Foster v. Apache Corp.

285 F.R.D. 632, 178 Oil & Gas Rep. 554, 2012 U.S. Dist. LEXIS 116915, 2012 WL 3568244
CourtDistrict Court, W.D. Oklahoma
DecidedAugust 20, 2012
DocketNo. CIV-10-0573-HE
StatusPublished
Cited by10 cases

This text of 285 F.R.D. 632 (Foster v. Apache Corp.) is published on Counsel Stack Legal Research, covering District Court, W.D. Oklahoma primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Foster v. Apache Corp., 285 F.R.D. 632, 178 Oil & Gas Rep. 554, 2012 U.S. Dist. LEXIS 116915, 2012 WL 3568244 (W.D. Okla. 2012).

Opinion

ORDER

JOE HEATON, District Judge.

Plaintiff Lois Foster brings this putative class action against defendant Apache Corporation (“Apache”) for underpayment of royalties on gas production. Ms. Foster seeks to represent the following class in this suit:

[636]*636All non-excluded persons or entities who are or were royalty owners in Oklahoma wells where Apache Corporation is or was the operator (or, as a non-operator, Apache separately marketed gas) from and after January 1, 2000. The Class Claims relate only to payment for gas and its constituent substances produced from the wells. The Class does not include overriding royalty owners or other owners who derive their interest through the oil and gas lessee. The persons or entities excluded from the Class are agencies, departments or instru-mentalities of the United States of America and the State of Oklahoma, publicly traded oil and gas exploration companies and their affiliates, and persons or entities that Plaintiffs counsel is, or may be, prohibited from representing under Rule 1.7 of the Oklahoma Rules of Professional Conduct.

Presently pending before the court are plaintiffs motions for class certification, to strike certain of defendant’s evidentiary materials, to file an amended complaint, and to strike Apache’s position as to whether the undersigned judge should recuse from this case.1 All motions have been fully briefed and are at issue. The motion for class certification and motions to strike came before the court for hearing on June 25-26, 2012, where the court received evidence and heard the arguments of counsel. After consideration of the parties’ submissions, the court concludes plaintiffs pending motions should be denied or are rendered moot in the circumstances existing here.

I. Background

A. Factual background2

Ms. Foster owns royalty interests in six Oklahoma gas wells. Her interests in these wells are governed by oil and gas leases with Apache, which is an oil and gas exploration and production company. During the class period, defendant has been the well operator for over 1,200 producing gas wells in Oklahoma and has marketed gas production for over 10,000 royalty interest owners.3 Apache has sold gas production from the class wells under thirty different marketing arrangements to over two dozen unaffiliated purchasers.4 These purchasers include midstream processing companies, gas marketing companies, and end-consumers.

Although it has several marketing arrangements, Apache sells its gas production at one of two general points in the gas-marketing process. Gas is either sold when it is in a condition such that it can enter (or has entered) an interstate transmission pipeline, or gas is sold to a midstream company at the point it enters the gathering lines on the leased premises,5 before the gas has been fully processed such that it can enter an interstate pipeline. Apache sells approximately 70% of its gas production downstream at or after it enters the transmission line and markets the remaining 30% to midstream companies.

When natural gas (methane) comes out of the ground, the gas stream often contains water, heavier hydrocarbons,6 and other im[637]*637purities. Additionally, the raw gas stream is usually of low pressure. The relative proportion of these constituents and the pressure of the gas can vary from well to well. Before natural gas can be sold in the interstate gas market, it must ordinarily undergo certain processing functions which place the gas in a homogenous condition capable of entering an interstate pipeline. This processing includes removing water, impurities, and NGLs, as well as compressing the residue gas.

When Apache sells gas production at or after gas enters the interstate pipeline, it first pays a midstream company to process the gas into a condition where it can enter that pipeline. Under the terms of its cash agreements with the midstream companies, Apache is charged separate fees for gathering, processing, and compression.7 In addition, the midstream companies are entitled to use whatever gas is necessary to fuel their gas plants without fee, and they keep the value of the NGLs for themselves.8 When Apache pays royalty to its lessees on gas marketed in this manner,9 it bears the entire cash compression fee itself, as well as the costs necessary to place the gas into the gathering line. However, the royalty owners share proportionately in the gathering and processing fees charged by the midstream companies, and royalty is not paid on the gas used for fuel to run the gas plant or on the NGL value retained by the midstream companies.

For the 30% of its gas marketed to the midstream companies, Apache purports to sell the entire gas stream as it enters the gathering lines, before the gas has been fully processed. The midstream companies gather, dehydrate, compress and process the gas stream, and then resell the residue gas and NGLs in the interstate market. Midstream companies use gas to fuel their processing plants under these arrangements as well. Gas sold by Apache under these contracts is sold on a percentage-of-proceeds (“POP”) or percentage-of-index (“POI”) basis, whereby Apache receives a large percentage (usually 80-90%) of the amount the midstream company ultimately receives for selling the residue gas and NGLs downstream.10 For gas marketed under these contracts, Apache pays royalty based on the amount it receives from the midstream company without deduction for any processing costs necessary for the gas to enter the gathering lines. Additional royalty is not paid on the fuel gas used by midstream companies to power their processing plants.

Under either type of arrangement, Apache performs some initial on-lease activities necessary to place the gas into the gathering lines. For example, Apache often uses a mechanical separator on the lease to remove liquids from the gas stream before it enters the gathering line.11 And for gas produced from at least one well, Apache passed the gas through a refrigeration unit on the lease to remove the NGLs. Each midstream contract — whether POP, POI, or cash — contains different minimum or maximum requirements for water, carbon dioxide, sulphur, and compression, among others, and Apache bears the full cost of placing the gas stream into that condition on the lease.

[638]*638Ms. Foster owns an interest in currently-producing wells where the gas is and has been sold to DCP Midstream, LP under a POP contract. Additionally, she owns an interest in a well which is no longer producing but which was producing during the class period. Gas produced from the latter well was processed under a cash agreement with Enogex Gathering and Processing LLC.

B. Overview of Oklahoma royalty law

The primary compensation mineral-interest owners receive for the production of oil and gas is a royalty, which is usually a fractional share in production or the value of production, free of the costs of production. See Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203, 1205, n. 1 (Okla.1998); Hemingway § 2.5, at 56.

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Bluebook (online)
285 F.R.D. 632, 178 Oil & Gas Rep. 554, 2012 U.S. Dist. LEXIS 116915, 2012 WL 3568244, Counsel Stack Legal Research, https://law.counselstack.com/opinion/foster-v-apache-corp-okwd-2012.