David v. Oxy USA, Inc.
822 F. Supp. 2d 1125
D. Kan.2011Background
- OXY USA, Inc. operates wells on plaintiffs’ property under leases containing free gas clauses.
- Approximately 2,200 class members; around 1,900 do not currently use house gas, while ~300 use it free of cost.
- OXY taps house gas at wellhead; surface owners connect themselves; OXY bears tap cost but not the connection burden on the surface owner.
- OXY has not cut off free gas to named plaintiffs but has installed compressors that lower house gas delivery pressure.
- Letters in 2007 warned of high H2S and declining pressure, encouraging conversion to alternative energy; separate letters warned of ongoing supply risk.
- Leases generally define free gas as gas for domestic use at no charge, often stating use at lessee’s own risk and expense; interpretive dispute centers on gas quality (useable vs. merely free gas).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does free gas require usable gas at the surface? | Schell argues free gas clauses require free, usable gas for domestic use. | OXY contends free gas means gas free of charge, regardless of quality. | Yes; free gas clauses require usable gas, not just gas emergent from the well. |
| Are the leases ambiguous on gas quality and does ambiguity favor lessor? | Ambiguity favors lessee or lessor depending on language; here ambiguity supports needing usable gas. | Clauses unambiguously place risk on lessee after gas is provided; quality not specified. | Gas clauses are ambiguous but interpreted in favor of the lessor to require usable gas. |
| Does the leases’ implied covenant to develop the minerals affect the duty to provide usable free gas? | Implied covenant to develop cannot override the express duty to provide usable gas. | Implied covenant to diligently produce could conflict with supplying usable gas. | Express terms control; implied covenant does not negate duty to provide usable free gas. |
| Is declaratory judgment appropriate to determine rights under the free gas clause? | DJA relief clarifies rights and avoids future disputes; should be granted. | DJA would not settle the controversy and could invite damages lawsuits later. | Yes; declaratory judgment proper and within court’s discretion. |
| Should plaintiffs obtain a permanent injunction prohibiting interference with free gas? | Injunction is necessary to prevent interruption of free gas and ensure ongoing supply. | Injunction would be premature and could harm production/diligent development and impose costs. | Denied; injunctive relief is premature given available damages and court-ordered declaratory relief. |
Key Cases Cited
- Bassell v. W.Va. Cent. Gas Co., 103 S.E. 116 (W. Va. 1920) (free gas obligation cannot be escaped for domestic use despite burden; may be supplied from other sources)
- Jackson v. Farmer, 594 P.2d 177 (Kan. 1979) (interpretation of leases by reading entire document; prefer lessor-favorable ambiguities)
- Richardson v. Nw. Cent. Pipeline Corp., 740 P.2d 1083 (Kan. 1987) (uses and domestic gas interpretations in lease context)
- Nicholson v. Pittsburgh & W. Va. Gas Co., 105 S.E. 784 (W. Va. 1921) (free gas obligation may persist despite economic burden; burden not excused by later conditions)
- Sternberger v. Marathon Oil Co., 894 P.2d 788 (Kan. 1995) (court comments on market-related language, not directly controlling gas-quality issue)