Piney Woods Country v. Shell Oil Company ( 1997 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 95-60632
THE PINEY WOODS COUNTRY LIFE SCHOOL;
RIDGEWAY MANAGEMENT, INC.; D’LO ROYALTIES, INC.;
JAMES H. STEWART, JR.; RUBINETTE STEWART; DIANA
WHITEHEAD STEWART; MILTON MONROE STEWART, SR.;
WILLARD STEWART MITCHELL; VIRGINIA HANSELL STEWART,
Individually and as trustee for the benefit of Mrs.
Carol Stewart Scott, Milton Stewart, Jr. and Thomas
Hansell Stewart; MAGGIE FAIRLEY SPENGLER; THOMAS L.
SPENGLER; JAMES V. FAIRLEY, Estate of, Albert L. Fairley
and Elenor McWane Fairley, Co-Executors of the Estate,
Individually, and all others similarly situated;
AMSOUTH BANK, Bank of Alabama, A Co-Trustee of two
trusts created by the last will and testament of James V.
Fairley; ALBERT L. FAIRLEY, JR.,
Plaintiffs-Appellants-
Cross-Appellees,
versus
SHELL OIL COMPANY,
Defendant-Appellee-
Cross-Appellant.
Appeal from the United States District Court for the
Southern District of Mississippi
(3:74CV307WS)
April 21, 1997
Before GARWOOD, DAVIS and STEWART, Circuit Judges.*
*
Pursuant to Local Rule 47.5, the Court has determined that
this opinion should not be published and is not precedent except
PER CURIAM:
In this diversity case, which has twice previously been before
us, defendant Shell Oil Company (Shell), lessee in certain oil and
gas leases on property in Rankin County, Mississippi, challenges
the district court’s determination that it is liable to the
plaintiffs, lessors in those leases, for underpayment of gas
royalty for the years 1979 through 1982. Plaintiffs complain of
the district court’s ruling that gas royalties were not underpaid
in the years 1985 and 1986. Plaintiffs also complain of the denial
of prejudgment interest with respect to the 1979-1982 underpayment.
We decline to consider the prejudgment interest matter, and
otherwise reject all the mentioned challenges to the district
court’s rulings.
Facts and Proceedings Below
The subject matter of this lawsuit is royalty from gas
produced in Rankin County, Mississippi. The gas from the Rankin
County fields is “sour,” that is, it contains more than trace
amounts of hydrogen sulfide and other contaminants. Before this
gas can be sold on the market, it must be transported to an
appropriate facility and processed into “sweet” gas. Shell, lessee
in oil and gas leases in which plaintiffs are (or hold under) the
lessors, treats the sour gas itself on site at its Thomasville
plant in Rankin County, recovering from the original sour gas both
under the limited circumstances set forth in Local Rule 47.5.4.
2
sweet gas (dry methane) and elemental sulfur.
In 1970 Shell began efforts to market the gas produced from
these fields. It sought buyers only in the intrastate market
because it wished to avoid restrictive federal regulations on
interstate sales. In 1972 Shell entered into a fifteen-year
contract to sell the bulk of its production, 40,000 Mcf per day, to
MisCoa.1 Shell also entered into a similar long-term contract
arrangement with Mississippi Power & Light (MP&L), which agreed to
take the excess volume produced by Shell’s Thomasville facility.
Although these contracts were the best available at the time,
subsequent developments in the international fuels market quickly
resulted in the fixed rates specified in those contracts being far
below sweet gas prices available on the open market.
Piney Woods I
On December 27, 1974, landowners in Rankin County filed this
lawsuit against Shell, their mineral lessee, over royalty allegedly
due them from natural gas produced under these leases and processed
at Shell’s Thomasville plant. The lawsuit was certified as a class
action in 1978. The plaintiffs claimed that Shell’s practice of
computing royalty from the long-term fixed rate contract proceeds
was, given the post-1972 gas price inflation, in derogation of
their contractual right to be paid “the market value” of the gas
1
An Mcf is 1000 cubic feet. MisCoa is a partnership of two
Mississippi corporations, Mississippi Chemical Corporation and
Coastal Chemical Corporation.
3
“at the well.” In 1982 the district court held a bench trial and
found for Shell on almost all claims. Piney Woods Country Life
School v. Shell Oil Co., 539 F. Supp. 957 (S.D.Miss. 1982) (Piney
Woods I).
Piney Woods II
That decision was certified for interlocutory appeal under
Fed. R. Civ. P. Rule 54(b) to this Court, which, after an extensive
discussion of the leases at issue, concluded by affirming in part,
reversing in part, and remanding the case back to the district
court for further proceedings. Piney Woods Country Life School v.
Shell Oil Co., 726 F.2d 225 (5th Cir. 1984) (Piney Woods II), cert.
denied, 105 S. Ct. 1868 (1985). The Piney Woods II panel made a
number of determinations which inform the issues presently before
this Court.
First, we concluded that, for purposes of leases that
distinguished between gas “sold at the well,” for which royalty was
based on “the amount realized from sale,” and other gas sold, for
which the royalty was based on “market value at the well,” the gas
in question was not “sold at the well,” and hence its royalty was
to be based on “market value at the well.” Piney Woods II, 726
F.2d at 230-233. We thus rejected Shell’s contention that the gas
at issue from these leases was “sold at the well” so that its
royalty would be based on “the amount realized from sale” rather
4
than “market value at the well.”2 Second, this Court held that the
lease term “market value” means “current market value at the time
of production,” not, as Shell had argued, at the time it entered
into the MisCoa contract. Piney Woods II, 726 F.2d at 238. Third,
this Court found that because the pertinent leases provided for the
“market value at the well,” the lessors were only “entitled to
royalty based on the value or price of unprocessed, untransported
[i.e., sour,] gas.” Id. at 240. Fourth, we recognized that while
“the best means of determining the market value at the well ...
would be to examine comparable sales of sour gas at other wells in
the area,” in the absence of such evidence “[t]he next-best method
is to examine sales of sweet gas and sulfur, to determine the
market value of the products resulting from processing at the
Thomasville plant. Processing costs may then be deducted as an
indirect means of determining what a buyer would have paid for sour
gas at the wellhead.” Id. If the plaintiffs were unable to
proffer sufficiently comparable sales of sweet gas to demonstrate
such a market value, a third means of showing market value, Shell’s
system based upon the amount actually realized from the sale of
2
This holding applied to the great majority of the leases then
at issue, and to all the leases now remaining in dispute. However,
at the time of Piney Woods II, there was also at issue gas from at
least one lease (a “Producers 88 (9/70)” form) which provided that
the royalty on all gas sold by lease (not just that “sold at the
well”) was to be based on the “amount realized by lessee, computed
at the mouth of the well.” Id. at 230 & n.6. See also id. at 240-
41.
5
Thomasville gas-less-processing costs, could be utilized, although
this was the “least desirable method of determining market value.”
Id. at 239 (citation omitted).
Finally, we held that Shell could, as had been its practice,
deduct processing costs in computing royalty, because, although the
royalties were to be based on market value at the well, there were
apparently no comparable sales of sour gas, and thus “[p]rocessing
costs may then be deducted as an indirect means of determining what
a buyer would have paid for the sour gas at the wellhead.” Id. at
240. “The function of processing costs in determining royalties
based on ‘market value at the well’ is to adjust for imperfect
comparisons.” Id. “The [market] value . . . of the [plant]
residue sweet gas reflects Shell’s processing costs. . . .” Id. at
241. “To determine the correct basis for royalty, processing . .
. costs may be deducted from values . . . established for processed
. . . gas.” Id. at 242. However, only reasonable processing costs
could be so deducted. Id. at 241. We noted that although the
district court had not made an express finding on the
reasonableness of the processing costs deducted by Shell, “[t]he
record would support a finding of reasonability”; and we left that
issue “open for further consideration by the district court.” Id.3
3
With respect to gas from the lease (or the few leases) on the
“Producers 88 (9/70)” form which provided that on all gas sold by
lessee (not just that “sold at the well”) the royalty was based on
the “amount realized by lessee, computed at the mouth of the well”
(see note 2, supra), we likewise held that Shell could deduct
6
Piney Woods III
After remand the district court held another evidentiary
hearing. The plaintiffs renewed their attempts to produce evidence
of comparable sales of processed sweet gas from which a derivative
market value for Thomasville processed gas could be established.4
The evidence adduced showed that the Shell-MP&L “excess volume”
contract had been terminated in 1981 and that in 1982 the Shell-
MisCoa contract had been modified, reducing Shell’s MisCoa
obligation to 21,000 Mcf per day. This in turn had freed up gas
for the newly deregulated interstate market, which Shell’s
Thomasville facility entered by means of a new “excess volume”
contract with Transcontinental Gas Pipe Line (Transco) in November
1982. During this entire period, Shell continued to compute its
royalty payments based upon the net proceeds obtained from these
processing costs, because such a deduction was necessary to
determine that portion of the price actually received for processed
gas at the plant tailgate which was allocable to, and represented
the price received for, the unprocessed gas at the mouth of the
well. “The . . . sale price of the residue sweet gas reflects
Shell’s processing costs.” Id. at 241. Again, only reasonable
costs could be so deducted. Id.
4
During this second hearing, Shell offered evidence of an
alternative means of determining market value. Shell’s model was
purportedly based upon the viewpoint of a willing buyer of the
Rankin County sour gas and consisted of evidence, culled from its
worldwide drilling and processing operations, showing what it would
cost to build a facility to process that gas into marketable sweet
gas. Shell’s model involved not only the price tag for capital
expended in the construction and operation of the phantom plant(s),
but also introduced variables to account for inflation and the
hypothetical willing buyer’s assumption of investment risk and
profit motive.
7
contracts, i.e., actual sales less processing costs.
In 1989 the district court rendered a judgment on the merits,
finding that the plaintiffs had failed to establish that the market
rate for Thomasville processed gas was at any time greater than
Shell’s long-term contract rate.5 Piney Woods Country Life School
v. Shell Oil Co., No. J74-0307 (W) (S.D. Miss., April 24, 1989)
(Piney Woods III). Although the plaintiffs’ evidence of assertedly
comparable sweet gas sales for the years 1979-1986 was not
subjected to nearly the same scrutiny by the district court as was
their related evidence bearing on the market in 1972-1978, the
district court as to the years 1979-1986 relied in part upon
federal regulatory ceilings to support its ultimate view that
Shell’s accounting and payment practice was consonant with the
“market value at the well” lease royalty provisions during that
period.
Piney Woods IV
The plaintiffs pursued a direct appeal from this judgment,
bringing the case before this Court for a second time. Piney Woods
Country Life School v. Shell Oil Co., 905 F.2d 840 (5th Cir. 1990)
(Piney Woods IV). In Piney Woods IV, this Court discussed the
“deregulation” which had made Shell’s entry into the interstate gas
5
The district court also rejected Shell’s alternative market
value model, finding it “rooted in too much pecuniary speculation
and hypothetical supposition.” Piney Woods III, unpub. op. at p.
9.
8
market by way of the Transco contract feasible. The Natural Gas
Policy Act (NGPA), which took effect on November 9, 1978,
segregated gas wells, including those in Rankin County, into two
distinct regulatory regimes.6 15 U.S.C. § 3315 (section 105 of the
NGPA) provided that the maximum lawful price which could be charged
for gas produced at wells within its demesne was “the price under
the terms of the existing contract, to which such natural gas was
subject on November 9, 1978.” Accordingly, this Court found that,
after section 105 became law in 1978, for gas produced from Rankin
section 105 wells “the actual price Shell was receiving became the
maximum lawful price that it could receive.” Piney Woods IV, 905
F.2d at 851.
A different result, however, obtained for those wells falling
under 15 U.S.C. § 3317 (section 107 of the NGPA). Under the NGPA,
gas from section 107 wells could be sold on the interstate market
at the going “market value.”7 Section 107 gas, unlike that from
section 105 wells, was thus not legally locked into a maximum price
determination based upon Shell’s pre-existing contract, but rather
6
The distinction between these two regimes was based upon
specified physical characteristics. The only one that is relevant
in this case is drilling depth; those wells over 15,000 feet deep
were treated under section 107, rather than section 105, of the
NGPA.
7
The statute provides that section 107 gas may be sold on the
interstate market at the adjusted price calculated from the complex
formula set forth in 15 U.S.C. § 3312 (section 102), establishing
a ceiling for the “interstate market value” at issue in this case.
9
was technically eligible for the higher prices available in the
interstate marketplace.
As noted, the district court in Piney Woods III had found that
the plaintiffs’ proof of market value for processed Thomasville gas
failed as a matter of fact for the years 1972-1986. This Court in
Piney Woods IV affirmed that finding as to the years prior to the
NGPA’s enactment (1972-1978), holding that the district court did
not clearly err in concluding that the plaintiffs’ evidence of
comparable sweet gas sales did not show sufficient similarity to
the Thomasville processed gas sales. We noted that many of the
comparable sales relied on did not reflect relevant nonprice
information, such as whether contract terms included variable take
or assured take provisions, the length of any commitment, the
volumes and quality of the gas, and whether the sale was interstate
or intrastate. Other sales relied on were of questionable
comparability because they either involved casinghead gas (with BTU
values of an unspecified level higher than the Thomasville
processed gas), or involved smaller quantities or were for very
short terms “which may have reflected one buyer’s particular urgent
needs.” Id. at 848. Additionally, we observed that “[e]ven though
the buyer of the Thomasville gas would be buying sweet gas (as
Shell did process the Thomasville gas), the delivery of that gas
still would be uncertain, as all the problems that can occur with
the ultrasour gas would directly affect the downstream delivery of
10
the sweet gas.” Id. at 848. Hence, “it was not clear error for
the district court to find that what was paid for other sweet gas
in smaller amounts . . . was not an accurate reflection of what the
market value of gas from the Thomasville plant would have been,”
and “the district court was within its discretion to find that the
risk inherent in guaranteeing to take large quantities of sweet gas
processed from ultrasour gas could not be decoupled from the value
of a contract for that sweet gas.” Id.8
This Court, however, vacated the district court’s judgment as
to the gas produced by section 107 wells after November 1978, and
as to all wells after January 1, 1985. We observed that the
district court did not give “the same intensity of examination” to
plaintiffs’ allegedly comparable sweet gas sales for the 1979-1986
period as it had for the 1972-1978 period, and further that “as the
nation’s and Mississippi’s gas prices were far higher during 1979-
1982 than in the earlier years, the disparities in comparable
markets may not be of sufficient moment during the latter period to
explain the discrepancy between prices received by Shell for
Thomasville gas and prices received in other Mississippi sales.”
However, we noted that the district court had also “relied upon
regulatory price ceilings as an additional ground to support its
8
In Piney Woods IV, we also observed that the district court
(in Piney Woods III) “found that Shell’s ‘plant processing’ charges
were reasonable,” Piney Woods IV, 905 F.2d at 843, and we did not
disturb that finding.
11
finding . . . for the years after 1978.” Piney Woods IV, 905 F.2d
at 850-51. We then turned to a consideration of the effect of the
price ceilings during the years after 1978.
Rejecting the district court’s contrary ruling, this Court
found that evidence of record, in particular plaintiff’s exhibit P-
155, a well-by-well, month-by-month listing of Shell’s sales
proceeds, enabled the district court to differentiate between the
origins of section 105 and section 107 gas and thus determine which
landowners were possibly entitled to damages. In addition, we
determined that particular aspects of the Shell-Transco contract
triggered section 105(b)(3) of the NGPA and placed the section 105
gas being sold to Transco under the same pricing scheme as section
107 gas as of January 1, 1985.
Based upon these findings, the Piney Woods IV Court remanded
the case for a determination of whether Shell owed the owners of
property with section 107 wells9 damages for underpayment of
royalties in the years 1979-1986.10 We also instructed that the
same inquiry be made for the owners of section 105 wells in the
years 1985-1986. In so doing we observed that “if Shell received
from its sales to Transco after December 31, 1984, less than the
9
These were specified as the Garrett, Spengler, Clark, Edge,
and Stevens wells. Piney Woods IV, 905 F.2d at 853.
10
Although we characterize the affected period as commencing in
1979, we recognize that the last two months of 1978 are included
within the relevant time frame.
12
market value of the gas sold . . . the royalty owners are entitled
to damages compensating them for not receiving their proper share
of the true market value” and that “[d]amages will be due to the
royalty owners should the district court find on remand that the
market value of the gas, limited by the applicable regulatory price
ceiling, was greater than the actual proceeds received by Shell for
the gas.” Piney Woods IV, 905 F.2d at 853-54.11
Piney Woods V
Following remand, the district court, without holding any
further evidentiary hearing, reconsidered the evidence of record
and prepared a memorandum opinion and order addressing the merits
of the plaintiffs’ claims. The court released a draft of this
opinion to the parties in December 1994. Both parties filed
objections, and the district court heard oral argument on these
objections in February 1995. The opinion and order were filed by
the district court, with the inclusion of a section rebutting the
parties’ objections, on June 6, 1995. Piney Woods Country Life
School v. Shell Oil Co., No. 3:74-cv-307WS (S.D. Miss., June 6,
1995) (Piney Woods V).
11
In Piney Woods IV, we also held that, although royalty was
payable on gas used as plant fuel, Shell owed nothing in this
respect notwithstanding Shell’s having simply ignored this item in
their cost accounting, “because the plant fuel materially enhances
the value of the gas (giving the royalty owners more than the at-
the-well value for which they bargained), the cost of plant fuel
must be borne by the royalty owners in proportion to their royalty
share.” Id. at 857.
13
In Piney Woods V, the district court found that for section
107 wells after 1978 and for all wells after 1984 “the market value
for deregulated Thomasville residue was the interstate market
price, notwithstanding that it continued to be sold in the
intrastate market pursuant to Shell’s long-term contract.” Piney
Woods V, unpub. op. at 21. The district court made findings of
fact as to which wells qualified for section 105 and section 107
status at particular times, the amounts available for the
interstate market, and the value on that market, which the court
determined by looking at comparable sales of record.
To determine Shell’s liability for the years 1979-1986, the
district court took the prevailing interstate market price for
sweet gas and compared it to Shell’s actual sales over those years.
Based upon this analysis, the district court found Shell liable for
underpayment of royalties during a period spanning November 1978,
when the section 107 wells were “deregulated,” until November 1982,
when Shell entered into its “excess volume” contract with Transco
and sold all of its section 107 gas on the interstate market. The
royalties owed were to those owners of section 107 wells producing
during this time period, with care taken after November 1982 not to
include any amount sold at market price to Transco. The district
court concluded that Shell had no liability for the period 1983
(December 1992)-1984 because during this time all section 107 well
production was sold at the prevailing interstate market rate to
14
Transco. The district court also found that, due to record
evidence indicating that a downturn in the interstate market after
1982 left no prospective buyers in that market willing to contract
for Thomasville gas, the royalty owners were not entitled to any
damages for the years 1985-1986.12 Based upon these findings, the
district court ordered the parties to re-calculate damages.
In his rebuttal to the parties’ objections, the district court
rejected Shell’s contention that the opinion’s approach to valuing
the Thomasville gas was invalid because it did not properly focus
on the value of the gas “at the wellhead,” i.e., as sour gas. The
district court noted that Shell itself had used the value of sweet
gas under its long-term contract to compute royalties, that prior
opinions of this Court blessed the sweet gas market value less
processing costs analysis utilized, and that “many years of
litigation have never once revealed what the market value of sour
gas at the well might be.” Piney Woods V, unpub. op. at 33. Shell
also objected to the district court’s finding that an interstate
market was available during the years 1979-1982, an assertion which
the district court found belied by the fact that all of the
Thomasville plant’s section 107 production, freed from commitment
to long-term contractual obligations in 1982, was sold on that
market to Transco in 1983-1984. Addressing the plaintiffs’
12
The district court observed that the interstate market price
fell steadily during this period.
15
objections to the finding of no underpayment in the years 1985-
1986, the district court found the plaintiffs’ assertion that
Transco would have been willing to buy up all of the MisCoa
contract gas had it been available “speculative” at best and
therefore insufficient to meet their burden of proving market
value.
Present appeals taken
On September 28, 1995, the district court filed an order
expressly granting plaintiffs’ motion for partial final judgment in
accordance with Federal Rule of Civil Procedure 54(b), denying
plaintiffs’ motion for prejudgment interest, and denying Shell’s
motion for reconsideration of the “wellhead value” issue. On
September 29, 1995, the district court entered a “Rule 54(b)
judgment” to reflect the disposition of the June 6 order. On
October 3, 1995, the plaintiffs filed a notice of appeal from this
“Rule 54(b)” judgment, docketed in this Court under cause No. 95-
60632. Shell also filed a notice of appeal and cross-appeal which,
like the plaintiffs’ appeal, was also docketed under No. 95-60632.
On December 18, 1995, the district court, on consideration of
a motion filed by Shell in the district court and plaintiff’s
response thereto, signed and filed an order certifying the June 6
and September 28 orders for interlocutory appeal pursuant to 28
U.S.C. § 1292(b); that order was entered on the docket December 19,
16
1995. On December 20, 1995, the plaintiffs filed a notice of
appeal referencing the orders of June 6, September 28, and December
18 (and attaching a copy of the latter). The plaintiffs’ appeal
was docketed in this Court as cause No. 95-60813. On December 28,
1995, Shell filed with this Court a petition for permission to
pursue an interlocutory appeal from the June 6 order under section
1292(b), which was docketed as our cause No. 95-00282. To this
point, we have neither granted nor denied leave to appeal under
section 1292(b). On January 16, 1996, Shell also filed a notice of
appeal and cross-appeal in response to the December 18 order. This
cross-appeal was docketed, like the plaintiffs’ appeal, under our
No. 95-60813.
On February 8, 1996, this Court consolidated cause Nos. 95-
00282 and 95-60632. On April 26, 1996, this Court consolidated
cause Nos. 95-60632 (consolidated) and 95-60813 for purposes of
oral argument and final disposition. Both parties have opted to
submit one brief as to all consolidated appeals.
Discussion
I. Appellate Jurisdiction
So far as the district court held plaintiffs were entitled to
recovery for the years 1979 through 1982, its ruling does not
dispose of the entirety of plaintiffs’ claim——even assuming those
years can be treated as a separate claim——because it does not award
damages, and hence is not appealable under Rule 54(b). United
17
States v. Menendez, 48 F.3d 1401 (5th Cir. 1995); Pemberton v.
State Farm Mutual, 996 F.2d 789 (5th Cir. 1993); Goodman v. Lee,
988 F.2d 619 (5th Cir. 1993).13 However, the district court by its
December 18, 1995, order, certified its June 6, 1995, order for
interlocutory appeal under section 1292(b), and on December 28,
1995, Shell filed in this Court its Fed. R. App. P. 5 petition for
permission to appeal the June 6, 1995, order. We now grant Shell
leave to appeal that order.
The situation as to the plaintiffs is somewhat different.
Arguably the June 6, 1995, order was certifiable and certified
under Rule 54(b) so far as it denied plaintiffs any recovery for
years after 1982.14 Two questions present themselves, however.
13
In its June 6, 1995, order, the district court, although
making findings regarding the interstate market price and Shell’s
resultant liability, made no apportionment of gas quantities
between particular section 107 and section 105 wells and also
failed to specify the quantities of section 107 gas redirected to
Transco’s pipeline at market rates in the latter part of 1982.
Accordingly, and due to the complex nature of the case and the
ongoing factual disputes and discrepancies concerning royalties
owed and the ownership interests involved, the anticipated
determination of the amount of damages cannot possibly be
characterized as merely “ministerial.”
14
And, if this is so, then plaintiffs’ October 1995 notice of
appeal properly brings before us the district court’s denial of
recovery for years after 1982.
Plaintiffs’ October 1995 notice of appeal does not, however,
bring forward the denial, by the district court’s September 28,
1995, order, of plaintiffs’ claims for prejudgment interest as to
the years 1979-1982, because, as explained in the text above, no
district court order has been entered disposing of the entirety of
any of plaintiffs’ claims respecting any of those years in that the
right to recovery has been established but not the amount of
damages. As we ultimately affirm the district court’s holding that
18
First, it is not entirely clear that the years after 1982 represent
an entire claim (or claims), as opposed to being merely part of a
single claim for royalty for the entire period after November 1978.
If the latter, Rule 54(b) certification is not available. We are
inclined to view the years after 1982 as presenting a separate
claim, not as being merely part of a larger, single indivisible
claim. Second, the district court’s actual Rule 54(b) judgment of
September 29, 1995, states that the court “hereby enters judgment
in favor of the plaintiffs pursuant to” the June 6, 1995, opinion.
Arguably, the district court meant to certify under Rule 54(b) only
the grant of relief for the years 1979-1982, not its denial for the
years after 1982. We reject this contention. We read the
September 29, 1995, order as certifying the June 6, 1995, order,
just as if it had read “enters judgment in favor of the plaintiffs
to the extent, but only to the extent, provided in the June 6,
1995, order.” To read the September 29 order as certifying under
Rule 54(b) only the granting of relief (without fixing damages) for
1979-1982, but not the denial of relief for years after 1982, would
be to read the order as intending to certify under Rule 54(b) only
that which could not be so certified without intending to certify
that which could be certified. Moreover, the September 29 order,
as well as that of September 28, reflects that the court granted
plaintiffs’ motion for certification under Rule 54(b). Although
plaintiffs are entitled to no recovery for years after 1982, the
question of prejudgment interest as to those years does not arise.
19
that motion is not in the record, we assume it was to certify the
only thing plaintiffs would have standing to appeal, namely the
denial of relief. Accordingly, we have jurisdiction under Rule
54(b) of plaintiffs’ challenge to the district court’s denial of
relief for the years following 1982.
The same jurisdictional result can perhaps also be justified
under section 1292(b). See Demelo v. Woolsey Marine Industries,
Inc., 672 F.2d 1030 (5th Cir. 1982). Plaintiffs argue, and Shell
agrees, that we can review the entire June 6, 1995, order as it is
all before us by virtue of Shell’s December 28, 1995, petition for
permission to appeal under Fed. R. App. P. 5 and the doctrine that
under section 1292(b) “appellate jurisdiction applies to the order
certified to the court of appeals, and is not tied to the
particular question formulated by the district court.” Yamaha
Motor Corp. USA v. Calhoun, 116 S. Ct. 619, 622 (1996). See also
Ducre v. Executive Officers of Halter Marine, Inc., 752 F.2d 976,
983 n.16 (5th Cir. 1985).15 This principle has been applied to
15
Plaintiffs also argue (but Shell disputes) that this same
principle brings up the September 28, 1995, order denying their
claim for prejudgment interest, because that order, as well as the
order of June 6, 1995, was certified under section 1292(b) by the
district court’s December 18, 1995, order. We disagree because
Shell’s December 28 petition for permission to appeal sought to
appeal only the June 6 order. A section 1292(b) appeal does not
extend to any orders other than that which is both properly
certified and as to which a timely petition for permission to
appeal is filed. See United States v. Stanley, 107 S. Ct. 3054,
3060 (1987); Adkinson v. International Harvester Co., 975 F.2d 208,
211 n.4 (5th Cir. 1992); FDIC v. Dye, 642 F.2d 833, 837 & n.6 (5th
Cir. 1981).
20
allow a party who did not seek permission to appeal to defend the
order certified under section 1292(b) on a basis other than the
controlling issue specified in the district court’s certification
order, just as an appellee in an ordinary appeal under 28 U.S.C. §
1291 may, without taking a cross-appeal, defend the judgment below
on a ground not relied on by the district court. See Armstrong v.
Bush, 924 F.2d 282, 296 n.13 (D.C. Cir. 1991); Consolidated
Express, Inc. v. N.Y. Shipping Ass’n, 602 F.2d 494, 501-502 (3d
Cir. 1979). However, the general rule, like that in section 1291
appeals, Speaks v. Trikora Lloyd, 839 F.2d 1436, 1439 (5th Cir.
1988); Shipp v. General Motors, 750 F.2d 418, 428 (5th Cir. 1985),
is that a party cannot procure a modification favorable to it of an
order certified under section 1292(b) absent that party’s having
timely applied for permission to appeal, even though the opposite
party did so timely apply and permission was granted. See, e.g.,
Tranello v. Frey, 962 F.2d 244, 248 (2d Cir. 1992); Luria Steel &
Trading Corp. v. Ogden Corp., 484 F.2d 1016, 1019, 1023-24 (3d Cir.
1973). See also Rodriguez v. Banco Central, 917 F.2d 664, 668-669
(1st Cir. 1990). But see Armstrong v. Executive Office, 1 F.3d
1274, 1290 (D.C. Cir. 1993) (apparently contra, but unclear). So,
the question of section 1292(b) jurisdiction over plaintiffs’
challenge to the district court’s denial of relief for years after
1982 would seem to turn on whether plaintiffs timely requested
permission to appeal. The district court’s December 18, 1995,
21
order was entered December 19, 1995; plaintiffs’ notice of appeal
was filed in the district court on December 20, 1995, was received
in this Court on December 28, 1995, and was docketed here on
December 29, 1995, and was thus before this Court “within ten days
of the entry of the order” of December 18 as section 1292(b)
requires for an application for permission to appeal. An ordinary
notice of appeal under section 1291 does not constitute an
application for permission to appeal as required by section
1292(b). Aucoin v. Matador Services, Inc., 749 F.2d 1180 (5th Cir.
1985); Aparicio v. Swan Lake, 643 F.2d 1109, 1111 (5th Cir. 1981).
However, this December 20, 1995, notice of appeal is not an
ordinary section 1291 notice, as it not only specifically mentions
section 1292(b), but also, by attaching and referring to a copy of
the district court’s December 18 order, identifies the issues and
the need for immediate appeal. In Aucoin, we observed that the
notice of appeal there lacked “a statement of the basis for a
discretionary appeal” and stated “we do not rest on form for its
esthetics; rather, we look to function.” Id. at 1181. Aucoin also
points to the desirability of the appellate court’s being called on
to assess whether to allow an appeal at a time relatively close to
the trial court’s certification. Id. In neither Aucoin nor
Aparicio had any party ever filed with this Court an application
for permission to appeal under section 1292(b). Plaintiffs’
December 20 notice of appeal contains the important information
22
called for by Fed. R. App. P. 5(b), and its only substantive
deficiency is that it does not specifically ask us to issue an
order granting permission to appeal; yet such a request was timely
before us as to the June 6, 1995, order by Shell’s December 28 Fed.
R. App. P. 5 application. Applying the Aucoin standard, under all
these circumstances it is not too much of a stretch to treat
plaintiffs’ notice of appeal as minimally meeting the requisites of
a Fed. R. App. P. 5 application to “cross appeal.”16 Accordingly,
to resolve any doubts which might arise as to the efficacy of
plaintiffs’ Rule 54(b) appeal from so much of the June 6, 1995,
order as denied them any recovery for the years after 1982, we
treat plaintiffs’ notice of appeal received in this Court on
December 28, 1995, as an application for permission to appeal under
section 1292(b) and we grant the application so far only as it
relates to the June 6, 1995, order.
However, assuming arguendo that plaintiffs’ December 1995
notice of appeal could properly be treated by us as a section
1292(b) application for permission to appeal the district court’s
16
We note that in Cobb v. Lewis, 488 F.2d 41, 53 (5th Cir.
1974), we treated an application for permission to appeal under
section 1292(b) as a section 1291 notice of appeal. In Tranello,
the Second Circuit was careful to point out that nothing by the
putative “cross-appellant” was filed in the court of appeals within
the section 1292(b) ten-day period; in Luria Steel & Trading Co.,
there was never an attempted “cross-appeal” of any kind; and in
Rodriguez, the court pointed out that the “cross-appellant’s”
notice of appeal, though filed in the district court within ten
days of the entry of the section 1292(b) order, was not received in
the court of appeals until well after the ten-day period had run.
23
September 28, 1995, denial of prejudgment interest respecting the
years 1979-1982, we deny leave to appeal that matter. The
September 28, 1995, order denying prejudgment interest as to those
years is plainly not appealable under section 1291 and Rule 54(b),
and we have at no relevant time been requested to grant leave to
appeal that order. The June 6 order does not address prejudgment
interest. Shell has reasonably taken the position that prejudgment
interest is not properly before us. Moreover, resolving that
question would do little to materially advance the ultimate
termination of the litigation, as, if there is any right to recover
actual damages, those must still be ascertained and quantified in
any event, and the additional calculation for prejudgment interest,
if any, would then become an essentially ministerial or mechanical
task. Ruling now on prejudgment interest does not hold much
potential for saving significant further proceedings in the
district court.
The upshot of all this is that plaintiffs’ entitlement to
prejudgment interest is not properly before us. What is properly
before us is Shell’s complaint that the district court erred in
holding it had underpaid royalty for the years 1979-1982, and the
district court’s holding that Shell had not underpaid for the years
after 1982. As to the latter, however, we consider only the years
1985 and 1986, as those are all plaintiffs complain of in their
brief (their complaints as to the years 1983 and 1984 are hence
waived).
24
We turn at last to the merits.
II. The District Court’s June 6 Order Determining Liability
A. Standard of Review
The case below was tried before the district court. We
therefore review all factual findings for clear error and
conclusions of law de novo. Peaches Entertainment v. Entertainment
Repertoire, 62 F.3d 690, 693 (5th Cir. 1995).
Both parties challenge, at different junctures, the district
court’s findings regarding the prevailing “market value” for
Thomasville gas, findings which bear upon both Shell’s contractual
liability and the amount of any damages that might be owed. Market
value is “what a willing seller and a willing buyer in a business
which subjects them and the commodity to restriction and
regulation, including a commitment for a long period of time, would
agree to take and pay with a reasonable expectation that the [FERC]
would approve the price (and price changes) and other terms and
then issue the necessary certificate of public convenience and
necessity.” Piney Woods IV, 905 F.2d at 852 (internal ellipses and
brackets omitted), quoting Weymouth v. Colorado Interstate Gas Co.,
367 F.2d 84, 90 (5th Cir. 1966). “Market value is a question of
fact, and it is up to the fact finder to determine the probative
strength of relevant evidence.” Piney Woods II, 726 F.2d at 238.
We review the district court’s findings mindful that under
Mississippi law “the royalty owners, as plaintiffs, bear the burden
25
of going forward with sufficient evidence to prove their damages by
a preponderance of the evidence.” Piney Woods IV, 905 F.2d at 845
(citation omitted) (internal quotation marks and brackets omitted).
Finally, although Mississippi law requires that the existence of
damages be reasonably certain and susceptible to pecuniary
valuation before relief can be granted, the plaintiffs will not be
denied recovery merely because some measure of speculation and
conjecture is required in determining the amount of damages. Id.,
905 F.2d at 945-946 (citations omitted).
B. Shell’s Liability for 1979-1982
We are here concerned only with gas from the section 107 wells
(see note 9, supra, and accompanying text).
In Piney Woods II, this Court approved three methods of
determining market value in this case. The preferred method,
comparable sales of sour gas, did not exist and according to the
district court continued to elude evidentiary substantiation in
1995. “The next-best method is to examine sales of sweet gas and
sulfur, to determine the market value of the products resulting
from processing at the Thomasville plant,” whereupon “[p]rocessing
costs may . . . be deducted as an indirect means of determining
what a buyer would have paid for the sour gas at the wellhead.”
Piney Woods II, 726 F.2d at 240. This was the method utilized by
the district court in the instant case.
In Piney Woods IV, this Court affirmed the district court’s
26
ruling rejecting the plaintiffs’ proof for the years 1972-1978 on
the ground that the proffered proof of comparable sweet gas sales
was flawed. Now, however, the district court, relying upon four
long-term contracts involving the sale of sweet gas processed from
sour gas from Mississippi fields, has derived a mean rate scale
demonstrative of the “interstate market value” for processed sour
gas. This index of market value, when juxtaposed to the actual
prices paid under the Shell-MisCoa long-term contract, illustrates
Shell’s liability and provides the basis for a calculation of
damages.
We affirm the district court’s use of these sales and the
“interstate market value” derived therefrom. These sales contracts
exhibit geographical, market output, and gas quality
characteristics markedly similar (and in one case identical) to
those of the Thomasville facility,17 overcoming the inadequacies in
the plaintiffs’ showing for the years 1972-1978 which we remarked
17
The Shell-MisCoa contract, made in 1972, had a term of 13
years, with provisions for extension, and involved the sale of
section 105 and section 107 pipeline quality sweet gas processed
from sour gas, with a daily deliverability quota of 40,000 Mcf.
The “interstate market value” found by the district court is based
upon four comparable sales contracts: Amerada Hess-Transco (P-
136), Pursue-Southern Natural (P-137), Shell-Transco (P-138), and
Tomlinson-Transco (P-139). All of these contracts concern only
section 107 pipeline quality gas. The Pursue, Shell, and Tomlinson
contracts concern sour gas produced in Rankin County and processed
on site into sweet gas. The Amerada Hess, Shell, and Tomlinson
contracts have terms of fifteen years and were entered into between
1978 and 1982, while the Pursue contract extends for the life of
the field. All of the contracts set daily deliverability quotas at
different levels: Amerada Hess (50,000 Mcf), Pursue (180,000 Mcf),
Shell (54,000 Mcf), Tomlinson (33,500 Mcf).
27
upon in Piney Woods IV. These sales contracts further demonstrate
both the existence of willing buyers on the interstate market
between 1979-1982 and reveal a discernible market price for sweet
gas processed from section 107 sour gas wells producing during this
time period, i.e., the Spengler, Garrett, Stevens, and Clark wells.
The district court did not clearly err in its determination of the
market value of processed gas.
However, the determination of the market value of processed
gas is only part of the equation for determining the “market value”
of the Thomasville gas “at the well,” the value on which Shell
should have computed royalty. “The method of analysis approved in
Piney Woods II for assessing the market value of Thomasville’s
ultra-sour gas at the wellhead by using comparable sweet gas sales
was to take the price established for the sweet gas market, then
deduct the processing costs inherent in changing the sour gas to
sweet gas, and thus arrive at the price of sour gas at the
wellhead.” Piney Woods IV, 905 F.2d at 848. We have previously
observed that this formula of sweet gas value-minus-processing
costs serves as a proxy, “an indirect means of determining what a
buyer would have paid for the sour gas at the wellhead.” Piney
Woods II, 726 F.2d at 240. Accordingly, we have emphasized that
any consideration of Shell’s processing costs——which under
Mississippi law as applied to both “amount realized by lessee,
computed at the mouth of the well” and “market value at the well”
28
lease provisions are not deductible as such——is necessitated by the
absence of comparable sales of sour gas establishing a market (or
actual sales) price for the gas prior to processing. Id.
In addition, this Court in Piney Woods II held that only
reasonable processing costs could be considered for such purpose,
noted that although the district court had not made an express
finding as to the reasonableness of the processing costs deducted
by Shell, the record would support such a finding, and left that
issue “open for further consideration by the district court.” Id.,
726 F.2d at 241. Following our Piney Woods II remand, the district
court (in Piney Woods III), as we noted in Piney Woods IV, “found
that Shell’s ‘plant processing’ charges were reasonable.” Piney
Woods III, 905 F.2d at 843. Piney Woods IV did not disturb that
finding.
Shell’s central argument on appeal challenges the district
court’s use of Shell’s actual processing costs in determining the
wellhead value of the gas. Shell argues that this approach ignores
variables like capital investment, risk, and profit motive, factors
which any willing buyer of Rankin County sour gas would have to
take into consideration before entering into a long-term contract
to process, market, and transport that gas. Shell also points out
that inflationary factors have increased the costs of plant
construction beyond that of the Thomasville facility, built in the
early 1970s, and posits that insofar as inflation is a factor in
29
increased market prices during the relevant time frame a variable
should be introduced to account for an extrapolated increase in
costs.
Insofar as Shell claims that “processing costs” are something
other than its actual costs, any proper consideration of that
argument must begin with our foundational opinion in Piney Woods
II. There we addressed plaintiffs’ challenge to Shell’s practice
of deducting its actual processing costs from its actual tailgate
sales proceeds to determine royalty due. We rejected this
challenge, and sided with Shell, both as to leases (such as the
“Producers 88 (9170)”, see notes 2 & 3 supra) providing for royalty
to be based on the “amount realized by lessee, computed at the
mouth of the well” and as to leases providing for royalty based on
“market value at the well.” We stated:
“Expenses incurred after production may be charged
against royalty computed ‘at the well’. 3 H. Williams,
Oil and Gas Law § 645 (1981). Accordingly, the costs of
processing and transportation maybe deducted.
. . . ‘at the well’ refers not only to the place of
sale but also to the condition of the gas when sold. ‘At
the well’ means that the gas has not been increased in
value by processing or transportation. It has this
meaning in conjunction with ‘value’ or ‘amount realized’
as well as with ‘sold’. The lessors under these leases
are therefore entitled to royalty based on the value or
price of unprocessed, untransported gas. [citation]. On
royalties ‘at the well,’ therefore, the lessors may be
charged with processing costs, by which we mean all
expenses, subsequent to production, relating to the
processing, transportation, and marketing of gas and
sulphur.
We emphasize, however, that processing costs are
30
chargeable only because, under these leases, the
royalties are based on value or price at the well.
Processing costs may be deducted only from valuations or
proceeds that reflect the value added by processing.”
Id. at 240 (emphasis added).
We went on to say:
“The lessors are entitled to gas royalty at the well.
This means royalty based on the value or price of the
sour gas before it is separated into marketable
constituents. The value or sale price of the residue
sweet gas reflects Shell’s processing costs.
We agree with the plaintiffs that the processing
costs,under both the “market value” and “amount realized”
provisions, must be reasonable.” Id. at 241 (emphasis
added)
And, we concluded “[t]o determine the correct basis for royalty,
processing and transportation costs may be deducted from values or
prices established for processed and transported gas.” Id. at 242.
Nothing in our discussion of “processing costs” indicates that
the “expenses” to which we referred were hypothetical or derivative
in nature; rather, given the nature of the plaintiffs’ challenge,
we were plainly addressing the processing, transportation, and
marketing expenses actually incurred by Shell (and actually passed
on to the royalty owners)——”Shell’s processing costs.” Furthermore,
this was applicable to both the “market value” and the “amount
realized” lease provisions. This view is reinforced by our
reliance in the above Piney Woods II passage on the general rule
that where the lease calls for royalty to be “computed ‘at the
well’” the “[e]xpenses incurred after production” are deducted.
Obviously, this refers to the lessee’s actual expenses (to the
31
extent reasonable), as reflected by the treatise we cited in
support of that proposition. See Williams & Meyers (Martin &
Kramer), Oil & Gas Law, § 645.2 (1996 Ed).
Contrary to the manifest implication of the above referenced
Piney Woods II passages, however, Shell seizes upon one passage
from Piney Woods II as a foundation upon which to construct its
argument. Our initial observation is that the passage Shell seizes
upon occurs in Part VIII of that opinion, in which we addressed
Shell’s practice of disregarding gas used for plant fuel in
computing royalty, and not Part VII of the opinion, our discussion
of the propriety of Shell’s deduction of processing costs in
computing royalty. The passage upon which Shell relies, which
follows a brief discussion of the accounting methodologies
applicable to the plant fuel question, states:
“Finally, processing costs are not per se chargeable to
market value royalty. They must be reasonable costs, and
the market value of sour gas may be more or less in a
given time period than the value of the finished products
less processing expenses.” Piney Woods II, 726 F.2d at
241.
Shell contends that this statement implies the existence of
a “value added” component which is not reflected by the simple
formula of processed gas market value minus actual costs. But such
is not necessarily the meaning of that passage. The limitation,
which we emphasized, that the costs must be “reasonable” suggests
otherwise. Further, it is not clear that “the value of the
finished products” refers to their market value, as opposed to
32
their sales proceeds; if the latter, the statement merely
recognizes that if the “market value” of the gas at the wellhead is
determined either by using comparable sales of sour gas or through
the proxy of comparable sales of sweet gas-less-processing costs
the result may well differ from the method utilized by Shell in
computing royalties, i.e., the actual sales price of processed
Thomasville gas, “the value of the finished products,” less
processing costs. Moreover, Shell had never actually accounted to
the lessors for any royalty on gas used as plant fuel, it had
merely assumed it was “a wash”. Id. at 241. We were at that point
unwilling to simply make that assumption, and remanded that matter
to the trial court. Ultimately, in Piney Woods IV we sustained the
district court’s ruling for Shell on remand in this respect (Piney
Woods III), and we accepted Shell’s contention “that it owes the
royalty owners nothing [respecting gas used for plant fuel], as the
royalty payments on plant fuel that would have been due to them are
exactly balanced by the share of the processing costs that are to
be borne by the royalty owners.” Id. 905 F.2d at 856. We
concluded “because we find that plant fuel is a processing cost, we
read our Piney Woods II decision as merely ratifying as correct the
existing course of performance [as to plant fuel] on the royalty
contract . . .” Id. 905 F.2d at 857.
In sum, the two brief above quoted sentences from the part
“VIII. Plant Fuel” portion of our Piney Woods II opinion, which
33
Shell relies on, do not suffice to overcome the clear thrust of
that opinion as a whole, namely: that in the absence of comparable
sales of sour gas, the best method of determining market value at
the well was to determine the market value of the sweet gas sold by
Shell at the Thomasville plant, by examining comparable sweet gas
sales, and then deduct Shell’s actual processing and transportation
costs applicable to its Thomasville gas, so far as those costs were
reasonable. Moreover, this is plainly what in Piney Woods IV we
contemplated the district court would do if, following our remand
there, it found comparable sales of sweet gas sufficient to reflect
market value of the Thomasville sweet gas in years after 1982.
We further determine that Shell’s evidence presented following
our Piney Woods II remand——no further evidence having been presented
following our Piney Woods IV remand——does not compel a different
conclusion.
Shell presented the testimony of two expert witnesses who
attempted to postulate the construction and investment costs
inherent in the processing, transportation, and marketing of sour
gas by considering the construction of a hypothetical on-site
processing facility analogous to Shell’s Thomasville facility.
Shell’s point was that a willing buyer of the sour gas produced at
the plaintiffs’ wells would have to construct such facilities in
order to market the gas because no market for unprocessed gas
exists. The figures Shell used were based upon a database
34
containing information gathered from its worldwide operations and
comparable information describing other firms’ ventures. The price
tag determined under the Shell model took into account the costs of
investment, construction, and inflation, as well as the profit
motive of a prospective willing buyer, on a recurring annual basis.
The district court concluded that Shell’s model was fraught
with supposition and built upon unsubstantiated conjecture. We
are unable to say that this finding is clearly erroneous.18
In sum, nothing in Shell’s “value added” argument convinces us
that the district court erred in law, or was clearly erroneous, in
concluding that Shell’s approach would not produce a determination
of the section 107 gas’s market value at the wellhead more precise
than that made by the district court. Shell’s recourse to an
increasingly recondite panoply of databases, charts, and indexes
reeks of the abstruse and arcane, could properly be found to be
susceptible to manipulation due to its amorphous quality, to resist
empirical validation, and to offer the prospect of interminably
prolonging this twenty-three-year-old case.
We again reiterate that in Piney Woods II we held that where
comparable sales of sour gas were not available, the next best
18
Shell’s actual costs of capital investment (as well as its
actual operating costs) appear to have been passed on to the
royalty owners as processing costs. See Piney Woods II, 726 F.2d
at 240. What is at stake in this litigation is not compensation
for Shell’s investment (and actual operating costs) in the
Thomasville facility, but rather the distribution of hypothetical
profits above and beyond those costs.
35
method of determining market value at the well was to first
determine the market value of the Thomasville plant processed gas,
if this could be done by evidence of comparable sweet gas sales,
and then deduct Shell’s actual plant operations and transportation
costs, to the extent those were not unreasonable. Nothing in Piney
Woods IV changed that. And, that is what the district court did.
Moreover, we pointed out in Piney Woods II that “[m]arket value is
a question of fact, and it is up to the factfinder to determine the
probative strength of relevant evidence.” Id. 726 F.2d at 238.
And, we further stated that “ . . . if, on remand, the search for
better measures of market value at the well proves unsuccessful or
inordinately burdensome, we think its the duty of the district
court to decide the question as best it can on the basis of the
evidence that it presented.” Id. at 239. Again, that is what the
district court has done. Its determinations are not clearly
erroneous or infected by legal error. Shell’s hypothetical cost
contentions present no basis for reversal.
Shell raises two other arguments against the district court’s
imposition of liability. Shell first posits that in Piney Woods IV
we held it was under no duty to renegotiate its contracts to enter
the interstate market and thus now cannot be held liable for
failing to perfect sales contracts commensurate with that market
rate. Piney Woods IV, 905 F.2d at 854-855. In a related
contention, Shell argues that although its section 107 gas
36
theoretically could have been sold on the interstate market for
greater than its section 105/long-term contract prices, it was
under no obligation to transfer section 107 gas from the intrastate
to the interstate market. In regard to this latter submission,
Shell notes that the regulatory regimes which govern the intrastate
and interstate markets are significantly different and argues that
such a difference in “legal quality” militates against the district
court’s ruling.
Regarding Shell’s first point, the Piney Woods IV language
relied upon by Shell dealt solely with the plaintiffs’ claim that
Shell was obligated to renegotiate its long-term contract to obtain
rates more in accord with those prevailing on the interstate
market. In rejecting that contention, we made it clear that we
were addressing only section 105 gas, for which Shell’s long-term
contract price as of November 1978, was also the maximum lawful
price Shell could charge. Piney Woods IV, 905 F.2d at 851. In
other words, we found that section 105 effectively limited the
market for section 105 gas to Shell’s long-term contract,
vindicating Shell’s actual sales price-less-processing-costs
royalty basis as to gas governed by section 105. Shell’s present
argument completely ignores our reasoning in vacating and remanding
the district court’s decision as to 1979-1986, namely the fact that
Thomasville section 107 gas was eligible for sale on the burgeoning
interstate market. Shell’s failure to renegotiate its long-term
37
contract is essentially irrelevant to a determination of what the
proper “market value” of that section 107 gas was. Shell’s
submission is without merit.
Shell’s second argument revolves around language excerpted
from our discussion in Piney Woods IV concerning Shell’s lack of a
duty to redrill its wells:19
“In Piney Woods II, id. at 239 n. 17, we quoted from
[Exxon v. Middleton, 613 S.W.2d 240, 246-247 (Tex.
1981)], which stated that comparable sales are those made
in the same category of a regulated market. Under this
method of assessing market value, Shell as lessee must
pay royalties on the market price of gas under the
existing regulatory scheme governing each well but is not
necessarily required to act to change the regulatory
scheme to achieve higher prices.” Piney Woods IV, 905
F.2d at 855.
Shell’s argument in essence adopts the Piney Woods IV principle
that there is no duty to change the relevant regulatory scheme and
applies it to section 107 gas by attempting to bifurcate the
section 107 regulatory regime we recognized in Piney Woods IV into
intrastate and interstate components. The gas we are concerned
with in this portion of the opinion, however, falls within the
regulatory regime of section 107; unlike section 105 gas, Shell’s
long-term “intrastate” contract price does not define the upper
reaches of the market for this gas, a fact reflected by the 1982
Shell-Transco contract. Indeed, Shell has cited no statute or
19
Redrilling the section 105 wells to over 15,000 feet in depth
would have resulted in those wells being reclassified as section
107 wells. See note 6, supra.
38
regulation, federal or state, which erected any legal barrier to
the sale of section 107 gas on the interstate market. This
argument is at its core only another of Shell’s persistent attempts
to define the available market in terms of its long-term contract
rather than by reference to existing comparable contracts, in
derogation of our holding in Piney Woods II. Accordingly, we
reject it.
We affirm the judgment of the district court holding that
Shell is liable for underpayment of royalty for the years 1979-
1982.
B. 1983-1984
The district court found that during this period, beginning in
November of 1982, all available section 107 gas was sold to Transco
at an interstate market price. Thus, Shell’s actual sales price
for this period reflects the market rate. Neither party challenges
this holding, and we discern no error in it. Accordingly, the
district court’s judgment absolving Shell of liability for the
years 1983-1984 is affirmed.
C. 1985-1986
Plaintiffs contend that the district court clearly erred by
finding that there was no competitive interstate market during this
time period for section 105 gas deregulated as of January 1, 1985.
Plaintiffs base this contention on the Shell-Transco contract,
39
which obligated Transco to take up to 54,000 Mcf per day, which was
more than the Thomasville plant’s 40,000 Mcf per day delivery
capacity. The plaintiffs, noting that the district court accepted
the Transco contract price as the interstate market price during
1983-1984 but abandoned this analysis thereafter, argue that the
admitted downturn in the interstate market can be tracked by the
“market out” options Transco utilized to reduce its contract price
throughout this period.
The record reveals that due to the interstate market’s
downturn after 1982, numerous interstate pipeline corporations,
like Transco, were refusing to take delivery or pay for gas under
existing contracts. Transco in particular markedly reduced its
takes during this time. Furthermore, the Shell-Transco contract
was an “excess volume” contract subject to the preexisting MisCoa
contract and therefore presupposed the limitation on available gas
resulting from the MisCoa contract.
The district court’s finding that no additional buyers were
present on the rapidly fading interstate market after 1982 is
supported by the record. The record suggests further that Transco
was the only viable buyer in that market for the relevant time
period. We agree with Shell that the nature of the Shell-Transco
contractual relationship is an adequate basis on which the fact
finder may properly reject, as unduly speculative, any suggestion
that plaintiffs had shown Transco would have purchased section 105
gas which was freed of the Shell-MisCoa contract. Furthermore, the
40
fact finder could properly take into account that there was no
showing that had Transco been forced to take all of Thomasville’s
40,000 Mcf output it would not have exercised its “market-out”
option to further reduce the contract price to one nearly identical
to the MisCoa contract rate. The burden of proving market value
includes proof of buyers willing to accept available deliveries,
and the district court was not clearly erroneous in concluding that
plaintiffs had failed to carry that burden. Finding no clear
error, we affirm this portion of the district court’s order as
well.
III. Other Matter
Shell argues that due to the post-1982 downturn in the
interstate market the MisCoa contract price for the years 1982-1986
actually exceeded the interstate market price and therefore Shell
is entitled to equitable recoupment of overages on royalties paid
to the plaintiffs during those years. Shell bases this argument
upon the proposition that the prices paid by Transco pursuant to a
contract entered into in 1982 cannot represent the market value in
1983-1986. Shell posits that because the plaintiffs could identify
no new buyers on the interstate market, the market was practically
valueless and therefore offered rates far below the MisCoa long-
term fixed rate contract price.
Assuming arguendo that Mississippi law allows for equitable
recoupment, see Glantz Contracting Co. v. General Electric Co., 379
41
So. 2d 912 (Miss. 1980), no pleading of record evidences Shell’s
intention to pursue an equitable recoupment theory. See Fed. R.
Civ. Pro. 8(c); Davis v. Odeco Inc., 18 F.3d 1237, 1246 (5th Cir.),
cert. denied, 115 S. Ct. 78 (1994); Chicago Great Western Ry. Co. v.
Peeler, 140 F.2d 865, 868 (8th Cir. 1944); J.V. Edeskuty & Assoc.
v. Jacksonville Kraft Paper, 702 F. Supp. 741, 749 (D. Minn. 1988).
Nor does it appear that this theory was proffered in the trial
court prior to the district court’s December 1994 issuance of the
preliminary draft of the June 6 order. Furthermore, we note that
Shell’s claim is improperly based essentially upon a dearth in the
plaintiffs’ proof. In Piney Woods II we set out a hierarchy of
three modes of analysis in determining what constitutes the
relevant “market value” in this case; given our affirmance of the
district court’s finding that the plaintiffs’ proof of comparable
processed sweet gas sales for this post-1982 period fails, the
applicable analysis is by default that of Shell’s actual sales-
minus-processing-costs system. Had Shell properly counterclaimed
or pleaded recoupment in its answer to plaintiffs’ claim, it could
conceivably have offered evidence of a relevant market where prices
were less than what Shell actually charged. No such pleadings
exist, however, and even if they did Shell has not met its
postulated burden of proving up the existence and parameters of
such a hypothetical marketplace. Shell’s claim for equitable
recoupment fails.
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Finally, Shell has briefed the issue of whether, due to the
district court’s rulings, it will be necessary and proper on remand
to send notices to those prospective plaintiffs whose claims have
exceeded the jurisdictional amount since the class was originally
certified. This question has not yet been ruled on in the district
court and is not materially related to any issue presented by the
June 6, 1995 order we review today. We therefore have no occasion
to reach the class notice issue at this time.
Conclusion
We affirm the district court’s June 6, 1995 order, and hold
that plaintiffs are entitled to recover from Shell for underpayment
of royalty for the period November 1978 through November 1982 with
respect to the section 107 wells. We approve the comparable sales
evidence utilized by the district court in determining the
interstate market value for processed gas and the propriety of
subtracting from that market value Shell’s actual processing costs
to determine the market value of the gas “at the well.” Damages
shall be calculated accordingly, without recoupment or set-off for
any asserted post-1982 overpayment by Shell. We do not have before
us, and do not reach, either the issue of plaintiffs entitlement to
prejudgment interest or the question of whether further notice to
class members is required. As to periods after November 1982, we
affirm the district court’s determination that Shell has not
43
underpaid royalty and is not liable to plaintiffs.
The district court’s June 6, 1995 order is AFFIRMED, and the
cause is REMANDED for further proceedings consistent herewith.
44