# Appendix — California v. Southland Royalty Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1702%3A03 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1978 - **Citation:** 436 U.S. 519 ## Text Supreme Court, U. S. — FILED ee wm 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 (e) Percentage i ; f | Ee 7 2 3 H ! i ; 73 i i 2 f 4 j J 1 1 t i 11 i 23 5 i i F Fs 3 fs u F + ith 23 8 elt 5233 1 if 1 ii i 3 f Hl ö 8 i it ae 2 2 — [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 voluntaril [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1702%3A03. Public record. Not legal advice.