
from Leon Goodman, et al. Presumably, Leon Goodman, et al.,
retain the remaining A reversionary interest.
„
B. Procedure
By order issued June 3, 1975, the Commission con-
solidated the two proceedings and invited the parties
to submit briefs on the legal issues presented. Noting
that the facts in the two proceedings were clear and
uncontested, the Commission determined that the legal
questions presented would be resolved without evi-
dentiary hearings on the basis of the filings and briefs
submitted in this consolidated proceeding.
III. Starr Posrriox
In both proceedings El Paso’s interest is in main-
taining its present supply of gas. At stake for El Paso
are approximately 15.7 million Mef of gas annually
or over 1 percent of its total agpual firm requirements.
On the other side, Reve. ..ffers (Southland, et al., and
Texaco, et al.) collectively stand to realize up to $21
million more annually by selling gas from the subject
leaseholds to the intrastate market.“ Thus the sides are
clearly drawn; and to both [244] sides the issue of
overriding concern, no matter how it is phrased, is
whether Reversioners, who according to Texas law
will control the gas after the expiration of the subject
leases,” must seek Commission permission and ap-
proval under Section 7(b) of the Natural Gas Act
before diverting the gas. This is the nature of the
*This calculation assumes that all Reversioners execute con-
tracts upon terms like those in the Southland-Intratex contract
(see note 3, supra) and is based upon the approximate current na-
tional rate for interstate sales of 51 cents per Mef of gas.
Gulf Oi Corporation v. Southland Royalty Company, 496 S.W.
2d 547 (1973).
371
single question presented in Docket No. C175-594 and
of question no. 1 presented in Docket No. CP75-209.
It is the position of the Commission staff that the
gas from the subject acreage, whether produced be-
fore or after expiration of the leases, is dedicated to
the interstate market and that by virtue of their
control over that gas Reversioners are subject to the
constraints of Section 7(b). As will be shown, only
this position is faithful to both prior precedent and
the public interest.
IV. ARGUMENT
A. Upon expiration of the fixed-term gas leases Re-
versioners are subject to the constraints of Section
7(b)
Not surprisingly, the various pleadings submitted
by those representing Reversioners’ interests contend
that Reversioners need not obtain prior Commission
abandonment authorization in order to sell the gas
to the intrastate market. Their contention is based
upon the fiction that there is a distinction for pur-
poses of dedication between gas from the same reserve
produced before and after the expiration of a lease.
Th claim is that only the gas produced during the
term of the 50-year lease is within the authority of
Lessees to sell and is relied upon by El Paso; there-
fore, only the gas produced prior to the expiration of
the leases is dedicated to interstate commerce. Gas
produced after expiration of the leases is, in Rever-
sioners’ view, undedicated, and so they argue that the
Commission has no jurisdiction to dictate to whom the
gas must be sold.
[245] To the contrary, the gas which will revert to
the control of Reversioners after the leases expire is
dedicated to the interstate market. By virtue of their
succession to control over that gas Reversioners, as
natural gas companies, become subject to the require-
ments of Section 7(b).
1. The gas produced from the subject acreage after
lease expiration is dedicated to interstate commerce.
It is well established that there can be no with-
drawal of gas once dedicated to the interstate market
from continued interstate movement without permis-
sion and approval of the Commission under Section
7 (b). Since the gas produced by Lessees is sold for
resale to El Paso which transports the gas in inter-
state commerce, clearly such gas is dedicated to in-
terstate commerce. Gas from the entire acreage of
both leaseholds is dedicated since Lessees are re-
stricted neither as to the amount of gas which may be
sold from the subject acreage nor as to the area from
which gas may be produced on the subject acreage.
Reversioners would, of course, have the Commission
believe that Lessees cannot dedicate to the interstate
market volumes attributable to the mineral estate of
Reversioners. There is no question that Lessees had
authority to sell all the gas from the reserves within
the fixed term of the lease." The mere fact that they
have not yet done so does not prevent the gas in the
reserve from being dedicated to interstate commerce.
* Atlantic Refining Co. v. P.S.C.N.Y., 360 U.S. 378, 389 (1959);
Sunray Mid-Continent Oil Co. v. FPPC, 364 U.S. 137, 156 (1960).
* Reversioners have a fixed royalty interest of 4% part of the
value of the casinghead gas (calculated at the rate of 4 cents per
Mef) with no right to take gas in kind.
373
An artificial cut-off in time in the dedication of
gas reserves to the interstate market in deference to
the terms of a lease is without foundation. The mere
expiration of a lease does not somehow interrupt the
dedication of gas. Case law consistently refers to
dedication of reserves as [246] uninterruptible. It has
previously been held that neither expiration of con-
tracts’ nor producer successions“ can impede the
continued interstate flow of gas once dedicated. Refer-
ring to an assignment of interest under a lease, the
court in Hunt v. FPC™ said,
Like the ancient covenant running with the land
the duty to continue to deliver and sell flows with
the gas from the moment of the first delivery
down to the exhaustion of the reserve, or until
the Commission on appropriate terms, permits
cessation of service under Section 7(b). [p. 342]
For the same reason that contract terms and as-
signments do not affect dedication of gas reserves,
neither should expiration of a lease. Once reserves
are dedicated to the interstate market they become a
part of the Commission’s regulatory scheme, safe-
guarded by Section 7(b), to ensure continuity and
stability of service. To allow contract terms,” assign-
® Amoco Production Company, et al., 46 FPC 1390 (1971).
10 Opinion No, 467, Cumberland Natural Gas Company, 34 FPC
132 (1965).
1 306 F. 2d 334, (1962), reversed on other matters 376 U.S. 515
(1965).
2 California v. Lo-Vaca Gathering Company, 379 U.S. 366, 369-
370 (1965).
374
— 22 2
247
ments“ or the instant fixed-term leases to control
the flow of gas reserves would undermine that regu-
latory scheme. Limiting reserve dedication to the
term of a lease would allow lessors to usurp the fune-
tion of the Commission and frustrate the purposes
of Section 7(b) by entering into short-term leases,
leases terminable at will, and bilateral agreements
with lessee-producers to agree to [247] minimize
production dedicated to the interstate market until
the lease expires at which time they may avail them-
selves of higher intrastate prices.“
It hardly needs to be said that allowing producers
to flaunt Commission regulation through the caleu-
lated use of leasing arrangements would disserve the
public interest. As long as the present dichotomy be-
tween interstate and intrastate gas prices continues
‘‘limited-term’”’ leasing arrangements would flourish
with the necessary concomitant that the supply of
gas to the interstate market would suffer. In the
instant cireumstances there is a potential diversion
from the interstate market (and from El Paso which
from Sepember 1974 to August 1975 curtailed ap-
proximately 12 percent of its firm requirements *)
Opinion No. 724, Blair-Vreeland, issued March 18, 1975 (53
FPC — & Docket No. CI74-331, mimeo p. 12. Opinion and
rong Denying Rehearing and Motion to Stay issued May 14,
“In a different context, attempts such as this to pit the intra-
state market against the interstate market in an effort to maxi-
mize gas prices have been rejected by the Commission. See, ¢.y.,
po A | pew ong 20, 1974, Wayne J. Spears, in Docket No.
218; and order issued February 27, 1975, James M. F t-
son, Sr., in Docket No. CI75-392. es
EI Paso’s Report of Gas Supply and . ’
(FPC Form 16). pply and Requirements, 1974-75
375
of 15.7 million Mef of gas annually. On the other
hand, a Commission determination that reversioners
under expired gas leases are subject to Section 7(b)
would impose a minimal burden. Few would be ad-
versely affected by such a determination because, as
Reversioners have pointed out, gas leases that are
limited in duration are now extremely rare.“ Fur-
thrmore, Reversioners must have understood that
their interest under the leases (other than royalties)
was contingent upon the extent of reserve depletion
during the 50-year term and that there may be no gas
remaining at term’s end (an event probably con-
sidered likley in the minds of the original parties to
the lease).
[248] In support of the contention that the gas
produced after the expiration of the subject leases
will be undedicated, it is stressed that because El
Paso was on notice of the limited term of the leases
there was no reliance upon the receipt of gas after
the expiration of said leases. The lack of reliance
by El Paso upon gas produced after the expiration
of the leases cannot be said to compel abrogation
of Section 7(b) control over the gas. As shown in
Opinion 467 (Cumberland), which was reaffirmed re-
cently in Opinion No. 724 (Blair-Vreeland), a pro-
ducer's interest in acreage can be effectively dedi-
cated irrespective of the fact that at its time of dedi-
cation the gas reserves in such acreage may have been
unproven. .. . (at p. 137). Although the interstate
buyers in Blair-Vreeland and Cumberland did not
„ See Petition to Intervene and Answer of Mineral Interest
Owners to Petition for Declaratory Order in Docket No. CP75-209
at page 5, footnote 12 and accompanying text.
376
ake
contract for gas in reliance upon undiscovered re-
serves, the Commission nevertheless held that the un-
discovered reserves were dedicated to the interstate
buyers.
It has further been argued that the decision in E!
Paso v. Bass, 48 FPC 1269 (1972), supports the con-
clusion that Reversioners will be free to sell the sub-
ject gas to whomever they choose without abandon-
ment authorization from the Commission. Perry Bass
leased gas interests to Shell Oil Company (Shell)
but retained an option to convert his royalty interest
to a working interest upon “‘payout of the well.“
Upon electing to convert his royalty interest to a
working interest, Bass sought to sell his gas to Nat-
ural Gas Pipeline Company of America (Natural)
rather than El Paso, to whom Shell had been selling
the leasehold gas. The Commission decided that Bass’
prior royalty did not make him a seller in interstate
commerce nor did his conversion from a royalty to a
working interest; therefore, Bass was free to sell
his share of the gas to Natural without prior aban-
donment authority.
Bass never reached the question of dedication of
reserves to the interstate market because there was
no attempt to divert the gas to the intrastate market.
Beeause in Bass the Commission was not dealing with
the public interest in maintaining the flow of inter-
state gas, about which the Commission is paramountly
concerned, Bass can hardly be said to [249] be con-
trolling over the instant questions. Furthermore, the
decision in Bass was influenced in large measure by
the Commission’s reluctance to discourage farmout
arrangements because such arrangements tend to pro-
377
mote interstate market gas dedication. The instant
ease, of course, does not deal with farmouts and to
that extent Bass is further distinguishable.
Bass’ distinguishability notwithstanding, the hold-
ing of Bass is readily reconciled with the decision
staff urges herein. From the outset of Shell’s sales
of gas to El Paso Shell lacked the authority to sell
the proportionate share of the reserves attributable
to Bass’ potential working interest, and, therefore,
Bass’ working interest gas was never dedicated to
El Paso. Since well payout is not an uncommon
occurrence, it was likely not within the contemplation
of Bass and Shell that Bass’ proportionate working
interest share of gas would be dedicated by Shell. In
the instant circumstances, however, Lessees had the
authority from the outset to sell all the gas from the
subject reserves, and, therefore, all the gas was dedi-
cated to El Paso. When the 50-year fixed-term leases
in question were executed it was likely not within the
contemplation of the parties to the leases that any
commercial amounts of gas would remain after lease
expiration; hence, there was no restriction upon dedi-
cation by Lessees.
No distinction can properly be made for purposes
of dedication of reserves to the interstate market,
between gas from the same reserves produced before
and after the expiration of a lease. The gas once
dedicated to the interstate market by Lessees remains
dedicated subject to the Commission’s control and
the provisions of Section 7(b).
2. By virtue of their succession to control over gas
dedicated to the interstate market Reversioners, as
natural gas companies, become subject to the require-
ments of Section 7(b).
[250] Commission permission and approval prior
to an abandonment is required under Section 7(b) of
the Natural Gas Act only of natural gas companies.
Are Reversioners natural gas companies subject to the
requirements of Section 7(b) ?
Following Mobil Oil Corporation v. FPC, 463 F.2d
256 (1971), Bass held that a royalty interest does not
necessarily subject the interest holder to Commission
jurisdiction because royalty provisions are not sales.
Furthermore, the Commission ruled that Bass did not
become jurisdictional when he converted his royalty in-
terest to a working interest because he was not thereby
automatically bound by the Commission’s certification
of the Shell-E] Paso sale. By similar reasoning, since
a reversionary interest is not a sale the interest holders
are not by virtue of that interest alone subject to the
jurisdiction of the Commission.
However, when Reversioners take over the interest
in the subject reserves on July 15, 1975, and August
8, 1975, they become bound by prior Commission cer-
tification and therefore step into the shoes of their
predecessors as natural gas companies. Bass was not
bound by prior certification because the gas he sought
to sell was never dedicated. On the other hand, be-
cause the reserves that Revisioners control have been
dedicated to interstate commerce Reversioners must
379
step into the shoes of Lessees in order that there might
be consistency of treatment of such reserves.”
A different conclusion would yield the anomalous
result that there is gas dedicated to the interstate mar-
ket, but the party controlling the gas is not a natural
gas company subject to the proscriptions of Section
7(b) of the Natural Gas Act. Therefore, on July 15,
1975, and August 8, 1975, Reversioners will assume
control over reserves dedicated to the interstate mar-
ket thereby assuming the status of a natural gas com-
pany subject to the requirements of Section 7(b) with
respect to the gas reserves.
[251] B. Lessees Need Not Obtain Commission
Permission And Approval In Order To Cease
Sales After Expiration Of The Leases.
Assuming Reversioners are required to file an ap-
plication pursuant to Section 7(b) a like filing by
Lessees is not required, although a technical construc-
tion of the applicable Regulations might dictate other-
wise. Section 2.64 of the General Policy and Interpre-
tations (18 CFR 2.64) allows that a producer (Lessees)
need not file for abandonment permission and ap-
proval if a certificate is required of its successor (Re-
versioners). But if Reversioners continue the percent-
age-type sales to Warren/Phillips (Plant Operators),
Section 2.64 would appear to be inoperative because
under the provisions of Section 154.91(e) of the Reg-
ulations (18 CFR 154.91(e)) no certificate would be
issued to Reversioners as producers selling gas under
a percentage-type contract. If Section 2.64 is deemed
„See Opinion No. 408, Graridge Corporation (Operator), et al.,
30 FPC 1165, 1162 (1963).
380
—ñ„ —— Se
inoperative then an application pursuant to Section
7(b) would be required of Lessees. Notwithstanding
this technical coustruction, an abondonment applica-
tion by Lessees would be both superfluous and incon-
sistent with the purpose of Section 2.64 to avoid un-
necessary filings. Accordingly, Lessees should not be
required to obtain permission and approval in order
to cease sales upon the expiration of the leases since
the sales may not be discontinued solely as a result of
the expiration of the leases.
©. Plant Operators Are Not Required To Obtain Com-
mission Permission And Approval In Order To
Reduce Sales To El Paso
Staff notes the contention in some of the pleadings
that, no matter the disposition of other questions in
this proceeding, Plant Operators are not required to
have Section 7(b) permission and approval prior to
curtailing deliveries to E] Paso. Plant Operators are
obligated to El Paso, pursuant to their contracts, to
deliver the full volume of surplus residue gas available.
The claim is that under such a contract Plant Opera-
tors are obligated only to their best effort and that
no abandonment authorization is required if [252]
deliveries need be curtailed due to no fault of their
own. Whether or not that contention is correct, Plant
Operators need not file an application pursuant to
Section 7(b). Under Section 154.91(e) Plant Opera-
tors need only file an annual report listing the pro-
ducer (Lessees) as no longer supplying their plant.
V. ConcLusion
Applicable law and the public interest in future dedi-
cation of gas to the interstate market compel the con-
clusion that Reversioners must obtain Commission per-
mission and approval pursuant to Section 7(b) prior
to diverting their interests in the subject gas from its
interstate commitment. This conclusion and the ap-
plicable Commission Regulations lead to the further
results that Lessees and Plant Operators are not sub-
ject to Section 7(b) upon expiration of the leases on
July 14, and August 7, 1975. The Commission should
issue a declaratory order in this proceeding consistent
with these conclusions.
Respectfully submitted,
/s/ Evwarp Ross Mark
Edward Ross Mark
/s/ Grorce H. WIIIAuS, JR.
George H. Williams, Jr.
Commission Staff Counsel
Washington, D. C.
June 20, 1975
[253] (CERTIFICATE OF SERVICE OMITTED
IN PRINTING)
-
+ = — ́— a mg
— ! “ ̃ wo i 5
[254] UNITED STATES OF AMERICA
BEFORE THE
FEDERAL POWER COMMISSION
Docket No. CP75-209
EL. Paso NATURAL Gas Company
Docket No. C1I75-594
Texaco Ine.
(Recetvep June 23, 1975)
Brief of the People of the State of California and the Public
Utilities Commission of the State of California
RicwaArp D. GRAvVeELLE
J. Cavin Simpson
Ranpoteu W. Drusen
5066 State Building
San Francisco, CA 94102
Attorneys for the People
of the State of California
and the Publie Utilities
Commission of the State
of California
June 19, 1975
383
[255] UNITED STATES OF AMERICA
BEFORE THE —
FEDERAL POWER COMMISSION
Docket No. CP75-209
Ex. Paso NATURAL Gas CoMPANY
Docket No. C1I75-594
Texaco Ine.
Brief of the People of the State of California and the Public
Utilities Commission of the State of California
Pursuant to the Federal Power Commission (Com-
mission) Order Consolidating Proceedings, Granting
Petitions to Intervene, and Prescribing Schedule for
Filing of Briefs, issued on June 3, 1975 in the above
entitled proceeding, the People of the State of Cali-
fornia and the Publie Utilities Commission of the
State of California (California), intervenors, respect-
fully submit their brief in this proceeding.
CaLrrornia’s INTEREST IN THIS PROCEEDING
California has intervened in this proceeding before
the Commission in order to represent the interest of
its more than 20 million residents who directly and
indirectly consume natural gas. The California Publie
Utilities Commission is the regulatory agency charged
by Article XII of the Constitution of the State of
California with the responsibility inter alia, of regu-
lating natural gas sold by distributors within Cali-
fornia. The state depends on natural gas as the basic
384
:
:
:
:
source of residential energy and, to a lesser degree,
of industrial energy. Approximately 80 percent of
the supply of natural gas required to meet the needs
of the California market must be imported from
sources outside the state. El Paso Natural Gas Com-
pany (El Paso) is a major supplier of natural gas
for use within California. During the last several
years, California distributors have been faced with
declining deliveries from El Paso. If El Paso loses
the sources of supply at issue in the subject proceed-
ing, there will be a direct effect on the volume of gas
available to California distributors.
[256] SraTEMENT oF Facts
This proceeding was instituted on January 20, 1975,
when El Paso filed in Docket No. (P75-209 a peti-
tion for a declaratory order resolving questions in
connection with the expiration of a 50-year fixed term
lease currently held by Gulf Oil Corporation (Gulf)
which will expire on July 14, 1975. On July 14, 1925,
Gulf Production Company, predecessor of Gulf, ob-
tained a 50-year fixed term oil and gas lease from one
W. N. Waddell. When Gulf’s leasehold expires on
July 14. 1975, the mineral rights, including the rights
to natural gas production shall revert to the rever-
sionary mineral interest owners. The reversionary
mineral interest owners plan to sell the natural gas
produced under the lease to intrastate pipeline com-
panies. Currently, Gulf sells the natural gas produced
under the lease through is subsidiary, Warren Pe-
troleum Company, to El Paso for interstate use.
Based on the above facts, El Paso posed three
questions to the Commission:
1. May Southland, et a/. (the reversionary interest
holders) divert natural gas from interstate commerce
to intrastate commerce without prior permission and
approval of the Commission?
2. Must Gulf, et al. obtain abandonment permission
and approval in order to cease sales to Warren Pe-
troleum Company and to effectuate a transfer to
Southland, et al.!
3. May Warren Petroleum Company reduce its
sales to El Paso to the extent such sales are attribu-
table to production from the subject leasehold prop-
erty without prior Commission permission ?
Subsequent to the submission of these questions te
the Commission, Gulf advised the Commission that
Warren lctrolewm Company is owned by Gulf so
that questions 2 and 3 are synonymous.
On April 8, 1975, Texaco Inc. (Texaco) filed in
Docket No. CI75-594 a petition for a declaratory
order to resolve issues similar to those raised by El
Paso in Docket No. 75-209. Texaco alleged that it is
the reversionary mineral interest owner of a 50-year
lease also held by Gulf. Texaco stated that the proper
question is whether a lessee, by making an interstate
gas sale, can commit more than its real property in-
terest thereby encumbering forever the real estate
and imposing upon the nonparticipating mineral fee
owner the obligations of Section 7 of the Natural Gas
Act. The Commission consolidated the two proceed-
ings in its order of June 3, 1975.
[257] CALIFORNIA’s PosITION
California takes the position that the volume of
gas currently flowing in interstate commerce that is
attributable to wellhead gas produced under both
50-year leases with El Paso cannot be diverted from
interstate commerce without Commission approval.
There are basically two issues to be resolved. May
the lessor reversionary mineral interest owner divert
natural gas from interstate commerce to intrastate
commerce without Commission approval and may the
lessee seller of natural gas in interstate commerce to
El Paso reduce the amount of natural gas it supplies
to El Paso without Commission approval? California
believes that these questions must be answered in the
negative. It is well established that once natural gas
is dedicated to interstate commerce it cannot be re-
moved therefrom without abandonment authorization
pursuant to Section 7(b) of the Natural Gas Act.
The contractual arrangements involved in the sale of
gas cannot override the provisions of the Natural
Gas Act. In both factual situations being considered
in this proceeding, the gas involved is, at present,
physically moving in interstate commerce directly
from the wellhead. Therefore, under the Natural Gas
Act, Commission approval must be obtained before
gas may be diverted from interstate use. Additionally,
it is California’s position that even if certain con-
tractual relationships constitute exceptions to the
authority of the Natural Gas Act, the parties to this
proceeding do no come within those exceptions.
ARGUMENT
1
THe ReversioNARY MINERAL INTEREST OWNERS CAN-
Nor Divert NATURAL Gas From INTERSTATE
CoMMERCE TO INTRASTATE CoMMERCE WITHOUT
Prior PERMISSION OF THE COMMISSION.
Exxon Corporation (Exxon) has argued that this
issue was resolved by the Commission in E/ Paso
Natural Gas Company v. Perry R. Bass, 48 F. P. C.
1269 (1972). In that case, the Commission ruled that
the owner of a royalty interest in a gas well who
elected to take a one-half working interest in the well
and sell the gas to another pipeline company need
not obtain abandonment authority from the Commis-
sion. Bass was the royalty interest holder who chose
to convert his royalty interest into a one-half share
working interest. At the time Bass made the conver-
sion, gas was being produced from the well by Shell
Oil Company and Shell was selling the gas to El Paso.
California asserts that there are critical factual dif-
ferences that distinguish the Bass case from the in-
stant case. The agreement under which Bass owned
a royalty interest contained provisions which express-
ly prohibited Shell from disposing of Bass’ share of
the gas [258] production. Further, the Commission
found that as a matter of public policy the type of
agreement involved in the Bass case, called a ‘‘farm-
out’’ agreement, should be exempt from the require-
ments of abandonment authorization because such
agreements encouraged oil and gas exploration.
In the instant case, the agreements between the
parties do not specifically prohibit the gas producer
from encumbering a percentage of gas belonging to
the reversionary interest owner. In this ease, the en-
tire gas production is currently in interstate com-
meree and it is this total amount that the reversionary
interest holders propose to remove from interstate
commerce.
The public policy in the Bass case is not applicable
in the present situation of gas shortages in the United
States today. There is sufficient incentive to produce
new gas wells without providing special exemptions
for particular contractual agreements. Rather, public
policy today dictates that the Commission strictly
limit contractual exemptions from the Natural Gas
Act.
The emphasis in the instant proceeding should not,
however, be placed on the contractual arrangements
as Exxon has argued. Rather, the Commission should
rely on the fact that the gas in issue is currently
dedicated to interstate commerce by its physieal move-
ment in EI Paso’s pipeline. The United States Su-
preme Court in the cases of Sunray Mid-Continent
Oil Company v. Federal Power Commission, 364 U.S.
137, 4 L.Ed. 2d 1623; and California v. Lo Vaca
Gathering Co., 379 U.S. 366, 13 L.Ed. 357, held that
the movement of natural gas in interstate commerce,
not the contractual arrangements between the parties,
(lictated the application of the Natural Gas Act.
In the Sunray Mid-Continent Oil Company ease,
the Court addressing the status of the contract in
dispute stated:
“Tt is apparent that the Commission’s order in
no way violates the integrity of petitioner’s con-
tract with United. During its term, both parties
389
are bound by it to the same extent as any member
of this regulated industry. When it expires, peti-
tioner, to be sure, will be under an obligation to
continue to deliver gas to United on the latter’s
request unless it can justify an abandonment be-
fore the Commission.“
[259] The Court went on to state:
An initial application of an independent pro-
ducer, to make movements of natural gas in in-
terstate commerce, leads to a certificate of public
convenience and necessity under which the Com-
mission controls the basis on which gas may be
initially dedicated to interstate use. Moreover,
once so dedieated there can be no withdrawal of
that supply from continued interstate movement
without Commission approval.’’*
The Sunray Mid-Continent Oil Company case clear-
ly asserts the authority of the Natural Gas Act over
gas flowing in interstate commerce regardless of the
contents of the contractual agreements between the
parties.
While the facts in the Lo Vaca Gathering Company
case are somewhat different from those in the instant
proceeding, the case is relevant in that it reiterated
the rule that it is the movement of gas in interstate
commerce that dictates the coverage of the Natural
Gas Act and the authority of the Federal Power Com-
* Sunray Mid-Continent Oil Company v. Federal Power Com-
mission 4 L. Ed. 2d 1623 at 1637
* Sunray Mid-Continent Oil Company, supra at 1637.
390
mission, not the contractual arrangements between
the parties.
II
Tur Sevier or NATURAL Gas 1x Lyverstate Com-
MERCERCE TO EL Paso May Nor Repuck THE
Amount or Natura Gas It Suppiies To EL Paso
Wirnoor CoMMISSION APPROVAL
California argues that the reasoning stated in
Section I above also applies to this issue. Gulf cannot
reduce its sales of gas in interstate commerce without
abandonment authority from the Commission. Mere
reliance on the reversionary mineral interest owners’
legal arguments is not acceptable to justify a redue-
tion in gas supply to El Paso. If Gulf cannot obtain
abandonment authority from the Commission, it can-
not reduce the volume of gas it is currently supplying
to El Paso. Gulf has a duty to protect the interstate
flow of the natural gas in question. In addition to the
reasoning in Section I, California asserts that Gulf
as a gas producer clearly comes within the doctrine
of Phillips Petroleum Co. v. Wisconsin 347 U.S. 672,
98 L.Ed. 1035. In the Phillips case the Court held
that the Conygpission has jurisdiction over ‘‘well-
hend saveS of natural gas by the producer.
Gulf as well as the reversionary mineral interest
owners cite the case of Mobil Oil Corporation v.
Federal Power Commission, 463 F 2d 256 (1972) to
establish that neither Gulf nor the reversionary in-
terest owners come under the [260] Commission’s
jurisdiction when their contract expires. In the Mobil
ease, the lessor was a mere royalty owner under a
391
land lease agreement. The lessor permitted oil and
gas exploration on its land not knowing whether there
would be actual production. The Court in the Mobil
case held that under that fact situation the Commis-
sion had no jurisdiction over the royalty interest.
California submits that in view of the two United
States Supreme Court cases cited above and the cur-
rent natural gas situation in the United States to-
day, both law and public policy dictate that the Mobil
case should not be applied. However, if the Commis-
sion finds that the Mobil case is applicable, Califor-
nia questions whether the reversionary mineral in-
terest owners in the instant proceeding can be cate-
gorized as mere lessors that had no knowledge of
whether oi! and gas would be produced on their
lands. Exxon and Texaco as well as other reversion-
ary mineral interest owners in this proceeding are
oil and gas corporations that purchased a share of
the reversionary mineral interest in the subject prop-
erty knowing that the gas reserves were proven and
that the field was substantially developed. As in case
of .J. v. Continental Oil Co., 381 U.S. 392, 14
L.Ed. 2466, the agreements involved in the instant
proceeding are such that they are very close in eco-
nomie effect to conventional sales of natural gas.
Therefore, the reversionary mineral interest owners
in the instant proceeding are better categorized as
royalty owners engaged in the sale of natural gas
in interstate commerce for resale and therefore come
within the purview Section 1(b) of the Natural Gas
Act.
CONCLUSION
For the above stated reasons, California respect-
fully requests that the Commission find that the nat-
ural gas in question comes within its jurisdiction and
that abandonment authority must be sought before
the natural gas can be diverted to intrastate use. In
this time of natural gas shortage in interstate com-
merce, the Commission must strictly [261] limit those
instances where agreements between private parties
ean avoid the authority of the Natural Gas Act and
the Commission. 0
Respectfully submitted,
„ Ricwarp D. GRAVELLE
Richard D. Gravelle
/s/ J. Catvin Simpson
J. Calvin Simpson
„ Ranvoten W. Devutscu
Randolph W. Deutsch
5066 State Building
San Francisco, California 94102
Attorneys for the People of the
State of California and the
Publie Utilities Commission
of the State of California
Dated: June 19, 1975
262
[262]
(VERIFICATION OMITTED IN PRINTING)
263]
(CERTIFICATE OF SERVICE OMITTED IN PRINTING)
[264]
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL POWER COMMISSION
Docket No, CP75-209
kL PAso NATURAL Gas COMPANY
Docket No. C1I75-594
Texaco, Ine.
(Recetvep June 23, 1975)
Initial Brief of El Paso Natural Gas Company
G. Scorr CUMING
General Counsel
Ex Paso NATURAL Gas COMPANY
Post Office Box 2185
Houston, Texas 77001
Ricuarp S. Morris
Assistant General Counsel
Harris S. Woop
ARTHUR R. ForRMANEK, JR.
Ex. Paso NATURAL Gas CoMPANY
Post Office Box 1492
El Paso, Texas 79978
C. Frank REIFSNYDER
Hogan & Hartson
815 Connecticut Avenue
Washington, D. C. 20006
Counsel for
El Paso Natural Gas Company
June 20, 1975
395
265
[265] TABLE OF CONTENTS
Page
eM . ... „ iii
Statement of the Caess 000 c eens 1
Statement of the Issues 9
Summary of El Paso’s Position 10
„. bebte onan 10
I. Gulf, et al. may not terminate their sale of
natural gas without first obtaining abandon-
ment authorization from the Commission .. 11
A. The issue has not previously been adju-
.. „% ᷣ 11
B. Gulf, et al.’s sales of casinghead gas and
gas well gas are sales of natural gas in
interstate commerce for resale as defined
by the Natural Gas Act ............... 12
C. The termination of the leases under
which Gulf, et 4. have operated wells
and sold natural gas therefrom for re-
sale in interstate commerce does not
eliminate the need to obtain abandon-
ment authorization prior to cessation of
GSR GURU occ . „„ 13
II. Warren and Phillips may not reduce their
sales in interstate commerce of residue nat-
ural gas to El Paso, the present level of
which is attributable in large part to pro-
duction from the leases in question, without
prior Commission abandonment authoriza-
Pee 15
— — — — —— —
A. This issue was not settled by Gulf v.
Southland Royalty jj 15
gas come within the jurisdiction of the
EP PTTTTTTTITTT TT Te 15
C. Warren and Phillips must obtain aban-
donment authorization in order to reduce
sales of natural gas which have been
dedicated to interstate commerce ...... 16
266
III. Southland, et al. must obtain abandonment
authorization in order to discontinue sales
of natural gas dedicated to interstate com-
merece by Gulf, et all. 16
A. El Paso Natural Gas Co. v. Perry R.
Bass must be confined to its facts ...... 17
B. The reversionary interest owners are
bound by the prior dedication of the gas
reserves to interstate commerce ....... 18
IV. The public interest requires that abandon-
ment authorization be obtianed before sales
to the current purchaser may cease ....... 20
EE EEE SESE EP OPPS PETE eee 21
1267]
TABLE OF CITATIONS
STATUTES Page
Natural Gas Act 15 U.S.C. §717 et seq. (1964)
Section l(a) 15 U.S. C. §717(a) ......... 12
Section 1(b) 15 U.S.C. §717(b) ......... 11
Section 7(b) 15 U.S.C. 6 717f ( ........ 10
ADMINISTRATIVE REGULATIONS
Section 1.29 of the Commission’s Rules of Prac-
tice and Procedure, 18 C. F. R. §1.29 (1974) 1
Section 154.91 of the Commission’s Rules of
Practice and Procedure, 18 C.F.R. § 154.91
—KH 14
CasEs
Continental Oil Co. v. F PC, 247 F.2d 904 (5th
ß 12
Deep South Oil Co. v. FPC, 247 F.2d 882 (Sth
Cir. 1957), cert. denied, 355 U.S. 930 (1958) 13
Farmland Industries v. Kansas-Nebraska Gas
Co., 349 F. Supp. 670 (D. Neb. 1972), aff'd.
486 F.2d 315 (8th Cir. 1973) ......... 10, 14, 29
Gulf Oil Corp. v. Southland Royalty Co., 496
S. W. ad 547 (Tex. 1973) .............. 3, 11, 15
Harper Oil Co. v. F PC, 284 F.2d 137 (10th Cir.
17—ẽkł‚ʒͥ»‚/„.ʃ!( —B , 8 13, 14
Hunt v. F, 306 F.2d 334 (5th Cir. 1962),
rev'd. on other grounds, 376 U.S. 515 (1964) 14
Michigan Consolidated Gas Co. v. F PC, 283
F.2d 204 (D.C. Cir. 1960), cert. denied, 364
We GE CUED .. 11 21
Mobil Oil Corp. v. F PC, 463 F.2d 256 (D.C.
Cir. 1971), cert. denied, 406 U.S. 976 (1972) 18
Panhandle Eastern Pipe Line Co. v. Michigan
Consolidated Gas Co., 177 F.2d 942 (6th Cir.
————K 16
1268]
People of the State of California v. Lo- Faca
Gathering Co., 379 U.S. 366 (1965) ... 13, 15, 16
Shell Oil Co. v. FPC, 247 F.2d 900 (5th Cir.
„:.“... . 8 13
Sunray Mid-Continent Oil Co. v. FPC, 364 US.
n 11, 13, 16, 18
Transcontinental Gas Pipe Line Corp. v. FPC,
488 F.2d 1325 (D.C. Cir. 1973), cert. denied,
414 U.S. 921 (197))))))));: 11, 20, 21
United Gas Improvement Co. v. Continental Oil
Co., 361 U.S. 302 (106 ))))))))))ꝛ eee 11
United Gas Pipe Line Co. v. F PC, 350 F.2d 689
(5th Cir. 1965), af d. 385 U.S. 83 (1966) 14, 16, 20
ADMINISTRATIVE DECISIONS
Bill J. Graham, et al., Docket No. CI75-626, et
l., —— F. P. C. ——, (issued June 16, 1975) 14
Blair Vreeland, Op. No. 724, —— F. P. C. ——,
(issued March 18, 1975) õ ) 18
Continental Oil Co. v. United States Gas Pipe
Line, 31 F. P. C. 1079 (1964), af d. 350 F.2d
689 (5th Cir. 1965), af d. 385 U.S. 83 (1966) 21
Cumberland Natural Gas Co., 34 F.P.C. 132
D 1 13, 18
Dirie Pipe Line Co., 14 F. P. C. 106 (1955) ... 16
El Paso Natural Gas Co. v. Perry R. Bass, 48
„ 11, 17
Graridge Corp., 30 F. P. C. 1156 (1963) ...... 18
Mitchell Energy Co., Op. No, 733. pf
—, (issued June 11, 1973) hůhh ns 19
United Gas Pipe Line Co., 3 F.P.C. 3 (1942) 14
Warren Petroleum Corp. v. Sun Oil Co., 48
es Ge GE ͥ 13
[269] ?
UNTED STATES OF AMERICA
BEFORE THE
FEDERAL POWER COMMISSION
Docket No. CP75-209
Et Paso NATURAL Gas CoMPANY
Docket No. CI75-594
Texaco, Inc.
Initial Brief of H Paso Natural Gas Company
Ex Paso NATURAL Gas Company (EI Paso“), pur-
suant to Section 1.29 of the Commission’s Rules of
Practice and Procedure and in accordance with the
briefing schedule established herein, respectfully sub-
mits this initial brief in the above-styled and docketed
proceeding.
I.
STATEMENT OF THE CASE
This proceeding is a consolidation of two proceed-
ings involving the issue of the necessity for abandon-
ment authorizations pursuant to Section 7(b) of the
Natural Gas Act as a result of the forthcoming ex-
piration of two 50-year fixed term oil and gas leases.
The first lease was executed on July 14, 1925, be-
tween Gulf Production Company, the corporate pred-
ecessor of Gulf Oil Corporation (Gulf“), as lessee,
and W. N. Waddell, et al., as lessors (hereinafter re-
*18 C.F.R. Section 1.29 (1974).
ferred to as the Waddell lease ).“ According to El
Paso’s information and belief there are currently six
other individual and corporate [270] lessees besides
Gulf subject to the Waddel! lease.’ All lessees inelud-
ing Gulf are hereinafter referred to as Gulf, et al.”’
By the terms of the Waddell lease, Gulf obtained
the exclusive right of exploiting 45,771 acres of land
in Crane County, Texas, and producing oil and gas
therefrom. Upon execution of the lease, Gulf com-
menced drilling operations on the land and has con-
tinuously conducted operations thereupon to the pres-
ent date. At the present time, Gulf is operating ap-
proximately 925 producing oil and gas wells on the
land.
On January 26, 1951, El Paso, as buyer, and Gulf,
as seller, executed a residge gas purchase agreement
* A true conformed copy of this oil and gas lease, recorded in
Volume 10, pp. 397-400 of the Deeds Records of Crane County,
Texas, is attached to EI Paso’'s Petition for Issuance of a Declara-
tory Order as Exhibit A and made a part thereof. An amend-
ment to this oil and gas lease dated March 16, 1926, recorded in
Volume 12, pp. 205-206, of the Deeds Records of Crane County,
Texas, was executed by the same parties, covering certain lands
in Crane County, Texas, as described therein. A true copy of this
amendment is attached to El Paso’'s original petition as Exhibit
Band made a part thereof.
* According to El Paso's information and belief these lessees
are: (1) B. W. P., Inc., a corporation duly incorporated under the
laws of the State of Texas, (2) Highland Production Company,
Inc., a corporation duly incorporated under the laws of the State
of Texas, (3) W. Nelson Rees, an individual who resides in Odessa,
Ector County, Texas, (4) G. Dillard Anderson, Jr. an individual
who resides in Midland, Midland County, Texas, (5) V. L. De Bolt,
an individual who resides in Odessa, Ector County, Texas, and
(6) John L. Harlan, Trustee, an individual who resides in either
EI Paso, El Paso County, or Monahans, Ward County, Texas.
401
by which El Paso agreed to buy surplus residue gas
from Gulf’s natural gasoline extraction plant in Crane
County, Texas, called the Waddell Gasoline Plant.“
Effective November 1, 1957, Gulf transferred to
Warren Petroleum Corporation, a whoily owned sub-
sidiary, certain facilities including the Waddell Plant
with its related gathering lines and the Gulf-El Paso
residue gas purchase agreement dated January 26,
1951. Gulf entered into a percentage-type contract for
the sale of casinghead gas from the Waddell lease with
Warren Petroleum Corporation. Effective December
31, 1971, Warren Petroleum Corporation was merged
into its parent corporation, Gulf Oil Corporation.
From that point on the properties previously owned
by Warren Petroleum Corporation have been oper-
ated in the name of Warren Petroleum Company
(**Warren’’) as a division of Gulf.
On March 1, 1972, El Paso and Warren entered
into an additional residue gas purchase agreement as-
suring El Paso of a continuing [271] supply of quan-
tities of residue gas from the Waddell Gasoline
Plant.“ This agreement includes sales of residue gas
attributable to certain gas wells operated by Gulf lo-
cated on the Waddell lease.
This residue gas purchase agreement, and subsequent amend-
ments thereto, constitute Warren Petroleum Company's FPO Gas
Rate Schedule No. 43. The Commission granted a certificate of
publie convenience and. necessity authorizing the sale of residue
gas to El Paso from the Waddell Gasoline Plant pursuant to
Warren Petroleum Company's Rate Schedule No. 43 at Docket
No. G-13445, 19 F.P.C. 1151 (1958). As indicated infra Warren
Petroleum Company is a division of Gulf.
This residue gas purchase agreement constitutes Warren 's FPO
Gas Rate Schedule No. 66. The Commission granted a certificate
of public convenience and necessity authorizing the sale of residue
402
El Paso takes delivery of the surplus residue gas,
which Warren sells aud El Paso purchases pursuant
to Warren’s FPC Gas Rate Schedule Nos. 43 and 66,
into its pipeline system at the outlet at the Waddell
Gasoline Plant and transports it through its juris-
dictional facilities for subsequent resale in interstate
commerce.’ El Paso purchases, transports, and resells
approximately 60 million cubic feet of such surplus
residue gas daily.
Of the surplus residue gas purchased by El Paso at
the outlet of the Waddell Gasoline Plant, approxi-
mately 25 million cubie feet daily is attributable to
production from wells on land leased by Gulf, et al.
pursuant to the Waddell lease. All lessees other than
Gulf make percentage-type sales to Warren of casing-
head gas produced from the acreage covered by the
Waddell lease. Since the merger of Gulf and Warren,
Gulf no longer makes such sales.
By the terms of the Waddell lease, the leasehold
estate expires fifty years after date of execution, which
is July 14, 1975. Gulf, et al. sought to extend the term-
ination date of the lease by either 4,661 or 4,286 days
on the grounds that they are entitled to such addition-
al days of production because of delays and interrup-
gas to El Paso from the Waddell Gasoline Plant pursuant to War-
ren’s FPC Gas Rate Schedule No. 66 at Docket No, CI72-760
(issued July 22, 1974).
*At the following docket numbers, the Commission granted
El Paso certificates of public convenience and necessity for the
construction and operation of pipeline and compression facilities
needed to transport gas from the Waddell Gasoline Plant: G-1629,
10 F. P. C. 644 (1951); G-2371, 13 F. P. C. 1008 (1954); G-10499,
16 F. P. C. 1354 (1956); and G-12580, 19 F. P. C. 393 (1958).
403
tions arising out of their compliance with regulatory
orders of the Texas Railroad Commission. The Su-
preme Court of Texas resolved the issue in Gulf Oil
Corporation v. Southland Royalty, 496 S. W.2d 547.
(1973), by holding that the expiration date of the
lease was not extended and the leasehold interest of
Gulf, et al. shall therefore expire on July 14, 1975. The
mineral rights, including the rights to natural gas
production, by Texas law shall therefore revert to the
reversionary interest owners on July 14, 1975.
Presently, the reversionary interest rights to the oil,
gas, and other minerals produced from the acreage
covered by the Waddell [272] lease are owned, held,
or claimed in major portion by Exxon Company,
U.S. A., a division of Exxon Corporation (“Ex-
xon’’) and by Mineral Interest Owners. Mineral In-
terest Owners includes Southland Royalty Company
(„Southland“), William V. Penn, et al., Trustees,
and Trustees Under the Will of Warren Wright. Min-
eral Interest Owners together own approximately 81
percent of the acreage covered by the Waddell lease.
Exxon owns approximately 14 percent of the acreage
and the remaining 5 percent is owned by several other
individuals and corporations.’ All of the reversionary
interest owners will together hereinafter be referred
to as Southland, et al.“
Upon termination of the Waddell lease and rever-
sion of the mineral interest rights thereunder, Mineral
A list of all said owners is attached to El Paso’s original peti-
tion as Exhibit ‘‘C’’. All listed owners were served in this action
by El Paso.
Interest Owners have agreed to sell to Intratex Gas
Company (‘‘Intratex’’), for resale solely in intrastate
commerce, the gas produced from the wells presently
covered by the Waddell lease." Exxon solicited pro-
posals for the purchase of the gas attributable to its
reversionary interest rights upon expiration of the
Waddell lease for resale in intrastate commerce.’
[273] On January 17, 1975, El Paso filed a Petition
for Issuance of a Declaratory Order with the Federal
Power Commission (‘‘Commission’’) in order to re-
solve three legal issues. These questions are basically
whether either Warren, Gulf, et al., or Southland, et
al. must file for Commission abandonment authoriza-
tion pursuant to Section 7(b) of the Natural Gas Act
*In their Petition to Intervene and Answer, Mineral Interest
Owners state that Southland Royalty Company has entered into
a contract to sell its interest in the gas to Intratex, an intrastate
buyer of gas, which is a wholly-owned subsidiary of Houston
Natural Gas Corporation, a distributor of gas in the City of
Houston, Texas, and environs. They also state that the other
Mineral Interest Owners have entered or in the near future will
enter into similar contracts with Intratex.
By letter dated February 21, 1975, El Paso sent to the Com-
mission articles from The Wall Street Journal, February 13, 1975,
page 20, and The Oil Daily, February 13, 1975, page 1, which
indicate that Southland concluded arrangements for the sale of
its share of natural gas to Intratex at a base price of $1.90 per
million British thermal units (Btu), plus fixed increases of 2.5
cents per million Btu on January 1, 1976, and at the end of each
six months thereafter.
Attached as Exhibit E to El Paso’s original petition is a
letter, dated October 1, 1974, addressed to Odessa Natural Cor-
poration ( Odessa), an intrastate pipeline affiliate of El I’aso,
from Exxon soliciting proposals for the purchase of Exxon’s share
of natural gas produced after July 14, 1975, from the various lands
— leases presently leased to Gulf, et al. pursuant to the Waddell
before Warren and Gulf, et al. may cease making
their current sales for resale in interstate commerce
and Southland, ct . may sell the gas currently at-
tributable to the Waddell lease to natural gas com-
panies doing business solely intrastate." The purpose
of the current proceeding is to resolve these issues.
Southern California Gas Company (‘‘SoCal’’), Mo-
bil Oil Corporation (‘‘Mobil’’), Southwest Gas Cor-
poration (‘‘Southwest Gas’’), the People of the State
of California (‘‘California’’), Texaco, Inc. (‘‘Texa-
co“), Exxon Corporation (‘‘Exxon’’), Mitchell Ener-
aad issues as stated in El Paso’s original petition read as fol-
lows :
(i) Given the fact that, according to Texas law, a certain
50-year fixed term lease automatically terminates on July 14,
1975, and the mineral rights thereunder revert to the rever-
sionary interest owners, must Gulf Oil Corporation and other
lessees under said certain 50-year fixed term lease, who have
been selling gas produced from said lease on a percentage-
type basis to Warren Petroleum Corporation for resale in
interstate commerce, obtain abandonment authorization pur-
suant to Section 7(b) of the Natural Gas Act (Act) and
Section 154.91 of the Commission's Regulations Under the
Natural Gas Act in order to cease such sales to Warren
Petroleum Corporation and effectuate the transfer by rever-
sion to Exxon Corporation, Southland Royalty Company, and
other reversionary interest owners of the mineral rights under
said certain 50-year fixed-term lease?
(ii) Given the facts set forth in (i), without prior Com-
mission authorization, may Exxon Corporation, Southland
Royalty Company, and other reversionary interests divert
natural gas from its present movement in interstate com-
merce to delivery and sale in intrastate commerce !
(iii) Given the facts set forth in (i), without prior Com-
mission authorization, may Warren Petroleum Corporation
reduce its sales in interstate commerce of residue natural gas
to El Paso, the present level of which is attributable in part
to production from the lease in question?
*
274
gy Corporation (‘‘Mitchell’’), Pacific Gas and Elee-
trie Company (‘‘PGandE’’), Gulf Oil Corporation
(„Gulf“), and [274] Mineral Interest Owners filed
petitions to intervene in this proceeding.” Only Gulf
disputed El Paso’s statement of facts as set forth in
El Paso’s petition for issuance of a declaratory order.
Gulf in its petition to intervene” stated that there is
no Warren Petroleum Corporation because Warren
Petroleum Corporation has been merged into Gulf
and subsequently became Warren Petroleum Com-
pany, a division of Gulf, and that there are therefore
no sales of the gas in issue between Gulf and Warren.
By its answer to Gulf’s petition to intervene, EI Paso
accepted Gulf’s clarification of the facts although it
did not accept Gulf’s conclusions and submitted that
Warren Petroleum Company should be substituted for
Warren Petroleum Corporation. Therefore, there ap-
pears to be no dispute among any of the parties to
the instant proceeding as to the material facts.
On April 7, 1975, Texaco filed a Petition for Issu-
ance of a Declaratory Order asking the Commission
to resolve the single legal issue of whether a lessee,
by making an interstate gas sale, can commit more
than its real property interest (ie,, its rights under
its lease), thereby both encumbering forever the real
estate and imposing upon the nonparticipating min-
™" Petitions to intervene by SoCal, Mobil, Southwest Gas, Cali-
fornia, Texaco, Exxon, Mitchell, PGandE, Gulf, and Mineral In
terest Owners were filed on February 6, 1975, February 19, 1975,
February 18, 1975, February 25, 1975, February 28, 1975, March
3, 1975, and March 3, 1975, respectively.
Petition to Intervene and Response of Gulf Oil Corporation,
Doeket No. CP75-209 (filed March 3, 1975.)
407
—
eral fee owner the obligations of Section 7 of the Nat-
ural Gas Act. This single issue is substantially the
same as those issues presented in El Paso’s original
petition. Texaco’s petition involves another 50-year
fixed term lease but covering property in Ector Coun-
ty, Texas. This lease was executed on August 7, 1925,
between Gulf Production Company, as lessee, and
Goldsmith, et al., as lessors, (hereinafter referred to
as the ‘‘Goldsmith lease“)“ and will expire on August
7, 1975. Texaco is one of the reversionary mineral in-
terest owners under the Goldsmith lease. Upon expira-
tion of the lease on August 7, 1975, the reversionary
mineral interest rights thereunder will revert to Tex-
aco and others. Gulf, the current lessee, is selling ca-
singhead gas from this property to Phillips Petroleum
Company (‘‘Phillips’’). Phillips is currently selling
such gas to El Paso at the tailgate of [275] Phillips’
Goldsmith Plant pursuant to Phillips’ FPC Gas Rate
Schedule Nos. 7, 32, 33, 497, and 483."*
respectively.
El Paso takes delivery of surplus residue gas into
its pipeline system at the outlet at Phillips’ Goldsmith
Plant and transports it through its jurisdictional fa-
* copy of this lease is attached to Texaco’s petition as Exhibit
** The Commission granted certificates of public convenience and
necessity authorizing the sale of residue gas to El Paso pursuant
to Phillips’ F. P. C. Gas Rate Schedule Nos. 7, 32, 33, 483, and
497 at Docket No. G-2625, 16 F.P.C. 1440 (1956); Docket No.
G-2625, 16 F. P. C. 1440 (1956); Docket No. G-3356, 16 F.P.C.
1442 (1956), amended by order issued June 12, 1961; Docket No.
C1I71-530 (issued April 23, 1971); and Docket No. CI72-590, 50
F. P. C. 390 (1973), supplemented by order issued July 22, 1974,
cilities for subsequent resale in interstate commerce.”
El Paso purchases, transports, and resells approxi-
mately 103 million cubic feet of such surplus residue
gas daily. Approximately 18 million cubic feet daily
of such surplus residue gas is attributable to produc-
tion from wells on land in Ector County leased by
Gulf and others pursuant to the Goldsmith lease.
The issues to be resolved under Texaco’s petition
as restated by El Paso are basically whether Gulf,
Phillips or Texaco must file for Commission abandon-
ment authorization pursuant to Section 7(b) of the
making their current sales of natural gas for resale
in interstate commerce and Texaco as reversionary in-
terest owner may sell the gas currently attributable
to the Goldsmith lease to natural gas companies other
than Phillips for resale in intrastate commerce.“
** At the following docket numbers, the Commission granted
El Paso certificates of public convenience and necessity for the
construction and operation of pipeline and compression facilities
through which El Paso transports gas from Phillips’ Goldsmith
Plant in interstate commerce G-655, 5 F. P. C. 115 (1946) ; G-1019,
8 F. P. C. 726 (1949); and G-1051, 7 F.P.C. 908 (1948).
% The issues as stated in EI Paso’s answer to Texaco’s petition
read as follows:
(i) Given the fact that, according to Texas law, a certain
50-year fixed term lease automatically terminates on August
7, 1975, and the mineral rights thereunder revert to the
reversionary interest owners, must Gulf and any other lessees
under a certain 50-year fixed term lease, who have been selling
gas produced from said lease on a percentage-of-the-proceeds
basis to Phillips for resale in interstate commerce, obtain
abandonment authorization pursuant to Section 7(b) of the
Natural Gas Act and Section 154.91 of the Commission's Regu-
lations under the Natural Gas Act in order to cease such
sales to Phillips and effectuate the transfer by reversion to
409
[276] On June 3, 1975, the Commission issued an
order consolidating these two proceedings for pur-
poses of briefing and decision. Permission to inter-
vene was granted to Exxon, Mineral Interest Own-
ers, Gulf, SoCal, Southwest Gas, Mobil, Texaco,
Mitchell, El Paso, Phillips, Northwest, and Cali-
fornia.
As stated in its order of June 3, 1975, the issues
raised by EI Paso’s petition to be resolved by the
Commission are:
(1) May Southland, et al., divert natural gas from
interstate commerce to intrastate commerce
without prior permission and approval of the
Commission ?
(2) Must Gulf, et al., obtain abandonment permis-
sion and approval in order to cease sales to
Warren and to effectuate a transfer to South-
land, et al.?
(3) May Warren reduce its sales to El Paso to the
extent such sales are attributable to production
Texaco and other reversionary interest owners of mineral
rights under said 50-year fixed term lease?
(ii) Given the facts set forth in (i), without prior Com-
mission authorization, may Texaco and other reversionary
interest owners divert natural gas from its present movement
in interstate commerce to delivery and sale in intrastate com-
merce ?
(iii) Given the facts set forth in (i), without prior Com-
mission authorization, may Phillips reduce its sales in inter-
state commerce of residue natural gas to El Paso, the present
level of which is attributable in part to production from the
lease in question?
1 Petitions to intervene in Docket No. CI75.594 were filed by
El Paso, Gulf, Phillips, Mineral Interest Owners, Northwest Pipe-
line Corporation (‘‘Northwest’’), and California.
410
from the subject leaschold property without
prior Commission permission and approval ?
[277] The Commission’s order of June 3, 1973, also
ineludes the issue as restated by Texaco; that is, whe-
ther a lessee by making an interstate gas sale can
commit more than its real property interest (i.c., its
rights under its lease), thereby both encumbering for-
ever the real estate and imposing upon the nonpartici-
pating mineral fee owner the obligations of Section
7 of the Natural Gas Act.
By said order of June 3, 1973, the Commission
ordered that initial briefs on the questions presented
in the consolidated proceeding be filed by any party
to the procceding and the Commission Staff on or
before June 11, 1975. The date set for reply briefs
was June 18, 1975.
On June 5, 1975, in response to a motion to revise
the briefing schedule filed by Exxon, the Commission
gave notice that the briefing schedule was revised to
allow all parties to file simultaneous briefs on June
20, 1975. The date for reply briefs was cancelled. By
order issued June 13, 1975, the Commission estal-
lished a June 25, 1975 filing date for reply briefs.
II.
STATEMENT OF THE IssuES
(i) Given the fact that, according to Texas law,
two 50-year fixed term leases automatically term
inate on July 14, 1975, and August 7, 1975, re-
spectively, and the mineral rights thereunder re-
vert to the reversionary interest owners, must
411
{
1
f
and Phillips for resale in inter-
state commerce, obtain abandonment authoriza-
tion pursuant to Section 7(b) of the Natural Gas
Act and Section 154.91 of the Commission’s Reg-
ulations under the Natural Gas Act in order to
cease such sales to Warren and Phillips and ef-
fectuate the transfer to Southland, et al. and Tex-
aco, respectively, and other reversionary interest
owners of mineral rights under said 50-year fixed
term leases? „
(u) Given the facts set forth in (i), without
prior Commission guthorization may Southland,
et al., Texaco and other reversionary interest own-
ers divert natural gas from its present movement
in interstate commerce to delivery and sale in
intrastate commerce ?
(iii) Given the facts set forth in (i), without
prior Commission authorization, may Warren and
Phillips reduce their sales in interstate commerce
of residue natural gas to El Paso, the present
level of which is attributable in part to produc-
tion from the leases in question ?
[278] III.
SumMary or EL Paso’s Posrrion
El Paso is of the firm belief that Section 7(b) aban-
donment authorization is required before the lessees
under the two leases (hereinafter included in the ref-
erence Gulf, et al.) may cease making sales of cas-
412
inghead gas to Warren and Phillips and before War-
and Phillips may reduce sales of residue gas to
Paso. The gas produced from acreage covered by
the prior dedication of the natural gas produced from
acreage which will revert to them upon expiration of
the leases. They cannot discontinue sales presently be-
ing made for resale in interstate commerce without
first obtaining permission of the Commission pursuant
to Section 7(b) abandonment procedures. It is El
Paso’s position that the interest of the public in sta-
bility and continuity of service during the present time
of critical gas shortages makes the requirement of
abandonment authorization in this instance imperative.
IV.
ARGUMENT
Section 7(b) of the Act requires that no natural
gas company abandon any service rendered by facili-
ties within the jurisdiction of the Commission without
™ Section 7(b) of the Act provides:
the permission and approval of
obtained, after due hearing, and a finding by the Commission
that the available supply natural gas is depleted to
or
the Commission’s prior approval. 15 U.S.C. Section
T17f(b) (1964). The language of the section is un-
equivocal, bluntly foreclosing any abandonment, wheth-
er justified or not, without this prior authorization.
Farmland Industries v. Kansas-Nebraska Natural Gas
Co., 349 F. Supp. 670, 677 (D. Neb. 1972), af d. 486 F.
2d [279] 315 (8th Cir. 1973). The jurisdiction of the
Commission attaches to sales of natural gas which are
destined for resale in interstate commerce. Section
1(b); 15 U.S.C. Section 717(b) (1964). Once natural
gas begins to flow in interstate commerce, it thereby
becomes dedicated to interstate commerce and Section
7(b) of the Act provides the exclusive means by which
the seller of gas may terminate service. Sunray Mid-
Continent Oil Co. v. FPC, 364 U.S. 137 (1960).
The purpose of the requirement of Section 7(b) is
to protect the interest of the public in the sale of
natural gas. Transcontinental Gas Pipe Line Corp. v.
FPC, 488 F.2d 1325 (D.C. Cir. 1963), cert. denied,
414 U.S. 921 (1974). This interest is recognized to be
greater than and to transcent the interests of indi-
vidual parties in their own private arrangements. Id.
It is also because of this overriding public interest that
„a] regulatory statute such as the Natural Gas Act
would be hamstrung if it were tied down to technical
concepts of local law.“ United Gas Improvement Co.
v. Continental Oil Co., 381 U.S. 392, 400 (1965) ). Thus,
Gulf Oil Corporation v. Southland Royalty Co., 496
S.W.2d 547 (Tex. 1973) did no more than to decide
when the lease held by Gulf and other lessees of the
Waddell ee Se See The holding in
that case, that the 50-year fixed term lease automati-
cally terminates on July 14, 1975, at which time the
414
mineral rights thereunder revert to the reversionary
interest owners, in no way affects the necessity for
Commission abandonment authorization pursuant to
Section 7(b) before sales of the gas to the present pur-
chasers may cease. It is undisputed that upon termina-
tion of the lease at least some of the reversionary
interest owners have arranged to sell natural gas pre-
viously dedicated to interstate commerce intrastate
purchasers. Such an action is precisely what the
Natural Gas Act has proscribed if accomplished with-
out prior Commission authorization.
I. Gulf, et al. may not terminate their sales of
natural gas without first obtaining aban-
donment authorization form the Commis-
sion.
A. The issue has not previously been adjudicated.
It should first be noted that the issue of whether a
lessee, selling natural gas in interstate commerce from
wells held under a fixed term lease, must obtain Com-
mission authorization pursuant to Section 7(b) of the
Natural Gas Act to terminate such sales upon the ex-
piration of the lease, has not previously been adjudi-
cated. As indicated above, Gulf Oil Corp. v. Southland
Royalty Co., supra, did not consider this issue in its
determination of when the lease in question terminates.
Furthermore, no other case appears to have dealt
squarely with this point. Of particular note is El Paso
Natural Gas Co. v. Perry R. Bass, 48 F.P.C. 1269
(1972). This case dealt with the issue of whether a
producer, who obtained reconveyance of a fractional
working interest pursuant to a farmout agreement,
415
was free to divert all of the gas, [280] previously sold
by the farmoutee to a natural gas company for resale
in interstate commerce, to another company, also for
resale in interstate commerce, without Section 7(b)
authorization. The Commission held that the pro-
ducer’s prior royalty interest did not make him a seller
of natural gas in interstate commerce for resale nor
did his conversion from a royalty interest to a work-
ing interest; therefore. the producer was free to sell
his share of gas as he wished without abandonment
authorization. However, nowhere in the opinion does
the Commission indicate that the farmoutee, a prior
working interest owner as are Gulf, et al., was also
free to cease sales of natural gas, which it had pre-
viously dedicated to interstate commerce, without first
going through the required Section 7(b) procedures.”
B. Gulf, et al.’s sales of casinghead gas and gas
well gas are sales of natural gas in interstate
commerce for resale as defined by the Natural
Gas Act.
The jurisdiction of the Commission extends to those
„natural-gas companies“ which are engaged in the
transportation of natural gas in interstate commerce,
or the sale in interstate commerce of such gas for re-
sale. 15 U.S.C. Section 717a (1964). Prior to aban-
donment of those facilities and services which come
within the jurisdiction of the Commission, Section 7
In fact, Shell Oil Co. (‘‘Shell’’), the farmoutee in Bass, was
required to and did file a notice of partial cancellation of its rate
schedule to reflect Bass’ conversion of his overriding royalty in-
terest to a one-half working interest. The Commission granted
Shell's request for partial cancellation.
416
281
(b) authorization must be obtained. 15 U.S.C. Section
717f. The lessees in the instant case are ‘‘natural-gas
companies within the meaning of the Act and their
sales of casinghead gas are within the jurisdiction of
the Federal Power Commission.
The sales by the lessees of natural gas” are sale (s)
in interstate commerce of such gas for resale.“ The
fact that the gas sold at the wellhead is not committed
on its interstate journey until some point after the
original sales take place is irrelevant as long as the
gas is ultimately delivered in interstate commerce.
Continental Oil Company v. FPC, 247 F.2d 904 (5th
Cir. 1957). Admittedly, gas sold by [281] Gulf, ef al.
ultimately enters El Paso’s interstate pipelines.” On
facts similar to those in the present situation the court
in Deep South Oil Co. v. FPC, supra, determined that
where gas produced from seller’s wells, at least in part,
was resold to consumers outside the state, seller was
making sales for resale’’ within the meaning of the
Natural Gas Act, notwithstanding the fact that such
gas, in the course of the interstate transmission, passed
through a local processing plant. By virtue of the fact
that the gas from seller’s wells continuously flowed into
20 Casinghead gas is natural gas within the meaning of
the Natural Gas Act. 15 U.S.C. Section 717a; Deep South Oil Co.
of Tex. v. FPC, 247 F.2d 882 (5th Cir. 1957), cert. denied, 335
U.S. 930 (1958).
The further fact that the gas sold by Gulf, et al. may be used
primarily for the manufacturing of gasoline does not bring the
transaction outside the jurisdiction of the Commission, for the
fact that some of the gas sold by the lessees is resold and eventually
crosses interstate lines brings the entire sale within the auspices
of the Commission, Shell Oil Co. v. FPC, 247 F.2d 900 (5th Cir.
1957).
417
a gathering system and became part of a mass of gas
which moved continuously from the gathering system
into a processing plant, and from the outlet of such
plant to interstate destinations, sales at and from the
outlet of such plant to interstate destinations, sales at
the well were also sales in ‘interstate commerce“ with-
in the meaning of the Natural Gas Act. Id. The fact
that the residue gas actually moving in interstate com-
merce may be of small volume in relation to the totality
of gas purchased by El Paso does not affect the inter-
state nature of the entire sale. The Commission’s ju-
risdiction attaches to interstate sales of any size.’’ War-
ren Petroleum Corp. v. Sun Oil Co., 48 F.P.C. 881,
886 (1972). See Harper Oil Co. v. FPC, 284 F.2d 137
(10th Cir. 1960). It is the actual physical movement
of the gas in interstate commerce along with its
eventual resale which are the important criteria in
determining Commission jurisdiction. See People of
the State of California v. Lo-Vaca Gathering Co., 379
U.S. 366 (1965).
C. The termination of the leases under which Gulf,
et al. have operated wells and sold natural gas
therefrom for resale in interstate commerce does
not eliminate the need to obtain abandonment
authorization prior to cessation of such sales.
“The principle is well established that dedication
of reserves for sale in interstate commerce oceurs at
least as soon as deliveries commence, and that once
service is begun, the producer cannot terminate the
service without Commission approval.’’ Cumberland
Natural Gas Co., 34 F. P. C. 132, 136 (1965). The key
term is service“ and the Commission has “long
418
—
drawn a distinction between the underlying service
to the public a natural gas company performs and
the specific manifestation . . . which that service takes
at a given moment.“ Sunray Mid-Continent Oil Co. v.
FC, 364 U.S. 137, 152 (1960). As early as 1942 the
Commission held that the continuing obligation to
perform service“ imposed by the Act outlasts the
term of a seller’s original contract of sale so that
[282] abandonment of service after the expiration of
such contract had to have Commission approval under
Section 7(b). United Gas Pipe Line Co, 3 F. P. C. 3, 9
(1942), cited in, Sunray Mid-Continent Oil Co. v.
FPC, supra.
A lease is merely another manifestation of a pri-
vate relationship which cannot be allowed to interfere
with the duty of continuing service imposed by the
Natural Gas Act. Bill J. Graham, et al., Docket No.
CI75-626, et al., —— F.P.C. —— (issued June 16,
1975). It is the initial volitional decision to purchase
and sell which subjects seller and buyer to duties tran-
scending personal contractual or other arrangements.
United Gas Pipe Line Co. v. FPC, 350 F.2d 689, 694
(5th Cir. 1965), aff’d. 385 U.S. 83 (1966). As pointed
out by the court in Hunt v. F, 306 F.2d 334, 342
(Sth Cir. 1962), rev’d on other grounds, 376 U.S. 515
(1964), the rights of a seller of natural gas may be
temporary, but his duties are not. The dedication of
natural gas to interstate commerce is in rem rather
than in personam and thus, ‘‘[]]ike the ancient cove-
nant running with the land, the duty to continue to
deliver and sell flows with the gas from the moment
of the first delivery down to the exhaustion of the
reserve, or until the Commission on appropriate terms,
419
permits cessation of service under Section 7(b), 15
U.S. C. Section 717f (b).“ Id. Without the proper au-
thorization, service must continue even if this might
place a hardship on the seller or give the buyer an
undue preference or advantage. Farmland Indus-
tries v. Kansas-Nebraska Natural Gas Co., 349 F.
Supp. 670, 677 (D. Neb. 1972), aff d. 486 F.2d 315
(8th Cir. 1973); see also Harper Oil Co. v. FPC, su-
pra.
The lessees have dedicated the natural gas produced
by their wells to interstate commerce. They have
brought themselves within the jurisdiction of the Fed-
eral Power Commission and thus may not cease mak-
ing sales of the gas from these wells without aban-
donment authorization.” Regardless of the termina-
tion of the lease, service must continue.
22 Section 154.91 of the Commission’s Regulations under the Act
states that natural gas producers which make sales on a percent-
age of the proceeds basis of natural gas to processing plant oper-
ators are subject to the requirements of Section 7(b) of the natural
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[283]
II. Warren and Phillips may not reduce their
sales in interstate commerce of residue
natural gas to El Uaso, the present level
of which is attribuable in large part to
production from the leases in question,
without prior Commission abandonment
authorization.
A. This issue was not settled by Gulf v. Southland
Royalty.
As with the lessees, the duties of Warren and Phil-
lips to continue their present level of sale of natural
gas in interstate commerce for resale was not settled
wih the decision of the Supreme Court of Texas in
Gulf Oil Corp. v. Southland Royalty Co., supra. The
Supreme Court of Texas decided only that the Wad-
dell lease will automatically terminate on July 14,
1975. The Supreme Court of Texas did not decide
that the continuing duty to sell gas covered by the
Waddell lease shall also automatically terminate on
July 14, 1975.
B. Warren’s and Phillips’ sales of residue gas come
within the jurisdiction of the Commission.
Warren and Phillips have for several years been
selling large quantities of residue natural gas to El
Paso whereupon it enters El Paso’s interstate system
to be resold in interstate commerce. There can be no
not the filings by operator as herein required have been made.
However, such producer is fully subject to applicable pro-
visions of the Natural Gas Act, including sections 5 and 7()).
421
doubt then that Warren and Phillips are natural gas
companies within the meaning of the Act and that
these sales to El Paso are likewise jurisdictional. See
People of the State of California v. Lo-Vaca Gather-
ing Co., supra; 15 U.S.C. Section 717(b) (1964).
[284]
C. Warren and Phillips must obtain abandonment
authorization in order to reduce sales of natural
gas which have been dedicated to interstate com-
merce.
A reduction in the quantity of natural gas delivered
is an abandonment of service. Panhandle Eastern Pipe
Line Co. v. Michigan Consolidated Gas Co., 177 F. 2d
942 (6th Cir. 1949); Dirie Pipe Line Co., 14 F. P. C.
106 (1955). If Warren and Phillips are allowed to
cease selling to El Paso residue gas attributable to the
leases in question the reduction will indeed be sub-
stantial. Sales from Warren alone will be reduced
nearly one-half. (Approximately 25 million cubic feet
per day of the 60 million eubie feet per day of surplus
residue gas which El Paso purchases at the tailgate of
the Waddell Plant reflects gas production attributable
to Gulf’s leasehold estate under the Waddell lease.)
This residue gas is natural gas which has been dedi-
eated to interstate commerce by the sale to and trans-
portation by El Paso in interstate commerce.
The sale of this natural gas may be abandoned only
upon proper Commission authorization. Sunray Mid-
Continent Oil Co. v. FPC, supra. Warren and Phil-
lips have a duty to continue this service. Jd. Their
duty cannot be abrogated by either the termination
422
of the lessees’ leasehold interests or any sales con-
tracts between Gulf, et al. and either Warren or Phil-
lips. See United Gas Pipe Line Co. v. FPC, supra.
Neither can the nature of Warren’s and Phillips’
contracts with El Paso, which are for the sale of sur-
plus residue gas, limit the duty they have to continue
selling gas which they have dedicated to interstate
commerce. It is the actual physical movement of the
gas across state lines which is determinative. Once
natural gas has become jurisdictional it cannot cease
to be so as the result of either prior or subsequent
agreements between the parties. People of the State of
California v. Lo-Vaca Gathering Co., supra. ‘*The
service .. is distinct from the contract.“ Sunray
Mid-Continent Oil Co. v. FPC, supra. Just as service
must continue past the expiration of the sales con-
tract, so too, once dedication has occurred, must the
level of service continue despite the terms of any
specific contract.
El Paso does not contend that mere fluctuations in
the amounts of surplus residue gas sold by Warren
and Phillips to E] Paso require abandonment author-
ibation. However, El Paso does contend that a perma-
nent reduction in sales by Warren and Phillips of
natural gas presently flowing in interstate commerce
does require abandonment authorization. The diver-
sion of natural gas produced from the Waddell and
Goldsmith leases upon the termination of those leases
will result in a permanent reduction in the sales of
gas by Warren and Phillips to El Paso.
III. Southland, et al. must obtain abandon-
ment authorization in order to discontinue
sales of natural gas dedicated to interstate
commerce by Gulf, et al.
[285]
A. El Paso Natural Gas Co. v. Perry R. Bass must
be confined to its facts.
As indicated above, in Perry R. Bass, supra, a pro-
ducer (i.e. Bass) pursuant to terms of a farmout
agreement with Shell exercised his option to convert
his overriding royalty interest into a 50 percent work-
ing interest. Although Shell had been selling all of the
natural gas produced from a well to El Paso for re-
sale in interstate commerce, the producer, after con-
verting his overriding royalty interest into a working
interest, sought to sell his 50 percent share of the
production to Natural Gas Pipe Line Company
(‘‘Natural’’) also for resale in interstate commerce.
The Commission held that Bass was free to sell his
shares of gas to Natural without first obtaining aban-
donment authorization since neither his prior royalty
interest nor his conversion from a royalty interest to
a working interest made him a seller of natural gas
in interstate commerce.
Factually, the situation in Bass was quite different
from the one under present consideration. In this case,
the entire output of the wells is proposed to be di-
verted to intrastate commerce whereas in Bass the
producer merely chose to sell to another interstate
pipeline company for resale in interstate commerce.
Furthermore, Bass and Shell executed an agreement
specifically prohibiting Shell from disposing of Bass’
424
share of the gas. Apparently no such agreement was
executed between Gulf, ct a/., the lessees, and South-
land, et al., the reversionary interest owners.
Most important, however, is the difference in the
instruments by which the respective parties obtained
their interests. The arrangement the parties used in
Bass was the farmout agreement. In supporting its
decision in Bass, the Commission heavily stressed that
[t larmouts serve the public interest, for they are a
means whereby an available drilling site is placed
with a person having available risk capital to the end
that the site is explored. Without farmout arrange-
ments, exploration will be limited, for exploration
would then occur only when there is a coincidence of
site availability and exploration risk capital in one
producer.“ Id. at 1277. The Commission felt that if
abandonment authorization was required of the pro-
ducer, It he future use of farmout agreements in the
natural gas producing industry would be discour-
aged, a result clearly contrary to the public inter-
est. Id. at 1278.
However, the instrument involved in this case, the
fixed term lease, does not particularly serve the public
interest. In fact, on page 5 of the Petition to Inter-
vene and Answer of Mineral Interest Owners to Peti-
tion for Declaratory Order filed herein, these rever-
sionary interest owners point out that s luch term
oil and gas leases now are extremely rare, in fact al-
most unique and. . ‘of no practical importance’
in Texas. Walker, The Nature of Property Interests
Created by an Oil Gas Lease in Teras, 7 Tex. L. Rev.
1, 15 (1928).“ [286] Thus it is unlikely that requiring
abandonment authorization in this instance would
pose a threat to the public interest.
425
For these reasons it is urged that the holding in
Bass be limited to the factual situation presented in
that proceeding. The stated goals of the Commission
in Bass were to regulate through application of the
Act in such manner as to encourage exploration, de-
velopment, and dedication of natural gas to the inter-
state market. Jd. at 1277. Because of the factual dis-
tinetions between Bass and the instant proceeding,
these goals can only be furthered in the present sit-
uation by requiring abandonment authorization.
B. The reversionary interest owners are bound by
the prior dedication of the gas reserves to inter-
state commerce.
As the court in Mobil Oil Corp. v. FPC, 463 F.2d
256, 260 (D.C. Cir. 1971), cert. denied, 406 U.S. 976
(1972) pointed out, the lease term gives the lessee
all possessory interests in gas produced during the life
of the lease, including full right of sale. As a result
of their sales of casinghead gas, some of which is
eventually resold in interstate commerce, Gulf, et al.
dedicated all of the gas produced from their leasehold
interest to interstate commerce. A gis flow, once jur-
isdictional, remains so until abandonment is permit-
ted. Sunray Mid-Continent Oil Co. v. FPC, supra.
This is so even though ownership of the gas may pass
into the hands of successors in interest. See Cumber-
land Natural Gas Co., 34 F. P. C. 132 (1965).
Each successor, by stepping into the shoes of his
predecessor, takes the properties and sales subject to
any benefits or infirmities inherent therein.“ Graridge
Corp., 30 F.P.C. 1156 (1963). Until termination of
the lease, Gulf, et al. are in possession of the entire
interest in the natural gas produced. Upon termina-
tion, the reversionary interest owners will succeed to
this interest. They must take this interest subject to
the prior dedication of the gas by the lessees.
It is not always the case that a particular producer
must himself choose to sell gas in interstate commerce
and commence deliveries to come within the Commis-
sion’s jurisdiction. This point is well illustrated by
the recent Commission decision in Blair-Vreeland, Op.
No. 724, —— F.P.C. ——, (issued March 18, 1975).
John B. Vreeland doing business as Blair-Vreeland
(**Vreeland’’) had entered into a farmout agreement
with Exxon covering 480 acres of land in Duval Coun-
ty, Texas. Ile proceeded to drill two wells whereupon
he was advised by the Tennessee Gas Pipe Line Com-
pany (“Tennessee that the gas from these wells had
been dedicated to interstate commerce as a result of
sales to Tennessee by Exxon, Vreeland’s predecessor
in interest. Vreeland contracted to sell the gas from
both wells to the Lo-Vaca Gathering Company for re-
sale in intrastate commerce. The Commission found
that the gas from these wells had been dedicated to
Tennessee as a result of its contract with [287] Exxon
and that Vreeland was bound by this previous dedi-
eation. Even though Vreeland had not himself made
sales of natural gas in interstate commerce for resale,
the Commission, by instead looking at the prior his-
tory of the acreage and reservoirs involved, held that
Vreeland as successor in interest could not withdraw
any portion of dedicated and certificated acreage from
the dedication. The important factor was the actual
flow of gas in interstate commerce rather than in
whom ownership was vested at the moment. Vreeland
427
had never been a willing seller in interstate com-
merce yet he could only attempt to avoid the prior
dedication of gas from his wells by means of Section
7(b) abandonment procedures.
On June 11, 1975, the Commission issued a decision,
Mitchell Energy Co., Op. No. 733, —— F.P.C. ——
(hereinafter cited as Mitchell), which further sup-
ports its holding in Blair-Vreeland, supra. The Com-
mission in Mitchell held that the assignment of an in-
terest in a gas producing field could not defeat the
fact that all of the natural gas therefrom had pre-
viously been dedicated to interstate commerce. The
assignee was held duty bound to continue service even
after the expiration of the assignor’s sales contract
which assignee had assumed. This was true whether
the gas was produced from the new wells drilled by
the assignee or from those developed by his predeces-
sor in interest.
The fact of dedication ‘‘from all available reserves“
was determined from a 1949 sales contract between
assignor Gray Wolfe and Tennessee Gas Pipeline Co.
Even though Mitchell had not itself made sales to
Tennessee, the Commission looked to the history of
the properties involved to find that Mitchell was
bound by the prior dedication. In summarizing its
position the Commission stated,
. . what is controlling is the service that Gray
Wolfe was rendering. This does not depend on
the continuation of the original sales contract of
1949, but the contract serves to indicate the type
of service that was to be rendered and which was
certificated by the Commission. Here the contract
plainly ineluded all gas produced from Gray
Wolfe’s interests in the Pinehurst Field. Gray
Wolfe was required to render that service and
to continue rendering that service. . Therefore
all sales made or to be made by Mitchell from
the Gray Wolfe reserves in the Pinehurst Field
are subject or will be subject to the Commission’s
jurisdiction and Mitchell must continue to sell
such gas in interstate commerce until relieved by
action of the Commission under Section 7(b) of
the Natural Gas Act. Id. at 6.
Likewise, the reversionary interest owners in this
ease must obtain abandonment authorization before
they may cease sales of natural gas from reserves ded-
icated to interstate commerce by Gulf, ct al. As long
as the lessees have not obtained abandonment author-
ization they are [288] required to continue rendering
their service of selling natural gas for resale in inter-
state commerce. Southland, et al. take their interest
subject to this duty since the gas reserves in issue are
already under the Commission’s jurisdiction and will
remain so until abandonment is authorized.
IV. The public interest requires that abandon-
ment authorization be obtained before sales
the current purchaser may cease.
“The proscription of abandonment without prior
Commission approval was designed to ensure stability
and continuity of service.“ Farmland Industries v.
Kansas-Nebraska Natural Gas Co., supra at 680. As
concern over the present energy crisis’? becomes more
and more acute, these goals become increasingly im-
429
portant. To hold that abandonment authorization is
not required in this instance would be to“ shift from
the governmental agency to a private interested party
the determination of this critical problem of the needs
of the public, not alone for today, but for the explo-
sive tomorrow.“ United Gas Pipe Line Co. v. FPC,
supra at 697.
One goal of the Act is to allow competing interests
to come forward in a hearing before the Commission
to enable the Commission to arrive at a decision as
to whether an abandonment would be in the public
interest. In Transcontinental Gas Pipe Line Gas Corp.
v. FPC, 488 F.2d 1325 (D.C. Cir. 1973), cert. denied,
417 U.S. 921 (1974) (hereinafter cited as La Gloria
Field) the court held that since ‘‘the public interest
is the ultimate criterion under Section 7(b),”’ the
Commission must afford a full comparative needs
hearing regardless of any contractual arrangements
entered into by the parties involved.
La Gloria Field involved two pipeline companies,
Transcontinental Gas Pipe Line Corporation (‘‘Trans-
co and Natural Gas Pipeline Company of America
(*‘Natural’’) which were engaged in the transporta-
tion and sale of natural gas in interstate commerce.
Both companies purchased their gas from La Gloria
Field producers. Upon discovering that they could not
continue to meet the requirements of both companies
and still have adequate gas for other needs, the pro-
ducers entered into an agreement with Naturel, which
was approved by the Commission, providing for a sub-
stantial reduction in deliveries to Natural until its
contract expired. In return, the producers agreed to
dedicate all the natural gas reserves in the La Gloria
430
a:
Field to Natural and to seek abandonment of all de-
liveries to Transco when its contract expired.
At the termination of Transco’s contract, abandon-
ment proceedings were instigated and the Commission
approved abandonment, according dispositive weight
to the private contractual arrangement absent a show-
ing of countervailing ‘unequivocal public necessity.”’
Id. at 1329. The court held that such rigid deferral to
a contractual arrangement was an inadequate means
to assure vindication of the transcendent [289] inter-
ests of the public.“ Jd. The case was remanded to the
Commission for further proceedings so that the com-
parative needs standard enunciated by the court in
“\Michigan Consolidated Gas Co. v. V, 283 F.2d 204
(D.C. Cir: 1960), cert. denied, 364 U.S. 913 (1960),
could be applied. The court in Michigan Consolidated
established the fundamental principle that all factors
relevant to the determination of which course of ac-
tion best promotes the overall publie interest must
be fully considered, giving primary importance to a
comparison of the needs of the competing natural gas
systems and the public markets they serve. Id. at 214.
The Commission should also take into consideration
economic effect on the pipelines and their consumers,
the presumption in favor of continued service and the
relative diligence of the pipelines in providing for
adequate natural gas supplies.“ La Gloria Field, su-
pra at 1330.
The important publie interest considerations which
were stressed by the court in both Lo Gloria Field
and Michigan Consolidated can only be developed dur-
ing the course of an abandonment authorization pro-
ceeding as set forth in Section 7(b) of the Act and
431
the corresponding regulations. Once facilities are
placed into operation under authority of the Natural
Gas Act, justifiable public reliance attaches to their
continued operation under Section 7(b), for public
rights and responsibilities arise upon the dedication
of facilities to the puble use and these rights cannot
be protected nor these responsibilities acquitted by the
individual natural gas companies.’’ Continental Oil
Co. v. United Gas Pipe Line, 31 F.P.C. 1079, 1081
(1964), af d. 350 F.2d 689 (5th Cir. 1965), f d. 385
U.S. 83 (1966). To ensure that there is no betrayal
of ‘‘justifiable publie reliance“ nor an abdication of
responsibility, it is essential that the Commission re-
quire abandoument proceeding prior to the cessation
of sales of natural gas which enter El Paso’s inter-
state pipelines. It is especially important that little
used, impractical instruments such as the fixed terin
leases in question not be allowed to defeat the goals
of Section 7(b).
V.
CONCLUSION
Wuererore, for the foregoing reasons, El Paso Nat-
ural Gas Company respectfully requests that the Com-
mission hold that sales of natural gas presently being
sold for resale in interstate commerce may not cease
as the result of the termination of two 50-year fixed
term leases without prior Commission authorization
pursuant to Section 7(b) of the Natural Gas Act. El
Paso respectfully requests that the Commission hold
that, before current sales may cease and the natural
gas diverted to intrastate commerce, such authoriza-
tion must be sought and obtained by (i) Gulf, et al.
432
as lessees under said leases and currently sellers of
natural gas produced therefrom for resale in inter-
state commerce, (ii) Warren and Phillips as sellers
of residue natural gas to El Paso for resale in inter-
state commerce, and (iii) Southland, et al. [290] as
reversionary mineral interest owners who, upon term-
ination of the leases in question, will have full rights
to the natural gas in issue.
Respectfully submitted,
Ex Paso NATURAL Gas Company
By /s/ Arrnur R. FokuAx EK, Jr.
Arthur R. Formanek, Jr.
One of Counsel
Gi. Scorr CumIna
General Counsel
L. Paso NATURAL Gas COMPANY
Post Office Box 2185
Houston, Texas 77001
Ricnarp S. Morris
Assistant General Counsel
Harris S. Woop
Artuur R. ForMANEK, In.
Eu Paso NATURAL GAS Company
Post Office Box 1492
I] Paso, Texas 79978
C. FRANK REIFSNYDER
Hocan & Hartson
815 Connecticut Avenue
Washington, D. C. 20006
Counsel for
EL. Paso NATURAL Gas CoMPANY
Dated: June 20, 1975
433
[291]
(VERIFICATION OMITTED IN PRINTING)
[292]
(CERTIFICATE OF SERVICE OMITTED IN PRINTING)
[293]
UNITED STATES OF AMERICA
FEDERAL POWER COMMISSION
Docket No. CP75-209, et al.
Ex Paso NATURAL GAs CoMPANY, ET AL.
(Fitep June 20, 1975)
Initial Brief of Exxon Corporation
Martin N. Erck
Paut W. WRIGHT
Exxon Corporation
P. O. Box 2180
Houston, Texas 77001
SHERMAN S. PoLanp
BERNARD A. Foster, III
Ross, Marsn & Foster
730 - 15th Street, N.W.
Washington, D. C. 20005
Attorneys for Exxon Corporation
Dated at Washington, D. C.,
this 20th day of June, 1975.
435
[294]
UNITED STATES OF AMERICA
FEDERAL POWER COMMISSION
Docket No. CP75-209, et al.
EL Paso NATURAL Gas COMPANY, ET AL.
Initial Brief of Exxon Corporation
1
INTRODUCTION
These consolidated proceedings involve petitions by
El Paso Natural Gas Company (EI Paso) and Texa-
co Ine. (Texaco) for a declaratory order to determine
whether either the mineral fee owners or their lessees
must obtain abandonment authorization upon the ex-
piration of certain 50-year fixed term oil and gas
leases as a result of the lessees’ sales in interstate
commerce for resale of production from the leasehold
estates during the lease terms.’ Since Exxon Corpora-
tion (Exxon) is one of the mineral fee owners to
which El Paso’s petition relates, this brief will be
In Texaco’s petition, it is requested that the declaratory order
also determine whether the processor, which purchases the lessee ’s
production under a percentage arrangement and resells the gas in
interstate commerce, must obtain abandonment authority upon ex-
piration of the lease term. While this question was initially pre-
sented by El Paso’s petition, it was subsequently pointed out by
the lessee, and agreed to by El Paso, that the processor is a cor-
porate division of the lessee. As a result there is no sale by the
lessee to the processor for which abandonment authority might be
required. Consequently, El Paso’s petition is limited to the ques-
tions of the need for abandonment authority by the mineral fee
owners and the lessee.
436
limited to the issues presented by El Paso’s petition.
Exxon has never sold or delivered any production
from its mineral fee estate to E] Paso and Exxon has
no contractual obligation to do so. In no sense has
Exxon dedicated its property to interstate commerce.
Accordingly, Exxon denies that it requires abandon-
ment authorization upon the expiration of the 50-year
fixed lease term. To conclude otherwise would deny
Exxon the full enjoyment of its mineral fee estate at
lease expiration and thus deprive it of its property
without due process of law in violation of the Fifth
Amendment to the Constitution. Also, as we shall show
later, the lessee, Gulf Oil Corporation (Gulf), is not
required to secure [295] abandonment authorization
regarding production from the mineral fee estate.
II
FACTUAL AND ProcepUuRAL SUMMARY
On January 20, 1975, El Paso filed its petition in
Docket No. CP75-209 requesting the issuance of a de-
claratory order regarding a 50-year fixed term oil and
gas lease between Gulf and certain mineral fee own-
ers, dated July 14, 1925, as amended March 16, 1926.°
By such lease, the mineral fee owners granted Gulf
the right for a fixed term of 50 years to explore and
develop the minerals underlying certain properties lo—
eated in Crane County, Texas. Pursuant and subject
to its specifically limited lease authority, Gulf devel-
oped, inter alia, natural gas production and arranged
* Copies of the lease and amendment are appended to E] Paso’s
petition for a declaratory order. The original lease, as amended,
is between Gulf and Waddell, ct al. Exxon subsequently succeeded
to a portion of the mineral fee interests of Waddell, et al.
437
to sell it to EI Paso. The sale of the gas produced by
Gulf is made to El Paso at the outlet of the Waddell
Plant located in Crane County pursuant to two sur-
plus residue gas sales contracts dated January 26,
1951, and March 1, 1972.
On July 14, 1975, the 50-year fixed term oil and gas
lease expires by its own terms and Gulf’s leasehold
estate in the mineral rights is extinguished. The ex-
piration of the lease and the concomitant extinguish-
ment of Gulf’s leasehold estate on that date has been
conclusively decided by the Supreme Court of Texas
in Gulf Oi! Corp. v. Southland Royalty Co., 496 S. W.
2d 547 (1973). With the termination of the lease on
July 14, 1975, Gulf will, by operation of law, no long-
er have any right to sell gas production from the prop-
erties that were subject to the lease. Instead, that
right will belong exclusively to Exxon and the other
mineral fee owners. Neither Exxon, nor the other
mineral fee owners, has contracted to sell its gas to
El Paso. In its petition, El Paso questions whether
Exxon and the other mineral fee owners and Gulf
each have to obtain Commission authority to abandon
the delivery of gas to it upon expiration of the lease.
In effect, EI Paso seeks to acquire that which it has
no contractual right to purchase and which has never
been dedicated to it.
[296] On February 7, 1975, the Commission gave
notice of El Paso’s petition for a declaratory order.
According to Gulf’s Petition to Intervene and Response in
these proceedings these two contracts and their related Commis-
sion certificate authorizations are currently in the name of its
affiliate, Warren Petroleum Company, a Division of Gulf Oil Cor-
poration (Warren). Since Warren is a division of Gulf there is
no sale prior to the delivery of the gas to El Paso.
438
Thereafter, Exxon, the other mineral fee owners, and
Gulf each filed on or about March 3, 1975, their re-
spective answers to El Paso’s petition denying that
abandonment authority is required by any of them
upon lease expiration.
On April 8, 1975, Texaco filed its petition for a
declaratory order in Docket No. C175-594. According
to its petition, Texaco is a mineral fee owner under
another 50-year fixed term oil and gas lease with Gulf
involving properties in Ector County, Texas. The gas
produced from the leased properties is sold by Gulf
to Phillips Petroleum Company which processes such
production in its Goldsmith Plant prior to reselling
it to EI Paso. Unlike EI Paso, Texaco maintains in
its petition that no abandonment authority is required
at the expiration of its 50-year fixed term lease in
August, 1975.
By order issued June 3, 1975, the Commission con-
solidated the El Paso and Texaco petitions for deter-
mination.* No hearing was deemed to be required. In-
stead, the parties are each required to file simultaneous
The Commissions June 3, 1975, order correctly recites that
El Paso’'s petition originally questioned whether Exxon, the other
mineral fee owners, and Gulf, and Warren each had to obtain
abandonment authority upon expiration of the 50-year fixed term
lease. However, as noted at footnote 1, supra, El Paso later with-
drew its question as to whether Gulf required abandonment au-
thority for a percentage sale to Warren since, in fact, no sale
between the corporate affiliates exists. Accordingly, Exxon does
not propose to address itself to this question in this brief. How-
ever, even if such u sale did exist, no authority would be required
for the reasons set forth in its March 3, 1975, Answer in these
these proceedings.
439
initial briefs on June 20, 1975, with simultancous reply
briefs due June 25, 1975.
III
ARGUMENT
A. A Commission Order Requiring Exxon To Deliver
Production From Its Mineral Fee Estate To El
Paso Would Violate Exzon’s Fifth Amendment
Rights.
When the 50-year fixed term oil and gas lease expires
on July 14, 1975, the right to dispose of production
from the mineral estate vests in Exxon, as mineral fee
owner, unencumbered by any contractual commitment
to El Paso. Such lease grants no authority to Gulf, as
lessee, to commit production [297] after the lease term
expires. Accordingly, when El Paso contracted with
Gulf to purchase production from Gulf’s leasehold
estate, it did so subject to Gulf’s authority to sell such
production as circumscribed by the lease. Just as Gulf’s
right to sell production ceases when the lease expires,
so also does El Paso’s right to purchase such produc-
tion cease when the lease expires. Since Exxon itself
has not delivered or agreed to deliver any production
from its mineral fee estate to El Paso, Exxon has no
duty to El Paso and El Paso has no right as to Exxon
with respect to such production when the lease expires
on July 14, 1975.
Nevertheless, El Paso, through the guise of suggest-
ing that Exxon or Gulf may require abandonment
authority upon lease expiration, seeks to acquire pro-
duction from Exxon when it has absolutely no right
to make such purchase. In the succeeding subsections
440
of this brief we demonstrate that El Paso’s contrived
abandonment theories are totally without merit. But
before proceeding with such demonstration, a much
more fundamental Constitutional issue which under-
lies El Paso’s entire thesis must be recognized. Such
issue, when properly understood, dictates that the
abandonment order sought by El Paso must be denied.
The abandonment orders sought by El Paso would
deprive Exxon of its property without due process of
law in violation of the Fifth Amendment of the Con-
stitution. Exxon has no obligation to sell or deliver
production from its mineral fee estate to El Paso or to
anyone else. It has never delivered, nor agreed to de-
liver, any of its production to El Paso. Nevertheless,
the relief requested by El Paso would force Exxon's
delivery of its production to El Paso by precluding
the delivery of such production to anyone else, inelud-
ing Exxon itself. Thus, it would deny Exxon its right
to determine freely the disposition of its production.
Clearly, a Commission order that would require Exxon
to sell and deliver its production to El Paso involun-
tarily would deprive Exxon of its property in such
gas in violation of its Fifth Amendment rights.
[298] The mineral fee owner's fundamental Consti-
tutional right to determine initially whether it will
Moreover, Exxon cannot be deemed to have agreed to such
deliveries by reason of its agreement to lease its properties to
Gulf. As found by the Court in Mobil Oil Corp. v. FPC, 463 F.2d
256, 262 (D.C. Cir. 1972), cert. denied 406 U.S. 976 (1972) the
lessor, when it agrees to the lease of the mineral rights, has no
knowledge whether gas will be discovered, much less whether gas,
if discovered. will be sold or delivered in interstate commerce.
Clearly, Exxon may not be found to have constructively aequiesed
in a sale to El Paso by reason of the lease to Gulf.
41
embark upon a sale that will result in it and its prop
erty being subject to the Commission's jurisdiction
forms the basis for the many judicial decisions which
delineate and limit the Commission's authority under
the Natural Gas Act. The right to agree to a sale was
most suceinetly stated by the Fifth Cireuit in Southern
Louisiana Area Rate Cases, 428 F.2d 407 (1970) cert.
denied 400 U.S. 950 (1970) where the Court found
(at p. 428):
„Tbe producers have a fifth amendment right not
to be forced to sell or surrender their property
without either due process or just compensation,
but the Constitution gives them no right to raise
prices irrespective of Commission approval in the
absence of a deprivation of property.“
Similarly, in United Gas Pipe Line Co. v. Mobile
Gas Service Corp., 350 U.S. 332, 338-339 (1956) the
Supreme Court held that under the Natural Gas Act
relations between parties are established initially by
the contracts to which they voluntarily agree, and the
Commission is empowered only to supervise those con-
tracts for the protection of the public interest. More-
over, the Commission cannot require a producer to
sell its gas to a user that the Commission favors, FPC
v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1,
17 (1961), nor can the Commission require a producer
„to dedicate its gas to interstate commerce,“ Public
Service Commission of N.Y. v. F PC, 463 F.2d 824, 829
(1972). Clearly, the Commission is without authority
to require Exxon to deliver any production from its
mineral fee estate to El Paso because, were it to do so,
it would deprive Exxon of its property without due
442
process of law in violation of the Fifth Amendment
to the Constitution.
Although Exxon is a jurisdictional natural gas eom-
pany because it makes numerous other sales of natural
gas in interstate commerce for resale, it is not so situ-
ated insofar as production from its mineral fee estate
is concerned. Exxon has neither sold nor dedicated
such gas to interstate commerce. However, if the relief
requested by El Paso were granted, Exxon would be
forced to become a jurisdictional company as to such
production because such order would compel Exxon
to perform involuntarily the threshold jurisdictional
act of commencing deliveries in interstate commerce.
Under such circumstances, the issuance of such an
order to Exxon would be no different from the Com-
mission issuing an order to a widget company that
has just acquired some new natural [299] gas reserves
directing it to sell its production from such reserves
in interstate commerce. Congress simply has not vested
the Commission with the power to take private prop-
erty for a publie use.
The fact the Commission order sought by El Paso
would foree Exxon to initiate a jurisdictional sale
readily distinguishes this case from the traditional
Constitutional decisions which uphold the imposition
of economic regulation under the Commerce power de-
spite the fact that such regulation may reduce the value
of the regulated property, FPC v. Hope Natural Gas
Co., 320 U.S. 59 (1944) ; Nebbia v. New York, 291 U.S.
502 (1934). In those cases, the parties themselves volun-
tarily agreed to the sale which subjected their prop-
erty to regulation. No such agreement exists here. Thus,
443
the traditional Constitutional cases which approve
economic regulation after a sale has been voluntarily
made have no application here. Under these cireum-
stances, El Paso’s petitioned relief must be denied if
Exxon’s Fifth Amendment rights are not to be vio-
lated.
B. The Mineral Fee Owners Are Not Required To
Obtain Abandonment Authority.
We turn now to the two specific questions raised by
El Paso’s petition which are summarized in the Com-
mission’s June 3, 1975, order. First, it is questioned
whether Exxon and the other mineral fee owners re-
quire abandonment authority at the end of the lease
term in order to dispose of their fee interests in the
gas to others than El Paso. This question assumes
implicitly a critical fact that simply does not exist.
Before any question of a need for abandonment au-
thority can arise, there must first have been a sale of
gas by Exxon and the other mineral fee owners to be
abandoned. Here, however, Exxon and the other min-
eral fee owners are expressly precluded by their lease
with Gulf from making any sales of gas from their
mineral estate during the 50-year fixed lease term.
During such period, the exclusive right to sell produc-
tion from the leased properties lies with Gulf. There-
fore, prior to July 14, 1975, when the lease expires,
Exxon and the other mineral fee owners have not sold,
because they could not sell, any gas from the leased
properties to El Paso. Notably, even El Paso does not
allege that it has purchased any gas from Exxon and
the other mineral interest owners. Consequently, there
has been no sale or service by or between these parties
444
to which the Commission’s abandonment jurisdiction
may apply.
[300] The fact that Exxon and the other mineral fee
owners, as royalty owners during the term of the 50-
year lease, make no sales subject to the Commission’s
jurisdiction has been conclusively determined in Mobil,
supra. There the D.C. Circuit held that (463 F.2d at
262) :
„As to leases of reserves from landowners to
lessee-producers there is no knowledge when the
lease is executed of the ultimate destination of
any gas that might be discovered, no knowledge
whether the gas, if discovered, will be sold either
to an interstate pipeline or to any other customer
that will move it across state lines. While the lease
by the landowner provides for a royalty in the
event of the discovery and sale of gas, typically
he has no control over any incident of such sale
either as to the quantity to be sold, the price to
be paid, the identity of the purchaser or whether
it shall be sold in interstate or intrastate com-
merce. To refer to the royalty owner as engaging
in the sale is to depart from the common under-
standing of the words used, industry parlance,
economic equivalent, or any other foundation
hitherto considered a source for discerning Con-
gressional intention.’’ (footnote omitted)
Thus, Exxon and the other mineral fee owners have
not made and could not make any sales of gas to which
the Commission’s abandonment jurisdiction can apply.
And, this basic fact is not altered by reason of their
445
retention of a royalty in the event Gulf discovered and
sold gas.
The holding of Mobil also demonstrates El Paso’s
misplaced reliance upon the commingling doctrine of
California v. Lo Vaca Gathering Co., 379 U.S. 366
(1965). El Paso suggests that its purchase of gas from
Gulf has somehow tainted the volumes belonging to
Exxon. However, before the Lo Vaca commingling
doctrine can have any applicability, there must be a
sale of gas by Exxon which is commingled with that
belonging to Gulf. However, as recognized by Mobil,
Exxon makes no sale of gas while the lease is in effect.
Thus, there never has been a commingling of the vol-
umes sold within the meaning of Lo Vaca. In contrast
to El Paso’s suggestion Exxon’s mineral fee produc-
tion is free of dedication to El Paso.
[301] The Commission itself has recognized in E/
Paso Natural Gas Company v. Perry R. Bass, 48 FPC
1269 (1972) that the delivery of gas by the lessee in
interstate commerce does not impair the rights of
the mineral owner to market its gas. In that case, El
Paso had been purchasing the full wellstream in a
particular well from the lessee, Shell Oil Company.
When the lessor, Perry R. Bass, exercised his back-in
working interest, El Paso questioned whether Bass
required abandonment authority before he could sell
his working interest gas to a pipeline company other
than El Paso. The Commission held that no abandon-
ment authority was required because El Paso’s rights
to purchase gas from the well were no greater than
Shell’s right to sell it.
Because of the extremely close factual relationship
between the Bass opinion and the instant proceeding
446
it is appropriate to quote extensively from the Com-
mission’s unanimous holding in that case (48 FPC at
1276-1277) :
The thrust of El Paso’s argument is that El Paso
in some manner acquired a right to purchase that
which Shell had no right to sell. We will not so
alter the basic property rights of mineral owners
through the fiction .of Section 7(b) application.
El Paso is charged with notice of the limitations
on Shell’s power to contract, for such limitations
preceded the Shell-El Paso agreement by seven
years and were express in the very instrument
which marked Shell’s inception of title, the 1956
farmout agreement. We note that the Shell-El
Paso gas contract did not purport to cover any
gas save that produced from ‘the properties owned
by Shell.’ In law, Shell contemplated selling, and
El Paso contemplated buying, Shell’s gas. Neither
party can be heard to say that the gas contract
can function to impair the pre-existing title of
Bass, who was not a party to the gas contract and
who could not have prevented its execution. El
Paso’s rights to purchase gas from the James
Ranch Well can rise no higher than Shell’s rights
to sell that gas, yet El Paso secks that result by
its claim that it is entitled to purchase Bass’ gas
until this Commission orders otherwise. Shell
obtained its working interest by lease assignment
from Bass. The Commission recognizes the legal
requirement that [302] when an assignment of
a lease oceurs, the successor steps ‘* * * into the
shoes of his predeceSsor [and] takes the properties
* * * subject to any benefits and infirmities in-
17
herent therein.’ Graridge Corp., et al., Opinion
No. 408, 30 FO 1156 at 1162. Shell took the James
Ranch lease subject to the infirmity that it could
not sell Bass’ gas, or bind Bass to a gas sales
contract.
„At the time of execution of the Shell-El Paso
contract, and at the time of our certification of
the sale and the facilities there provided for, Bass
was a royalty owner. Bass so remained until the
happening of the contingency-payout to Shell of
its well costs—which triggered Bass’ right to con-
vert its royalty interest to a working interest. As
a royalty owner, Bass was not a ‘seller’ within
the meaning of the Natural Gas Act and was not
in any way subject to our jurisdiction. This is the
express holding of Mobil Oil Corp. v. F. P. C., 463
F.2d 256 (CADC-1971) cert. denied 406 U.S. 976
(1972) which overturned Opinion No. 562, 42 FPC
164. Section 7(b) operates only on ‘natural gas
companies’, that is, as defined in Section 2(6) of
the Act, those who transport or sell for resale in
interstate commerce. It follows, therefore, that
Section 7(b) does not apply to Bass, since Bass
is neither a seller or transporter at this time.
To hold otherwise would result in a very force-
ful exercise of Commission jurisdiction over a
class of persons which the courts have decreed to
be outside our jurisdiction. Were we to read See-
tion 7(b) as applicable to royalty owners, we would
exert rate control indirectly—by examination of
Section 7(b) economic issues—when we have been
told that we are without authority to exert direct
rate control over royalty owners. Mobil v. F. P. C.,
448
supra. We will not so subvert the clear holding
of a court.“ (footnote omitted)
Here, as in Bass, there is no basis in law or fact
for the Com nission to find that Exxon will become
automatically bound by Gulf’s certificates or contracts
with El Paso upon the expiration of the 50-year fixed
term lease. Like Bass, Exxon [303) was a royalty
owner at the time of the execution and certification
of the Gulf contracts with El Paso. As a royalty owner,
Exxon, like Bass, neither owns nor operates any facili-
ties in connection with the existing transaction between
Gulf and El Paso which are subject to the Commis-
sion’s jurisdiction. Moreover, Exxon, like Bass, did not
grant Gulf any authority with respect to the disposi-
tion of production from its mineral fee estate, and did
not itself agree to any sale of such production to El
Paso. Thus, to hold that Exxon, as fee owner, somehow
automatically would be bound involuntarily to deliver
its production to El Paso would clearly subvert the
holdings of Mobil and Bass.
C. Gulf Is Not Required To Obtain Abandonment
Authority.
El Paso questions whether Gulf requires abandon-
ment authority to ‘‘transfer’’ Gulf’s interests to Exxon
at the expiration of the lease term. At the outset, it
must be recognized that there is no transfer“ of inter-
ests at the end of the lease term. On July 14, 1975,
Gulf’s leasehold estate simply expires. Thus, there
simply is no “ transfer“ either in law or in fact for
the Cominission to approve.
449
Moreover, the Commission’s opinion in Bass dictates
that no abandonment authority is required by Gulf.
There, Bass, in his lease to Shell, precluded Shell from
disposing of his working interest in the gas production.
As a result of this contractual limitation, the Com-
mission found that Shell could not have sold Bass’
gas to El Paso and El Paso could not have purchased
it. Thus, the Commission held that its power to require
abandonment authorization, of necessity, is limited to
the gas which Shell had the right to sell.
Here, Gulf, like Shell, obtained its right to exploit
certain oil and gas rights through a lease from Exxon.
Such lease granted Gulf authority to dispose of pro-
duction only during the 50-year fixed term. Gulf had
no right either under the lease or otherwise to commit
Exxon’s fee interest in production to El Paso. Thus,
Gulf’s right to sell production under its contract with
El Paso and El Paso’s right to purchase production
from Gulf ceases with the expiration of the lease. Since
Gulf has no right to sell production beyond the 50-year
fixed lease term, it, like Shell, does not require aban-
donment authorization when the lease expires. And,
in any event, it is apparent from El Paso’s petition,
and stated in Gulf’s answer, that Gulf will continue to
sell residue gas to El Paso pursuant to their existing
surplus residue gas sales agreements.
[304] IV
CONCLUSION
WHEREFORE, Exxon requests that the Commission
find that there has been no dedication of production
from its mineral fee estate and that the Commission
450
declare that no abandonment authority is required at
the expiration of the 50-year fixed term oil and gas
lease.
Respectfully submitted,
Exxon CORPORATION
MARTIN N. ERCK
Pau. W. WMOHT
Exxon CORPORATION
P.O. Box 2180
Houston, Texas 77001
SHERMAN S. POLAND
BERNARD A. Foster, III
Ross, Marsu & Foster
730-15th Street, N.W.
Washington, D.C. 20005
By /s, BERNARD A. Foster, III
Bernard A. Foster, III
Dated at Washington, D. C.,
this 20th day of June, 1975.
[305 ]
(CERTIFICATE OF SERVICE OMITTED IN PRINTING)
451
[306]
UNITED STATES OF AMERICA
BEFORE THE FEDERAL POWER COMMISSION
Docket No. CP75-209
Ext Paso NATURAL GAs COMPANY
Docket No. CI75-594
Texaco, Inc.
(ReEcEIvVED JUNE 20, 1975)
Initial Brief of Gulf Oil Corporation
Docket No. CP75-209 involves a Petition by El
Paso Natural Gas Company (EI Paso) for a declara-
tory order resolving three questions:
1. Whether Gulf Oil Corporation (Gulf) and
other lessees under fixed term leases which expire
July 14, 1975 Who have been selling gas pro-
duced from said lease on a percentage type basis
to Warren Petroleum Corporation for resale in
interstate commerce, [must] obtain abandonment
authorization pursuant to Section 7(b) of the Nat-
ural Gas Act?“
2. Whether the owners of the reversionary min-
eral interests, Exxon, et al., under the fixed term
leases may divert natural gas from its present
movement in interstate commerce to delivery and
sale in intrastate commerce ?”’
452
3. Whether Warren Petroleum Corporation '
may, without prior Commission authorization, re-
duce its sales of residue gas to Kl Paso to the
extent such reduction is the result of the termina-
tion of the fixed term leases ?
The Petition of Texaco Inc., raises substantially the
same issues with regard to another fixed term lease
owned by Gulf in Ector [307] County which expires
August 7, 1975, and under which Texaco is a rever-
sionary mineral owner. The gas is currently being sold
by Gulf to Phillips Petroleum Company (Phillips).
I.
GuLF’s Postriox
It is Gulf's position that it is not required to secure
any authorization from the Commission to discontinue
deliveries of gas to El Paso or Phillips upon expira-
tion of the term leases.
II.
STATEMENT OF Facts
All parties are in agreement that the facts in both
proceedings are without dispute. The facts in EI Paso,
Doeket CP75-209, are as follows:
On January 26, 1951, El Paso entered into a con-
tract with Gulf to purchase ‘‘surplus residue gas
— —
‘As El Paso has since conceded, this question actually relates
to Gulf Oil Corporation, since Warren Petroleum Corporation has
been liquidated and its Certificates, including the one involved,
transferred to Gulf as a successor in interest. The operations of
the former Warren Petroleum Corporation are operated as a Divi-
sion of Gulf under the name Warren Petroleum Company, a
Division of Gulf Oil Corporation.
453
available for sale“ from casinghead gas processed in
Gulf’s Waddell Plant in Crane County, Texas. The
Commission, by Order dated May 28, 1956, issued a
Certificate of public convenience and necessity to Gulf
in Docket No. G-7156. The Gulf-El Paso contract was
amended from time to time to increase the volume
of surplus residue gas covered by the sale. As a result,
the Commission issued orders from time to time, in-
cluding one dated August 1, 1956, in Docket No. G-
57156, and one dated February 24, 1958, in Docket No.
G-13445, amending the Certificate to include these
increased volumes. Part of the residue gas sold by
Gulf to El Paso after processing in the Waddell
Plant was produced from two oil and gas leases which
provided that the leases should terminate after a fixed
period of time. Exxon, Southland and others are the
owners of the reversionary mineral interests under
said leases. Litigation developed between Gulf and the
reversionary mineral owners with regard to the date
on which the fixed term of the lenses expired. This
litigation was consummated in the decision of the
Supreme Court of Texas in Gulf Oil Corporation, et
al. v. Southland Royalty Company, et u., 496 SW (2d)
547 (1973) which held that the term leases will ex-
pire on July 14, 1975, and that on that date the min-
eral rights, including gas, under said leases, will
revert as a matter of law to the reversionary mineral
owners, and that thereafter Gulf would have no right,
title or interest therein.
In Texaco, Ine., Docket No. C1I75-594, the facts are
as follows:
[308] Texaco is the owner of one-fourth of the re-
versionary mineral interests under a term lease to
454
Gulf, a copy of which is attached as Exhibit A“ to
Texaco’s Petition for Issuance of a Declaratory Or-
der. The term of this lease expires August 7, 1975,
after which date one-fourth of the mineral rights, in-
cluding gas, will revert as a matter of Law to Texaco.’
Gulf is currently selling casinghead gas produced
from this fixed term lease to Phillips pursuant to the
terms of a percentage type Casinghead Gas Contract
dated November 9, 1971, a copy of which, marked
Exhibit A' is attached to Gulf’s Petition to Iuter—
vene in the Texaco proceeding. This contract is for
a term, which as to Texaco’s mineral interest, will
expire with the expiration of the term lease covering
said interest. Gulf understands that Phillips processes
the gas delivered to it in its Goldsmith Plant in Ke-
tor County, Texas, and sells the surplus residue gas
to El Paso pursuant to various FPC Rate Schedules.
Texaco is not a party to Gulf's Casinghead Gas Con-
tract with Phillips, and has never sold any gas to
Phillips produced from the lands covered by the fixed
term lease.
III.
El Paso’s first question as to whether Gulf should
he required to secure abandonment authority before
ceasing deliveries of the gas produced from the term
leases to Warren Petroleum Corporation has been
disposed of by agreement. In Paragraph IV of its
Answer to Gulf’s Petition to Intervene, and in Para-
* The owners of most but not all of the balance of the mineral
interests have extended the lease by agreement. The gas attrib
utable to these interests will continue to be delivered by Gulf to
Phillips in accordance with Gulf’s Casinghead Gas Contract.
455
graph II of its Motion for a Briefing Schedule, El
Paso concedes that by virtue of the merger of War-
ren Petroleum Corporation into Gulf, there are no
sales of gas between Gulf and Warren for which aban-
donment authority could be required. The details of
this merger and the Commission’s Order approving
Gulf’s suecession to Warren Petroleum Corporation’s
Rate Schedules are set forth in Gulf’s Petition to
Intervene in the El Paso proceeding in Paragraph
IV, and are incorporated herein.
IV.
El Paso’s second question as to whether the rever-
sionary mineral interest owners are required to se-
eure Commission [309] authorization prior to dispo-
sition of their gas after termination of the leases is
u matter for the reversionary mineral owners, al-
though much of the discussion which follows is equally
applicable to that question.
V.
The remaining question raised by El Paso is wheth-
er Gulf’ should be required to secure Commission
authorization before reducing its sales of surplus resi-
due gas from the Waddell Plant to El Paso follow-
ing termination of the fixed term leases on July 14,
1975. A similar, although not identical question, in-
volves Gulf’s delivery of gas to Phillips attributable
to Texaco’s reversionary mineral interest after ex-
EI Paso couched its question in terms of Warren Petroleum
Corporation but since Warren has been merged with Gulf, the
question is actually directed at Gulf.
456
piration of the fixed term of that lease on August 7,
1975.
It is Gulf’s position that in neither case did it pur-
port to dedicate the gas to El Paso which it will not
own after expiration of the leases, and that had it at-
tempted to do so, any such dedication would have been
ineffective as a matter of law. Gulf’s contract to sell
residue gas to El Paso from its Waddell Plant* cov-
ers precisely what the language implies ‘‘surplus resi-
due gas available for sale.“ This gas results from
processing gas produced from various leases owned
by Gulf or purchased from other producers. Upon ex-
piration of the fixed term leases, the gas produced
therefrom will no longer contribute to the surplus
residue gas Gulf could sell to El Paso. As a matter
of law, this gas will belong to the reversionary min-
eral owners and Gulf will have no control over it or
their disposition thereof. The same is true with regard
to Gulf’s sale of gas produced from the term lease
covering the Texaco mineral interest. The Casinghead
as Contract with Phillips terminates by its own
terms as to the Texaco interest with the termination
of the lease covering such interest. Gulf attempted no
dedication of gas beyond the interests it owned end
no authority is required from the Commission to limit
its deliveries to EI Paso and Phillips to the interests
it owned when those commitments were made.
Furthermore, even if Gulf had attempted to com-
mit the gas that will be the property of reversionary
Warren Petroleum Company, a Division of Gulf Oil Corpora-
tion’s Rate Schedule No. 43.
457
mineral owners beyond the term of its ownership,
such attempt would have been ineffective to bind it
to continue a delivery of gas to which it had no right.
[310] El Paso v. Bass, Opinion No. 638, 48 FPC
1269 (1972) is dispositive of this question. In that
case Bass farmed out leased acreage to Shell, reserving
the right to one-half of the working interest after the
well had paid out. Shell drilled a well and contracted
to sell the gas to El Paso. The well paid out. Bass
claimed his one-half of the working interest. El Paso
filed a Petition for a Declaratory Order as it did in
this proceeding, to require Bass to secure Commission
approval before proceeding with his contemplated sale
of the gas to another purchaser. The Commission held
that no Commission action was required, The Commis-
sion’s observations are startlingly applicable to this
proceeding. The Commission stated :
“The thrust of El Paso’s argument is that El
Paso in some manner acquired a right to purchase
that which Shell had no right to sell. We will not
so alter the basic property rights of mineral own-
ers through the fiction of Section 7(b) application.
El Paso is charged with notice of the limitations
on Shell's power to contract, for such limitations
preceded the Shell-El Paso agreement by seven
years and were express in the very instrument
which marked Shell’s inception of title, the 1956
farmout agreement. We note that the Shell-El
Paso gas contract did not purport to cover any
gas save that produced from ‘the properties owned
by Shell.’ In law, Shell contemplated selling, and
458
311
El Paso contemplated buying, Shell’s gas.“ (p. 9,
Op. 638)° '
El Paso’s position here is substantially the same,
that it somehow acquired the right to purchase that
which Gulf had no right to sell. The leases under which
Gulf acquired its fixed term rights were executed many
years before any contract was made with El Paso.
These leases were of record and in any event Gulf
never purported to sell to El Paso gas to which it had
no right. The Commission further stated:
Neither party can be heard to say that the gas
contract can function to impair the pre-existing
title of Bass, who was not a party to the gas con-
tract and who could not have prevented its execu-
tion. EI Paso’s rights to purchase gas from the
James Ranch Well can rise no higher than Shell's
rights to sell that gas, yet El Paso seeks that result
by its claim that it is entitled to purchase Bass’
gas until this Commission orders otherwise. Shell
obtained its working interest by lease assignment
from Bass. The Commission recognizes the legal
requirement that when an [311] assignment of a
lease occurs, the successor steps... into the shoes
of his predecessor [and] takes the properties . . .
subject to any benefits and infirmities inherent
therein.’ Graridge Corp., et al., Opinion No. 408,
30 FPC 1156 at 1162. Shell took the James Raneh
lease subject to the infirmity that it could not sell
Bass’ gas, or bind Bass to a gas sales contract.“
(P. 9, Op. 638)
* All emphasis in the brief is added.
459
Language could hardly be more applicable to this
proceeding. Gulf, like Shell, never owned the gas which
El Paso would subject to Commission authority. As the
Commission pointed out in Bass, neither party can be
heard to say that Gulf’s contracts with El Paso and
Phillips could impair the pre-existing reversionary
title of the mineral owners, even if they had purported
to do so, which they did not.
The above quotation, beginning with the words El
Paso’s right to purchase.. was quoted by the Com-
mission with approval in Blair-Vreeland, Docket C1I74-
331, in Opinion No. 724A, page 4, as recently as May
14, 1975. In that case Blair-Vreeland drilled wells on
a farmout from Exxon which covered a lease which
had previously been dedicated by contract to Tennes-
see. The Commission held that Blair-Vreeland was a
successor in interest to Exxon, and as such bound by
its contract dedication. The Commission distinguished
the Bass case in part with the above quotation. In its
discussion, the Commission specifically agreed with the
following statement, taken from Blair-Vreeland’s
application :
ee. dn Bass the question was not what Bass
could bestow on Shell, but what Bass in fact did
bestow [on Shell] by way of a farmout agreement.
Bass retained a eth override convertible into a
% working interest after puyout of the cost of
drilling the well to Shell. Shell attempted to dedi-
cate 100% of the gas [to El Paso] and the Com-
mission held that the gas to which Bass was en-
titled (44) was not dedicated because it was never
owned by Shell. (Application, pp. 10-11)“ (p. 4,
Op. 724-A)
460
The only difference between that analysis of the Bass
ease and this case is that while Bass could have be-
stowed the right of full disposition on Shell, it did not;
while in these proceedings Gulf never owned the rever-
sionary interests and could not have committed them
to El Paso. The Commission continued its discussion
in the Bass case:
„At the time of execution of the Sell-El Paso
contract, and at the time of our certification of
the sale and the facilities there provided for, Bass
was a royalty owner. Bass so remained until the
happening of the contingency-payout [312] to
Shell of its well costs—which triggered Bass’s
right to convert its royalty interest to a working
interest. As a royalty owner, Bass was not a ‘sell-
er’ within the meaning of the Natural Gas Act
and was not in any way subject to our jurisdiction.
This is the express holding of Mobil v. F. P. C.,
— F.2d —— (CADC 1971) cert denied ——
U.S. —— (1972), which overturned Opinion 562,
42 FPO 164, Section 7(b) operates nh on natur-
al gas companies’, that is, as defined in Section
2(6) of the Act, those who transport or sell for
resale in interstate commerce. It follows, therefore,
that Section 7(b) does not apply to Bass, since
Bass is neither a seller or transporter at this
time. (p.10, Op. 638)
As in Bass, during the terms of the leases the re-
versionary mineral owners were royalty owners, and
as such were not “‘sellers’’ within the meaning of the
Natural Gas Act to which Section 7(b) could apply.
The Commission further continued its discussion in
Bass:
461
312
But did Bass become jurisdictional at the
point in time when it converted its royalty inter-
est to a working interest? This question can be
answered in the affirmative only if we can con-
clude that Bass then became a seller automati-
cally bound by the Shell-El Paso contract and
our certificates. We have no basis in law to reach
such a conclusion, particularly so since Bass had
precluded such a result in its 1956 farmout with
Shell. It is not our function to re-make contracts
for the parties. And it is patently clear that one
who proposes to become a seller in interstate
commerce is entitled to accept or reject, our cer-
tification without compulsion to render service.“
(p. 10, Op. 638)
As in Bass there is no basis in law upon which to
conclude that the mineral owners will become sellers
to El Paso and Phillips upon termination of the
leases. This Commission cannot remake the reversion-
ary provisions of the term leases to compel the min-
eral owners to dedicate their interests to El Paso
contrary to their desires.
In its Petition for a Declaratory Order, El Paso in
Footnote 14 on page 7 discusses the Bass case, and
makes a concession which in our judgment virtually
disposes of these proceedings. El Paso there stated:
By its order issued December 8, 1972, the
Commission decided that Bass’ prior royalty in-
terest did not make him a seller of natural gas
in interstate commerce for resale nor did his con-
version from a royalty interest to a [313] work-
462
ing interest; therefore, the producer was free
to sell his share of the gas to Natural.”’
Transposing the names of the parties, EI Paso ap-
parently concedes that neither the reversionary min-
eral owners’ prior royalty interests nor the conver-
sion of such royalty interests to working interests
made them sellerſs] of natural gas in interstate com-
merce for resale. Even more decisive is the
concession that therefore the reversionary mineral in-
terest owners will be free to sell their share of the
gas elsewhere. The only distinctions E] Paso made of
the Bass case are stated in the last paragraph of the
Footnote, which reads:
„The Commission in Perry R. Bass did not
address itself to the issues raised here. In partic-
ular, the Commission did not address itself to
whether a party in the position of Gulf (i.c., a
prior working interest owner) must obtain aban-
donment authorization before the lessor may
‘back in’ to the working interest. Moreover, the
factual situation is so different in this case, when
the entire output of the wells is proposed to be
diverted to intrastate commerce, that the Perry
R. Bass decision should not be controlling on any
issue raised herein by El Paso.“
The argument that Bass is distinguishable because
it did not pass on the question as to whether Shell
was required to secure abandonment approval from
the Commission before Bass could dispose of its share
of the gas to Natural is clearly without merit. While
the Commission made no specific mention of Shell, if
Bass was authorized to dispose of the gas to another
purchaser without abandonment approval, no require-
463
ment could be imposed on Shell to prevent the very
disposition of the gas the Commission had just ap-
proved. Obviously if Bass sold its gas to Natural with
the Commission’s blessing, Shell couldn’t deliver the
same gas to El Paso. It would be an anomaly for the
Commission to hold that the reversionary mineral
interest owners will be entitled, like Bass, to dispose
of their gas to another purchaser, but that Gulf will
be required to deliver that very gas to El Paso and
Phillips until it secures some further approval from
the Commission. Any such reading of the Bass case
would be ridiculous.
The other distinction drawn by El Paso was that
the factual situation was different because the entire
output of the wells in the present proceedings is pro-
posed to be ‘‘diverted to intrastate commerce“ bor-
ders on the absurd. Surely the validity of Bass is not
dependent upon whether a part or the entire output
of wells is involved. There is nothing in Bass to in-
dicate that Bass’ right of disposition of his gas would
have been any the less if he elected to sell it to a pur-
chaser for intrastate use rather than to another inter-
state purchaser. Commission [314] decisions cannot
rest on any such irrelevant distinctions. The Bass case
is in point and dispositive of these proceedings.
CONCLUSION
Wuererore, Gulf submits that no further action
by the Commission by way of abandonment or other-
wise is required of Gulf with regard to the disposition
of the gas attributable to the reversionary mineral in-
terests after expiration of the limited term leases in-
volved in these proceedings.
464
Vated: June 18, 1975
[315]
Respectfully submitted,
(VERIFICATION OMITTED IN PRINTING)
Gurt On. CorPORATION
/3/ By Warren M. SPARKS
Warren M. Sparks
B. James McGraw
P. O. Box 1589
Tulsa, Oklahoma 74102
Attorneys for Gulf
Oil Corporation
315
(CERTIFICATE OF SERVICE OMITTED IN PRINTING)
316
[316] UNITED STATES OF AMERICA
BEFORE THE FEDERAL POWER COMMISSION
Docket No. CP75-209
EL. Paso NATURAL Gas COMPANY
Docket No. CI75-594
Texaco, IN.
(RECEIVED JUNE 23, 1975)
Initial Brief of Mineral Interest Owners
J. Evans ATTWELL
Henry S. May, Jr.
VINSON, ELxIxS, SEARLS, CONNALLY &
SMITH
2100 First City National Bank
Building
Houston, Texas 77002
Attorneys for
Mineral Interest Owners
June 20, 1975
317
13171
INDEX
Page
I. STATEMENT OF THE CAS 1
EEE ESET SES IPOS POSTTEST TTY 4
A. Factual Background 4
B. Mineral Interest Owners Are Not Re-
quired To Obtain Abandonment Authori-
zation Under Section 7(b) Before Initiat-
ing Sales of Gas to Intratex ............ 8
©. El Paso’s Other Suggestions Are Like-
wise Without Merit 17
r a eee 20
Exursit A
CERTIFICATE OF SERVICE
[318] UNITED STATES OF AMERICA
BEFORE THE FEDERAL POWER COMMISSION
Docket No. CP75-209
EI. Paso NATURAL Gas Couraxx
Docket No. CI75-594
Texaco, Inc.
Initial Brief of Mineral Interest Owners '
I.
STATEMENT OF THE CASE
On January 20, 1975, El Paso Natural Gas Com-
pany (El Paso) filed a petition for declaratory order
in Docket CP75-209 pursuant to Section 1.7(c) of
the Rules of Practice and Procedure.’ The “‘contro-
versy or uncertainty’’* which is [319] the subject of El
The Mineral Interest Owners on whose behalf this petition to
intervene and answer is filed are listed on Exhibit A hereto.
Section 1.7(c) of the Commission’s Rules of Practice and Pro-
cedure states:
(e) For declaratory orders. Petitions for the issuance, in
the discretion of the Commission, of a declaratory order to
terminate a controversy or remove uncertainty shall state
clearly and concisely the controversy or uncertainty which is
the subject of the petition, shall cite the statutory provision
or other authority involved, shall include a complete state-
ment of the facts and grounds prompting the petition, to-
gether with a full disclosure of petitioner 's interest, and shall
conform to the requirements of §§ 1.15 and 1.16.
* Contrary to the requirement of Section 1.7 (e), El Paso does
not state clearly and concisely the controversy or uncertainty”’
which is the subject of its petition. Instead, El Paso requests the
Commission to resolve three complex questions which are framed
in a manner clearly prejudicial to Mineral Interest Owners and
Paso’s petition arises from the termination on July
14, 1975, of the 50-year fixed-term oil and gas lease
held by Gulf Oil Corporation (Gulf) on the approx-
imately 46,000 acres in Crane County, Texas, referred
to in El Paso’s petition. The gas attributable to Gulf’s
fixed-term leasehold estate is sold to El Paso at the
tailgate of the Waddell Gasoline Plant which is oper-
ated by Warren Petroleum Company (Warren), a
division of Gulf Oil Corporation.“ Under established
principles of Texas oil and gas law, Gulf will be the
sole owner and seller of this gas production until its
leasehold estate terminates on July 14, 1975. Upon
termination of Gulf’s leasehold estate on July 14,
1975, Mineral Interest Owners will hold fee simple
title to their pro rata share of the :nineral estate un-
derlying the subject acreage.’ Gulf Oil Corp. v. South-
land Royalty Co., 496 S. W. 2d 547, 552 (Tex. Sup. Ct.
1973). In other words, upon termination of the lease
on July 14, 1975, Gulf will have no right, title or in-
terest in any gas produced from and attributable to
the
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