Face Challenges Confidently

003 Dorchester Gas Prod. Co. v. Harlow Corp.

Tuesday, September 1st, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Dorchester Gas Producing Company v. The Harlow Corporation, S.W.2d (Tex. App.– Amarillo, No. 0 7-86-0024-CV, July 23, 1987). Dorchester owned the “gas and gas rights” under a section of land in Gray County, and Dorchester or its predecessors had been producing gas from the Brown Dolomite since the late 1940’s. Harlow owned the “oil and oil rights” under the same land, and, sometime after 1979, Harlow drilled and completed two wells in other formations and also perforated the Brown Dolomite. Harrington owned an override on Harlow’s interest. Dorchester sued for title to all gas from all formations (including casinghead gas), injunctive relief, and for damages for conversion. Harlow claimed that “oil and oil rights” included casinghead gas, that casinghead gas is any gas produced with oil, and that Harlow could produce gas from any formation so long as the well did not exceed a gas/oil ratio (GOR) of 100,000 to 1. The trial court enjoined Harlow from producing any gas from the Brown Dolomite, awarded damages against Harlow for conversion as to gas produced from the Brown Dolomite, and Dorchester got no damages against Harrington.
Held: Affirmed. This was the first case to squarely present on appeal, in the context of conversion, the gas/oil title question and the high perforations question. In probably the longest opinion the Amarillo Court has ever written, the court deals with many issues crucial to the resolution of those questions. On the title question, a 1953 conveyance of the “oil and oil rights” from Panoma Corporation to Lawrence R. Hagy (in the chain of title for both Dorchester and Harlow) was held to include casinghead gas as a matter of law. The title question was not submitted to the jury. Ownership is to be determined by the title documents and the statutory definitions and case law in effect at the time of the conveyance in question. Casinghead gas was defined by statute as “gas and/or vapor indigenous to an oil stratum and produced from such stratum with oil,” and gas was defined as “all natural gas other than casinghead gas.” Case law was consistent with that definition, the parties to the instrument were experienced oil men and deemed to be familiar with the technical meanings of the terms, and by custom of the industry oil rights included casinghead gas. The trial court thus rejected Dorchester’s position that it owned all gas and rejected Harlow’s position that it owned all gas produced from a statutory oil well (i.e. a well with a GOR of less than 100,000:1). Harlow owned “casinghead gas” defined as gas and/or vapor indigenous to an oil stratum and produced from such stratum with oil. Dorchester owned all natural gas other than “casinghead gas.” The appellate court at least agrees with the trial court and perhaps goes even further. The appellate opinion places particular emphasis upon the fact that gas was being produced from the Brown Dolomite at the time of the Panoma-Hagy assignment, and it can be read as concluding that Dorchester owned all gas produced from the Brown Dolomite.
With the title issue resolved, the trial court submitted the high perforations and conversion issues to the jury by inquiring whether the substance produced from the Brown Dolomite was “casinghead gas,” as defined above, and by inquiring whether gas other than “casinghead gas” was being produced from Harlow’s wells. The jury answered in favor of Dorchester. If the appellate court’s conclusion is that all gas from the Brown Dolomite belonged to Dorchester, the definitional distinctions between gas and casinghead gas in this case become almost meaningless. It is only necessary to distinguish crude oil from gas and to distinguish gas (including casinghead gas) production out of the Brown Dolomite from casinghead gas production out of other formations. The court placed the burden of proof on Harlow to establish the quantity of production from other formations. The court rejected Harlow’s position that damages should be limited to the volume of Dolomite production multiplied by the regulated price which Dorchester would have received. Instead damages were calculated on the higher open market price which Harlow actually received plus interest.
The judgment imposed joint and several liability on The Harlow Corporation and its president, W. V. Harlow, Jr. The president was held individually liable as a corporate officer who committed a tortuous action (conversion of Dorchester’s gas) in the course of his corporate duties. In this case there was very direct personal involvement of the president in the decision to perforate in the Brown Dolomite. The judgment against the other working interest owners is limited to their respective individual interest in the Harlow wells, but Dorchester apparently never sought to impose joint and several liability upon the nonoperators for the entire judgment. The take-nothing judgment as to Harrington was upheld on a procedural point, so that it is unclear whether in a proper case the overriding royalty owner might have to account.
Finally, Harlow challenged the jurisdiction of the courts to act in matters reserved to the Railroad Commission. Although this jurisdictional challenge was sustained by the Amarillo Court of Appeals in the Energy-Agri case (reported in our last News Bulletin), the Amarillo court rejected that argument in this case without any reference to its earlier decision. Apparently the court analyzed the Energy-Agri case as focused on the rights to classify and to produce a well, while this case is focused on the ownership of the substance produced.
The case is extremely significant for many operators and mineral owners in the Texas Panhandle where the severance of oil and gas rights is common. Because ownership will be determined by reference to the title documents and the statutory and case law definitions which existed at the time of the conveyance, there is no simple or easy answer to the ownership question for everyone.
However, the statutory and case law definitions have been relatively constant, so that the principal issue becomes the title documents. The opinion may be read as holding that under the Panoma-Hagy assignment all gas from the Brown Dolomite belongs to Panoma’s assignees. The decision may not be binding upon others not a party to this case, or as to lands not included in this case, but the opinion offers some guidelines for the resolution of troublesome issues which have recently clouded development and production decisions in the Texas Panhandle. It is widely expected that the case will ultimately go to the Texas Supreme Court. The Energy-Agri case reported last month has been forwarded to the Texas Supreme Court, but at press time that court had not yet accepted or rejected the application for an appeal.