Summary
In Coyle v. Louisiana Gas Fuel Co., 175 La. 990, 144 So. 737, 743, the royalty clauses of the lease were similar to the royalty provisions of the contract annexed to and made a part of the plaintiffs' petition, except that in the Coyle lease one-eighth of the gas was to be delivered to Coyle, while in the Crichton lease one-eighth of the market value of the gas is to be paid to the plaintiffs.
Summary of this case from Crichton v. Standard Oil Co. of LouisianaOpinion
No. 31042.
April 25, 1932. On Rehearing October 31, 1932. Second Rehearing Denied November 28, 1932.
Appeal from Twenty-Sixth Judicial District Court, Parish of Webster; J.F. McInnis, Judge.
Action by R.M. Coyle against the Louisiana Gas Fuel Company. From a decree for plaintiff, defendant appeals.
Decree set aside, and judgment rendered.
Wilkinson, Lewis Wilkinson, of Shreveport, for appellant.
Drew Richardson, of Minden, for appellee.
Hudson, Potts, Bernstein Sholars, and Madison, Madison Fuller, all of Monroe, and T.R. Hodge, of Rayville, amici curiæ.
Defendant appeals from a judgment ordering it to pay plaintiff a royalty on the oil, gas, and gasoline produced under an oil and gas lease covering eighty acres of land owned by plaintiff in Webster parish.
The lease in question was executed by plaintiff in favor of Moffitt Murphy, and, through mesne assignments, is now owned by defendant.
The royalty clause, which we are called upon to interpret, obligates the lessee as follows, viz.:
(1) To deliver to the lessor, free of cost, in the pipe line to which he may connect his wells, the equal one-eighth part of all oil produced and saved from the leased premises.
(2) To pay the lessor one-eighth royalty for the gas from each well where gas only is found, while the same is being used off the premises.
(3) To pay the lessor for gas produced from any oil well and used off the premises, or for the manufacture of casing-head gas, one-eighth royalty for the time during which such gas shall be used.
At the time of the execution of the lease, no deep wells producing gas rich in gasoline content had been drilled in the field where plaintiff's land is situated. Subsequently, such wells were drilled, and plants were erected by several companies for the extraction of the gasoline content from the gas before running it through the lines for domestic use. And it appears from the record that until the gasoline is extracted the gas is not fit for domestic consumption.
In 1929 a well producing gas rich in gasoline content was brought in on plaintiff's land.
At the time the lease was executed between plaintiff and Moffitt Murphy, it was not contemplated that gasoline would be stripped from the wells producing gas only.
Plaintiff claims that he is entitled as royalty one-eighth of the gas at five cents per one thousand cubic feet and one-eighth of the gasoline extracted from the gas. Defendant disputes the claim.
Defendant contends that, as the royalty clause is silent as to casing-head gas, royalty is due plaintiff only on the gas itself, including its gasoline content, when it is reduced to possession at the well.
Defendant entered into contracts with the Palmer Corporation of Louisiana, its subsidiary, under which defendant received four cents per thousand cubic feet for the gas and also one-third of the amount of gasoline extracted therefrom at the company's plant located at Cotton Valley, La.
Defendant does not own any extraction plant. It contends that its contracts with the Palmer Corporation, which were made without plaintiff's consent, are fair, and were made in the interest of the royalty owners, including itself.
The record shows that defendant tendered plaintiff four cents per one thousand cubic feet for the gas and his proportion of one-eighth of one-third of the gasoline extracted therefrom, which plaintiff refused to accept in full settlement of his claim for royalty. And defendant demands in reconvention as paid in error the return of $1,232.82 paid plaintiff as royalty on gasoline extracted from the gas.
The court below, in its judgment, ordered that plaintiff receive 35/40 of 1/8 of the oil, gas, and gasoline produced on the leased property, and ordered defendant to pay for the gas at the rate of four cents per thousand and gasoline at the market price for each month. The court also gave plaintiff judgment for $2,465.64 as the balance due on the gasoline for the months of October, November, and December, 1929, and January, 1930; ordered that defendant pay 35/40 of 1/8 of the gasoline, at the market price, for all months from and including February, 1930, and that all future payments under the lease contract be made in accordance with the judgment and the written opinion of the court made part thereof by reference.
Defendant and appellant assigns the following as errors committed by the court below, viz.:
(1) The court erred in not holding plaintiff to be entitled only to the recovery of his interest in what appellant receives for the gas and the gasoline extracted therefrom; i.e., at the present time four cents per thousand cubic feet for the gas used off the premises, plus one-third of the sales price of gasoline extracted therefrom.
(a) The court erred in not holding that the amount received by appellant for the gas and its gasoline content was the basis for measurement of the amounts to be paid plaintiff.
(b) The court erred in fixing definitely and permanently the amount plaintiff should receive for the gas, i.e., four cents per thousand cubic feet, which price is applicable only so long as it is received by appellant, since the price may advance or decline at the expiration of appellant's contract with the Palmer Corporation.
(2) In any event, plaintiff is not entitled to recover more than 35/40 of the market value of the gas and gasoline extracted therefrom after deducting the necessary cost of extraction.
We have been referred to two cases in our jurisprudence involving royalty on gasoline under oil and gas leases; namely, Wilkins v. Nelson, 155 La. 807, 99 So. 607 and Wemple v. Producers' Oil Co., 145 La. 1031, 83 So. 232.
The Wilkins Case was one primarily to annul a mineral contract for lesion; the plaintiff alleging that it evidenced a sale of the oil and gas beneath the surface. As an alternative plea, plaintiff claimed one-eighth of the gasoline defendant produced from the land. The court rejected the claim, holding that gasoline could not be classed as oil within the meaning of the term as used in the contract.
Under the contract, Wilkins conveyed to Nelson all the mineral rights in and to the land for a cash consideration of $900 and a one-eighth royalty on all oil produced on the leased premises. No oil was discovered, but gas was produced from which gasoline was extracted; the residuum of gas being burned in the manufacture of carbon black.
On its peculiar facts, the decision is clearly correct. Having sold the gas without reservation, plaintiff was without any right or interest in it, and the gasoline which he claimed was part of the gas.
The instant case presents a different aspect; the court being called upon here to interpret the royalty provisions of a mineral lease and not to determine the nature of the property leased.
Under the contract in the Wemple Case, the lessor conveyed to the lessee all the oil and gas in and under the leased premises, with the reservation to the lessor of an equal one-eighth of all the oil produced on his lands. The contract further provided that, if gas was found, the lessee should pay the lessor $200 annually for that product. No express provision was made in the contract for any royalty on casing-head gas or gasoline.
The defendant drilled a number of producing wells on the leased premises, and it constructed and operated "a device or plant for the saving of the oil known as `casing-head gas,' being gas saturated with volatile oil, whereby the said volatile oil was condensed and is being condensed into liquid `form.'" The defendant also installed a plant or factory on the leased premises at a cost of $14,174.52 for the manufacture of gasoline from casing-head gas obtained from the lessor's property.
The court held that, at the time the contract was entered into, it was not in the contemplation of the parties that casing-head gasoline would be produced, and, while holding that it was not oil and covered by the royalty clause on oil, the court decided that, the lessee having seen fit to utilize the gasoline, since no one is presumed to give, it was obligated to pay the lessor one-eighth royalty on it, with no deduction allowed for the cost of the factory.
It appears from the record that the Coyle well, like all the wells of approximately the same depth in the Cotton Valley field, produce gas that is so heavily saturated with gasoline that it is unfit for commercial uses. The gas produced by these wells, which are commonly known as gasoline wells, carries approximately one and one-half to two gallons of gasoline per one thousand cubic feet.
It is shown by the testimony that casing-head gasoline is extracted from a gas well as well as from an oil well. The term was applied originally to gasoline extracted from gas that came out of the casing-head of an oil well, but the term is now also applied to gasoline taken from a gas well.
The record discloses that for the months of October, November, and December, 1929, approximately $14,120 worth of gas was produced by the Coyle well, and during the same period approximately $28,000 worth of gasoline was obtained from the same well.
We think, as was held in the Wemple Case and in Gilbreath v. States Oil Corporation, 4 F.2d 232, 233, decided by the United States Circuit Court of Appeals for this Circuit, with Judge Dawkins, formerly an associate justice of this court, delivering the opinion, the issue involved in the case requires that the terms of the contract be viewed in the light of the conditions as they existed at the time, and as to what was reasonably in the minds of the parties as expressed in their agreement.
The petroleum industry has expanded enormously during recent years, due in a large measure to the invention and improvement of the internal combustion engine, and, as said in Gilbreath v. States Oil Corporation, supra, "it has assumed an importance, especially as to the production of petroleum gas or gasoline, second to none as a source of mechanical power."
If at the time the contract was entered into the value of the gasoline content of the oil or gas that might be produced from wells drilled on the leased premises was unappreciated by the lessee, it is, nevertheless, wholly reasonable to assume that the lessor, a mere layman, had no knowledge of it; otherwise, self-interest would have impelled him to exact a reasonable return for the assignment of so valuable a right.
We find nothing in the record to warrant the belief that the lease under review contemplated that defendant should be allowed to take the gasoline, a product of much greater value than the gas, from the leased premises by merely paying him for one-eighth of the gas.
If its gasoline content is not regarded as included in the gas within the meaning of the contract, then, obviously, defendant is not entitled to it, or any part of it. If it is so regarded, then one-eighth of it is due plaintiff by virtue of the agreement.
It is established by the record that the lessee itself originally interpreted the lease herein as providing for the payment to the lessor of one-eighth royalty on the gasoline produced by the well on the leased premises, since it paid the lessor on that basis for the months of October, November, and December, 1929, and January, 1930. No payments were made thereafter on advice of counsel, and defendant now contends that the payments in question were made in error.
It is also established by the record that it is the custom of the other oil companies operating in the Cotton Valley field under leases similar to the one under review here to pay the lessors one-eighth royalty on gasoline produced by the gas wells.
Defendant argues that plaintiff should be charged with its proportion of $190,000, which it cost its subsidiary, the Palmer Corporation, to erect its plant for the extraction of gasoline.
The plant, unlike the plant in the Wemple Case, was not erected on the leased premises. If the holding in that case, disallowing the lessee's claim, is correct, which we think it is, by stronger reasoning the claim of the lessee here should be rejected.
The plant of the Palmer Corporation was erected and in operation long before the well on plaintiff's land was drilled. The plant serves twenty-three producing wells, and, judging by the value of the gasoline it extracted from the gas produced by the Coyle well, its operations are highly profitable. And all its profits are turned over as dividends to the defendant. We find nothing in the rules of law or the principles of equity applicable to the case that warrants us in assessing plaintiff for any part of the cost of the erection of the plant of the Palmer Corporation.
Defendant contends, alternatively, that, if plaintiff is entitled to a royalty on gasoline, he is only entitled to one-eighth of the one-third defendant receives under its contract with the Palmer Company; and that, if this is not so, he is entitled only to one-eighth of the gasoline after the cost of its extraction is deducted.
In the case of Wemple v. Producers' Oil Co., supra, the court allowed plaintiff royalty of one-eighth on casing-head gasoline free of all cost. This ruling was approved and followed in the Gilbreath Case, supra. And it appears from the record that the other oil companies operating in the Cotton Valley field pay a straight royalty of one-eighth on gas and gasoline without deducting any stripping charge.
Defendant entered into its contract with the Palmer Company without obtaining plaintiff's consent, and the agreement is not binding on plaintiff.
The terms of the lease obligate the lessor to pay the lessee a royalty of one-eighth of the gas produced, which means free of all cost. Under the effect we are giving to the royalty clause of the lease, the lessor is entitled to one-eighth of the value of the gasoline as well as of the gas produced from the lessor's land, without any deduction whatever.
Defendant assigns as error that the court below definitely and permanently fixed the amount of plaintiff's recovery for the gas produced at four cents per thousand cubic feet, whereas that rate should be made to apply only so long as defendant obtained it. If there is any ambiguity in the judgment in that respect, it should be corrected.
For the reasons assigned, the judgment appealed from is amended by making the rate of four cents per one thousand cubic feet of gas that defendant is ordered to pay plaintiff applicable only so long as defendant obtains it, and, as thus amended, the judgment is affirmed at the cost of the defendant and appellant.
O'NIELL, C.J., absent.
On Rehearing.
The true issue, presented in this case, is whether plaintiff, as lessor, is entitled to be paid his proportionate part of the net sale price, or of the gross sale price, of the gasoline extracted from the gas, due him as royalty, produced from gas wells on the lease. In our former opinion, we held that defendant was entitled to payment on the gross sale price, and there said, among other things: "The terms of the lease obligate the lessor to pay the lessee a royalty of one-eighth of the gas produced, which means free of all cost." We doubted the correctness of this ruling and of our decree, and therefore granted a rehearing.
The contract, it may be said, would operate harshly, if it required defendant, after going to the expense of extracting the gasoline for the double purpose of preserving it for sale and of making the gas, containing the gasoline, usable and merchantable, to pay plaintiff royalty on the basis of his proportionate share of the total gasoline extracted, without deducting the cost of the extraction.
Even had defendant been in bad faith in reducing the gas to possession, which does not appear to be the case, since he obtained possession under a contract of mineral lease, granted by the owner of the land, nevertheless defendant would be entitled to the cost of extracting the gasoline, as a preservative measure. The gas was not usable with the gasoline in it. Plaintiff would not accept his proportionate part of the gas with the gasoline in it. Therefore there was nothing for defendant to do but to save the gas and the gasoline contents by having the gasoline liberated from the gas. To do this would redound to the benefit of plaintiff. Plaintiff, however, would be liable to defendant for the cost of the extraction of the gasoline in proportion to the amount thereof received by him, for article 2314 of the Civil Code provides that: "He to whom property is restored must refund to the person who possessed it, even in bad faith, all he had necessarily expended for the preservation of the property." Nabors Oil Gas Company v. Louisiana Oil Refining Company, 151 La. 361, 384 to 387, 91 So. 765.
Since persons may be expected to contract with one another on a basis equitable to each, a contract should not be given a construction that will work a hardship on one of the parties, where this may be avoided without defeating, in whole or in part, the intention of the parties at the time of the execution of the agreement.
Further consideration of the contract of lease leads us to the conclusion that such a construction may be made of the contract here. The royalty clauses in the contract obligate the lessee as follows: "(1) To deliver to credit of lessor, free of cost, in the pipe line to which he may connect his wells, the equal one-eighth part of all oil produced and saved from said leased premises; (2) to pay the lessor one-eighth (1/8) royalty for the gas from each well where gas only is found, while the same is being used off the premises; * * * [and] (3) to pay the lessor one-eighth royalty for gas produced from any oil well and used off the premises or for the manufacture of casing-head gas one-eighth (1/8) royalty. * * *"
The first clause relates to oil wells only, and the present well does not fall within the designation of an oil well. As to such wells, plaintiff is bound to deliver the one-eighth royalty, in kind, to plaintiff's agent, the pipe line company, to be placed to his credit, free of cost. The second clause relates to wells producing gas only, and not oil and gas, the one-eighth royalty to be delivered to the lessor, which seems to be conceded to be in kind. Nothing is there said touching whether or not the delivery is to be made free of cost, as was done in the preceding clause, relative to oil wells. The third clause relates to gas produced from an oil well, there being none involved here, and to the manufacture of casing-head gas. There, the royalty is one-eighth of the gas produced or manufactured, and nothing is said concerning the cost of production or of manufacture. This clause does not aid in the construction of the question, here presented, and relates to a different class of gas, as shown by the context of the clause.
It will be observed that, although in the first clause, touching oil wells, the royalty is to be delivered free of cost, nevertheless in the next clause, touching gas wells, no reference whatever is made to the delivery of the royalty free of cost. It does not follow, however, that it was the intention of the parties to the contract that it should, under all circumstances, be delivered free of cost, for, if such was the intention, there would have been no reason to omit from this clause the words "free of cost" which had been used in the preceding clause. What we think the clause contemplates is that, if the well should come in as a gas well, impregnated, which it did, with gasoline, which the parties had no particular reason to expect at the time of the execution of the contract, the law would step in, as a part of the contract, and say whether the royalty should be delivered free of cost. This we think the law has done by providing, in effect, that the cost of extraction, incurred by the lessee, to preserve the gas and its gasoline content, by making both merchantable, should be deducted before computing and delivering the lessor's royalty. Civ. Code, art. 2314.
The case of Wemple v. Producers' Oil Co., 145 La. 1031, 83 So. 232, 238, does not militate against the view here expressed. In that case, the question of the right to royalty on gasoline produced from casing-head gas was involved. The contract made no reference to royalty on gasoline so produced. The court, however, allowed royalty on the gasoline, as it was part of the oil produced, without deducting the expense of extracting the gasoline, but the court, in refusing to allow such deduction, said: "If the treatment of the casing-head gas were shown, in this case, to involve an expense greater in proportion to the value of the product than that incurred in the production and handling of the oil, it would perhaps be proper to increase the allowance to the operator in a like proportion; but no such showing has been made."
The case of Gilbreath v. States Oil Corporation (C.C.A.) 4 F.2d 232, does not seem to be pertinent to the particular issue under consideration here. All that was held there was that, since casing-head gas, or gasoline, produced from such gas, was part of the oil, the lessor was entitled to the one-eighth royalty, provided for oil produced.
At this point, it should be observed that defendant for a period of three months, at the commencement of production, paid plaintiff royalty on the gasoline produced without making any deduction for the extraction of the gasoline. Defendant claims that the payments so made were made in error, without the proper conception of its rights. Plaintiff urges that they show the construction of the contract, at its confection, made by both parties. We think, however, that the payments were made hastily, in misconception of defendant's rights, and did not operate to plaintiff's injury, in any respect, and therefore should not be regarded as being, in truth, defendant's construction or be permitted to operate against it as an estoppel, or otherwise.
The gas produced in this case, which is not, correctly speaking, casing-head gas (Thornton on Oil and Gas [5th Ed.] § 217, p. 377; Gilbreath v. States Oil Corporation, supra; Mussellem v. Magnolia Petroleum Co., 107 Okla. 183, 231 P. 526; section 13 of Act No. 252 of 1924), but is gas, taken from the earth, through a gas well, was sold by defendant to the Palmer Corporation, a subsidiary of defendant, which had a plant nearby for the extraction of gasoline. The gas, with its gasoline content, the latter being a part of the gas, was sold to that corporation for four cents a thousand feet. Two-thirds of the gasoline extracted was allowed for the extraction, and the remaining one-third was sold at the market rate prevailing at the time of the sales. This charge for extracting the gasoline does not seem to be out of accord with what is usually, or frequently, charged for that service, as will appear from quotations from departmental bulletins of the United States, to be found in Wemple v. Producers' Oil Co., 145 La. 1031, 1039, 1040, 83 So. 232; Mills-Willingham on Oil Gas, p. 195, in a note, relative to departmental regulations of the federal government, touching the Five Civilized Tribes and the Osage Indians. We should consider the charge such a one as is fair and allow it. As the gasoline was part of the gas produced, and as the royalty on the gas is one-eighth, the allowance of the foregoing deduction entitles the royalty owner or owners to one-eighth of one-third of the gasoline extracted and saved and to one-eighth of the gas produced and saved, but, as plaintiff has sold all but 35/40 of the 1/8 royalty, he is entitled to only 35/40 of 1/8 of 1/3 of the gasoline saved or the proceeds thereof, and to 35/40 of 1/8 of the gas produced and saved.
For the months of October, November, and December, 1929, plaintiff, as already said, in effect, has been paid more than defendant was called upon to pay. For January, 1930, plaintiff tendered defendant a check for $477.03 in full payment of royalty on gas and a check for $224.24 in full payment of royalty on gasoline. The amounts of these checks were arrived at on the same basis as we have arrived at the royalty due. Plaintiff cashed them, after this suit was filed, with full reservation of his asserted rights. Therefore plaintiff has received all that was due him for January, 1929.
Defendant has a reconventional demand for the excess payments, made by it in error, for the months of October, November, and December. However, defendant has not pressed the demand, and we therefore omit its consideration.
Our original decree, as well as the decree of the district court, is set aside, and judgment is now rendered ordering plaintiff to receive and defendant to pay plaintiff 35/40 of 1/8 of the gas produced and saved and 35/40 of 1/3 of 1/8 of the gasoline extracted and saved from said gas, or (defendant appearing to be willing thereto) of the proceeds, at market value, in each month, of both the gas and gasoline, after the month of January, 1929, the "one-third" relating to the gasoline, to vary with such change as there may be in the cost of extracting it. In all other respects plaintiff's demands are rejected, the costs of appeal to be paid by plaintiff, the costs of the lower court to be shared equally between the parties to this suit. The right is reserved plaintiff to ask for a rehearing.
ST. PAUL, J., takes no part.
ROGERS, J., dissents, adhering to the views expressed in the opinion on the original hearing.
I cannot concur in some of the views expressed in the above opinion.
It is conceded by both sides that the gas from this well in its natural state is not fit for domestic consumption, and is therefore worthless. It is stated in the majority opinion that "it appears from the record that until the gasoline is extracted the gas is not fit for domestic consumption," and it is held that "the lessor is entitled to one-eighth of the value of the gasoline as well as of the gas produced from the lessor's land, without any deduction whatever."
The "deduction" referred to is the cost of extracting the gasoline from the gas so as to make it "fit for domestic consumption," or, in other words, the costs necessarily incurred in rendering the product of the well of some value.
The lessee paid $1,000 for the lease, which was a sound, substantial consideration, and, under the terms of the lease, it paid all expenses of drilling the well. As an additional consideration for the lease, it agreed to pay the lessor one-eighth royalty for the gas from each well where gas only was found, while the same was being used off the premises.
But, when the gas was reduced to possession and ownership by being brought to the surface of the ground, it was found to be worthless on account of its being "wet," or having a heavy gasoline content. In its natural state, it could not be used either on or off the premises, and therefore had no value.
So that the lessor and the lessee, at the moment the gas was reduced to possession and ownership, found themselves in the situation of owning, in the proportion of one-eighth to the lessor and seven-eighths to the lessee, a product which was useless to either. Each had performed the obligation assumed under the lease contract, the lessor by permitting the lessee to explore for gas, and the lessee by paying the price of the lease and making the exploration which resulted in reducing the gas to possession. If the lessor had chosen to do so, he could have taken his one-eighth of the gas as it came from the well in kind, because he owned it. I understand that this is conceded. But he could not compel the lessee to take and pay for his one-eighth. It could not be used off the premises.
Under this lease contract, the lessee obligated itself to pay the lessor one-eighth royalty for the gas "while the same is being used off the premises." By this it was intended, as I take it, that the lessee should handle all the gas, both its interest and that of the lessee, and, in case the lessee made use of it, it should pay the lessor one-eighth of its value, and, in case it was sold, pay to him one-eighth of the proceeds.
But it was not intended or contemplated that the lessee should pay to the lessor anything unless the gas could be used, and in this case it could not be used in its natural state. Therefore neither the lessor nor the lessee owned anything of value when the gas was brought in.
But, by separating the gasoline from the gas, there would be left two valuable products, the "dry gas" and the gasoline extracted.
Under such circumstances, it was to the interest of each that the gasoline be extracted from the gas. This process is complicated and very expensive, and neither the lessor nor the lessee had facilities for that purpose. It was for these reasons that the lessee contracted with the Palmer Corporation, which had an extracting plant two and one-half miles away, to give it, as remuneration for extracting the gasoline from the gas, two-thirds of the gasoline extracted, leaving to the lessor and the lessee all the "dry gas," which was worth 4 cents per thousand cubic feet, and one-third of the gasoline, owned in the proportion of one-eighth to the lessor and seven-eighths to the lessee.
The giving to the Palmer Corporation of two-thirds of the gasoline extracted for extracting it from the gas can be viewed in no light other than a payment of the expense of converting a worthless product, the gas in its natural state, into two valuable elements, dry gas and gasoline.
But the plaintiff in this case, the lessor, who has an interest in the gas as it comes from the well, and who would be helpless and unable to realize anything from the lease unless some such arrangement were made, is not willing to bear his share of this expense, and the majority opinion holds that he need not do so. It holds that the lessee must bear all the expense, that it must pay to the lessor the value, not of his one-eighth of the one-third of the gasoline left after paying the Palmer Corporation, but the value of one-eighth of the whole quantity extracted.
The underlying reason for this holding is that the lessor, being entitled to a one-eighth royalty in the gas, is entitled to the same royalty in all it contains. I find no fault with that reasoning. It is well founded in equity, and there is jurisprudence to support it.
But in my opinion the holding that this plaintiff, the lessor, is entitled, under the circumstances here shown, to a one-eighth royalty in the gross amount of gasoline extracted from the gas, is not well founded either in law or equity, and I know of no jurisprudence to support it.
The case of Wemple v. Producers' Oil Co., 145 La. 1031, 83 So. 232, decided by this court, and Gilbreath v. States Oil Corporation (C.C.A.) 4 F.2d 232, are cited as authorities.
If either of these cases supports the holding from which I dissent, I confess that my reading of them has been vain.
In each of these cases, the court had under consideration the question whether a lessor under an ordinary mineral lease was entitled to a royalty or his pro rata share of the gasoline produced from casing-head gas, and it was held that he was. Reasoning by analogy, I think these cases support the proposition that a lessor is entitled to his share of the gasoline contained in the gas.
In the Wemple Case it was held that one operating an oil well under an oil and gas lease entitling him to all the oil produced, less one-eighth reserved to the lessor as royalty, who exercises the right to use the vacuum pump process, as a result of which and the consequent lowering of the pressure and the increased flow of gas and the lighter constituent of the crude oil are resolved into vapor which is brought up to the casing-head.
"Whence it is led through coils of water-cooled pipes, the lower temperature of which superinduces the precipitation therefrom of casing-head gasoline, while the heavier constituents are brought up at the same time and through a tube inclosed in the same pipe, such lessee is in no position to deny to the lessor, as also springing from the lease, the same royalty * * * that he concedes upon the heavier constituents, which preserve their liquid form, unless he can show that the production of the gasoline involves greater expense, and less profit in proportion, than the production of such heavier constituents." (Quotation from syllabus. Italics ours.)
The lessee was not permitted to deduct the alleged extra expense of producing the gasoline from the casing-head gas, because he could not or did not show that "the production of the gasoline involves greater expense, and less profit in proportion, than the production of such heavier constituents," the oil.
In speaking of the claims made by the lessee, the court said:
"Neither he nor any other witness explains the connection between those items of cost and the separate and distinct expense, whatever it may have been, or may be, incurred in the extraction of the casing-head gasoline from the casing-head gas."
And on page 1048 of the opinion in 145 La., 83 So. 232, 238, the court said:
"If the treatment of the casing-head gas were shown, in this case, to involve an expense greater in proportion to the value of the product than that incurred in the production and handling of the oil, it would perhaps be proper to increase the allowance to the operator in a like proportion; but no such showing has been made."
On rehearing Justice Sommerville said: "The comparatively small expense, as shown in the record, for machinery used by defendant in saving casing-head gasoline, would not warrant us in charging the owner [the lessor] with any part thereof."
In the Wemple Case, the production of gasoline from casing-head gas was a mere incident to the production of the oil, and the extra expense seems to have been trivial.
In the federal case cited the court held that casing-head gas or gasoline derived therefrom was part of the oil, a one-eighth royalty of which had been reserved, and was not natural gas within the meaning of the lease, which contained no reference to gas. It was further held that the lessor was entitled to his one-eighth thereof.
But, in the case at bar, the gas in its natural state was utterly worthless and could be rendered valuable only by the process of extracting the gasoline from it.
The construction of an extraction plant involves an expense vastly out of proportion to the cost of producing the gas. That owned and operated by the Palmer Corporation cost $190,000. A less expensive one might be constructed. If some simple and inexpensive contrivance could have been installed for extracting the gasoline from the gas, such as running the gas through water-cooled coils, or some scheme evolved to save the "drip gasoline" as is sometimes done, I think the Wemple Case might be said to be authority for the holding in this case. But the undisputed testimony is that such could not be done successfully, and that nothing but an extraction plant would suffice to convert this natural gas from a worthless product into substances of value.
I cannot sanction the holding that the lessor, under the circumstances here shown, is entitled to one-eighth of the gross products salvaged from this worthless gas, free from the necessary expenses. All he is entitled to is his one-eighth royalty in the net amount saved.
It is stated in the majority opinion that: "Defendant [the lessee] entered into its contract with the Palmer Company without obtaining plaintiff's consent, and the agreement is not binding on plaintiff."
That is true; but plaintiff is not in court trying to set the contract aside. He probably would not do so if he could, because it resulted greatly to his benefit. It enabled him to obtain substantial sums for his gas. He has, in a sense, ratified the contract by receiving his royalty from the gas sold. What he contends is that the lessee should bear all the expense of the salvaging process.