Fawcett v. Oil Producers, Inc. of Kansas
352 P.3d 1032
Kan.2015Background
- This is a class action by royalty owners (the Fawcett class) against Oil Producers, Inc. of Kansas (OPIK) contesting royalty calculations under 25 oil & gas leases (1944–1991).
- OPIK sold raw natural gas at the wellhead to midstream purchasers, who took title and then processed, transported, and resold the gas; OPIK’s receipts were determined by formulas that deduct various post-production costs.
- Leases required royalties as a fraction of "proceeds" or "proceeds of sale at the well;" the leases do not expressly authorize deductions.
- Fawcett sought summary judgment arguing the marketable‑condition rule required OPIK to bear post‑production, post‑sale processing costs (so deductions in purchase contracts could not reduce royalties). The district court and Court of Appeals agreed in part; OPIK appealed to the Kansas Supreme Court.
- The Kansas Supreme Court reversed the lower courts on the issue reviewed: when gas is sold at the well, the operator’s duty to make gas marketable is satisfied by delivering gas in a condition acceptable to the purchaser in a good‑faith sale; post‑sale processing deductions in the third‑party contracts need not be borne solely by the operator as a matter of law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether OPIK may deduct post‑production, post‑sale processing/gathering costs (as set forth in third‑party purchase agreements) when calculating royalties under "proceeds/at the well" leases | Fawcett: raw wellhead gas is not marketable until pipeline quality; marketable‑condition rule requires operator to bear post‑sale processing costs, so deductions cannot reduce royalties | OPIK: gas was sold at the well in good faith; royalties are a share of actual proceeds received at the well — contract deductions reflect the negotiated sale price and can be shared | Held: Reversed — where gas is sold at the well and delivered in a condition acceptable to the purchaser in a good‑faith sale, the operator’s marketable‑condition obligation does not as a matter of law extend to post‑sale processing; deductions in purchase contracts need not be borne solely by operator |
| Whether leases requiring royalties "on proceeds from sale at the well" mean royalties must be calculated on gross price before purchaser deductions | Fawcett: "proceeds" means gross downstream price before deductions; operator cannot pass deductions to royalty owners | OPIK: "proceeds" means the actual contract price received from the purchaser at the well (after negotiated deductions) | Held: The term "proceeds" refers to the gross sale price in the contract between first purchaser and operator; but negotiated post‑sale deductions represent bona fide sale adjustments and are not automatically chargeable solely to operator as a matter of law |
| Whether operator can contract third parties to perform services that operator would otherwise be required to perform | Fawcett: operator cannot avoid marketable‑condition duty by outsourcing; contractual deductions cannot mask operator’s obligations | OPIK: contracting to midstream purchasers is a reasonable marketing method that shares downstream value and is consistent with implied duty to market | Held: Operator may sell at the well to third parties; sale in good faith that delivers gas in condition acceptable to purchaser satisfies marketable‑condition duty for purposes of post‑sale processing allocation |
| Whether conservation fees were improperly deducted from royalties | N/A (OPIK conceded issue after Hockett) | N/A | Held: District court judgment for the class on conservation fees affirmed (conservation fees are operator's sole responsibility per Hockett) |
Key Cases Cited
- Robbins v. Chevron U.S.A., Inc., 246 Kan. 125 (recognizes implied duty to market)
- Gilmore v. Superior Oil Co., 192 Kan. 388 (operator must bear cost to make unmerchantable gas marketable when done on the lease)
- Schupbach v. Continental Oil Co., 193 Kan. 401 (same rule as Gilmore regarding compression to make gas marketable)
- Waechter v. Amoco Production Co., 217 Kan. 489 (royalty on proceeds of wellhead sale entitles lessor to share only in amount actually received by lessee)
- Sternberger v. Marathon Oil Co., 257 Kan. 315 (transportation costs to reach market can be shared when gas is marketable at the well)
- Hockett v. The Trees Oil Co., 292 Kan. 213 (conservation fees are operator’s sole responsibility)
- Coulter v. Anadarko Petroleum Corp., 296 Kan. 336 (lessee bears costs of producing and putting gas in condition to be sold under marketable condition rule)
- Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001) (contrasting view: operator may be solely responsible for post‑sale processing under marketable‑condition theory)