Davis v. Key Gas Corp.

124 P.3d 96, 34 Kan. App. 2d 728, 166 Oil & Gas Rep. 360, 2005 Kan. App. LEXIS 1222
CourtCourt of Appeals of Kansas
DecidedDecember 16, 2005
Docket94,308
StatusPublished
Cited by10 cases

This text of 124 P.3d 96 (Davis v. Key Gas Corp.) is published on Counsel Stack Legal Research, covering Court of Appeals of Kansas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Davis v. Key Gas Corp., 124 P.3d 96, 34 Kan. App. 2d 728, 166 Oil & Gas Rep. 360, 2005 Kan. App. LEXIS 1222 (kanctapp 2005).

Opinions

Green, J.:

L. Wayne Davis and Davis Farms, L.L.C. (collectively referred to as Davis) appeal from the trial court’s ruling in favor of Key Gas Corp. (Key Gas) on the issue of whether Key Gas was paying proper royalties to Davis under two existing oil and gas leases. Additionally, Davis appeals from the denial of its motion for amended findings of fact and conclusions of law. The question on appeal is whether Key Gas was required to pay Davis’ portion of the transportation costs and other expenses deducted under a gas purchase agreement that Key Gas had entered into with ONEOK Midstream Gas Supply, L.L.C. (ONEOK). The oil and gas leases contain a condition precedent requiring Key Gas to charge transportation costs and other expenses to the leases before Key Gas became hable for these expenses. Because the costs in question were not charged to the leases that exist between Key Gas and [730]*730Davis but rather were deducted by ONEOK from the amount given to Key Gas by ONEOK for gas purchased, the condition precedent which would trigger Key Gas3 liability for these costs was never fulfilled.

Nevertheless, Key Gas, which had control of this condition precedent under the oil and gas leases, had an implied obligation to protect Davis against transportation costs and other expenses that would reduce Davis3 royalty. Key Gas made the completion of the condition impossible when it entered into the gas purchase agreement with ONEOK and allowed ONEOK to deduct transportation costs and other expenses. Key Gas will not be allowed to use its own action which prevented the condition precedent from being fulfilled to escape liability for these costs. Accordingly, we reverse and remand with directions.

In February 2003, L. Wayne Davis and his wife, Betty Davis, granted two oil and gas leases to Thomas Energy, Inc. Under the leases, Thomas Energy, Inc. agreed to pay the Davises (as lessors) a royalty of one-eighth of the proceeds received from “the sale of gas, gas condensate, gas distillate, casinghead gas, gas used for the manufacture of gasoline, or any other product and all other gases, including their constituent parts, produced from the land herein leased.33 Both of these leases contain the same Exhibit A attachment. Paragraph 9 of Exhibit A includes the following language:

“It is agreed that the Lessor shall bear no costs of gas treatment, dehydration, compression, transportation or water hauling charged to this lease by Lessee in its operations thereon. It is further agreed that Lessor shall receive their proportionate royalty share of all monies received by Lessee for oil and/or gas production attributable to this lease[,] including any premiums, rebates and refunds of any land or nature paid to Lessee and any take-or-pay payments, production payments, contract buy outs or contract buy downs, which directly reduce the amount of royalty revenue Lessor would otherwise receive from oil and/or gas production from this lease.”

Thomas Energy, Inc. assigned these leases to Key Gas. Thereafter, Key Gas filed a “Declaration of Pooling and Unitization,33 which consolidated part of the land covered by the two leases into one 160-acre operating unit.

[731]*731Key Gas later entered into a gas purchase agreement with ONEOK, in which ONEOK contracted to purchase natural gas from Key Gas and for the right to process and extract natural gas liquids from the gas. Exhibit A of the contract sets the amount that ONEOK would pay Key Gas at 98% of the price set forth in a specified industry index. In addition, the contract allows ONEOK to charge Key Gas various fees, including a fee for the volume of gas lost and unaccountable, a compression fee, a compression fuel fee, a gathering fee, a dehydration fee, a treating fee, and a conditioning service fee. ONEOK deducted the applicable fees from the amount owed to Key Gas under the contract and then remitted a check for the net amount to Key Gas. Key Gas or one of its related companies would then send Davis a check for the one-eighth royalty share less the proportionate deductions made by ONEOK.

In July 2004, Davis filed suit against Key Gas and United Energy, Inc. United Energy, Inc. owned a working interest in the oil and gas leases. In its petition, Davis raised numerous issues, including that Key Gas was deducting from Davis’ royalty checks charges for transportation of gas which were expressly prohibited under the oil and gas leases. In January 2005, the parties stipulated that the only remaining issue before the trial court was “whether the Defendant, Key Gas Corp., is required to pay to the Lessor its proportionate share of deductions from gas proceeds charged by ONEOK as to 100% of the proceeds.” The parties entered into a settlement agreement as to all other issues raised in Davis’ petition, including any claims raised against United Energy, Inc.

The trial court decided the remaining issue based on the briefs and documentation submitted by the parties. In its brief, Davis argued that the unambiguous language contained in paragraph 9 of Exhibit A of the leases prohibited deductions from Davis’ royalties. Davis pointed out, however, that the contract between Key Gas and ONEOK allowed a deduction of 7.5% of gross royalty for transportation charges. Davis argued that Key Gas could not contract the authorization to make deductions and then disclaim responsibility. Davis contended that Key Gas was fulfilling its marketing responsibilities, which was part of its operations on the lease, when it contracted for the sale of gas to ONEOK. Davis maintained [732]*732that by authorizing the deductions against Davis’ royalty share, Key Gas breached the terms of the oil and gas leases.

On the other hand, Key Gas argued that it was paying appropriate royalties to Davis. Key Gas maintained that the deductions were made under the ONEOK contract and were not charges made by Key Gas under its leases with Davis. Key Gas contended that it made no other deductions from the ONEOK payment and that it was paying Davis the proportionate share of the actual proceeds received. It appears that Key Gas never disputed that the types of costs and expenses deducted by ONEOK were those listed in paragraph 9 of Exhibit A of the oil and gas leases.

In its memorandum decision issued in February 2005, the trial court entered judgment in favor of Key Gas. In doing so, the trial court referenced a particular case originally decided by it, see Sternberger v. Marathon Oil Co., 257 Kan. 315, 324-32, 894 P.2d 788 (1995), and indicated its concern in that case had been about “the opportunity for an unscrupulous operator to self-deal through a controlled entity or arbitrarily make charges for services beyond their real economic value.” The trial court further stated:

“In this instance, the exhibit to the lease form prohibits charging the lessors share for costs of this nature incurred by the lessee.
“The difficulty is that the industry has changed as noted in the Stemberger opinion that instead of gas pipeline companies building line to the wellhead with the purchase price reflective of the cost of bringing the pipeline to the well, the present market involves taking the gas from the wellhead to a point off the leased premises before the first sale takes place.
“In this instance, the price is determined by a published standard for gas delivered to a major cross-country pipeline.

Free access — add to your briefcase to read the full text and ask questions with AI

Related

Law Co. Building Associates v. Law
444 P.3d 376 (Court of Appeals of Kansas, 2019)
Law Company Building Associates v. Law
Court of Appeals of Kansas, 2019
Fawcett v. Oil Producers, Inc. of Kansas
352 P.3d 1032 (Supreme Court of Kansas, 2015)
Fawcett v. Oil Producers, Inc.
306 P.3d 318 (Court of Appeals of Kansas, 2013)
Thoroughbred Assoc. v. Kansas Royalty Co.
248 P.3d 758 (Court of Appeals of Kansas, 2011)
Premier Realty, LLC v. I.T.J. Investments, Inc.
209 P.3d 741 (Court of Appeals of Kansas, 2009)
Davis v. Key Gas Corp.
124 P.3d 96 (Court of Appeals of Kansas, 2005)

Cite This Page — Counsel Stack

Bluebook (online)
124 P.3d 96, 34 Kan. App. 2d 728, 166 Oil & Gas Rep. 360, 2005 Kan. App. LEXIS 1222, Counsel Stack Legal Research, https://law.counselstack.com/opinion/davis-v-key-gas-corp-kanctapp-2005.