Union Gas System, Inc. v. Carnahan

774 P.2d 962, 245 Kan. 80, 106 Oil & Gas Rep. 294, 1989 Kan. LEXIS 119
CourtSupreme Court of Kansas
DecidedMay 26, 1989
Docket62,613
StatusPublished
Cited by12 cases

This text of 774 P.2d 962 (Union Gas System, Inc. v. Carnahan) is published on Counsel Stack Legal Research, covering Supreme Court of Kansas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Union Gas System, Inc. v. Carnahan, 774 P.2d 962, 245 Kan. 80, 106 Oil & Gas Rep. 294, 1989 Kan. LEXIS 119 (kan 1989).

Opinion

The opinion of the court was delivered by

Herd, J.:

This is a consolidation of two natural gas cases transferred from the Court of Appeals pursuant to K.S.A. 20-3018(c). The first case, Union Gas System, Inc. v. Glen Carnahan et al., stems from an action filed by Union Gas System (Union) on August 1,1985, seeking condemnation and quiet title. Union also asked for an accounting and punitive and exemplary damages, and for an injunction against further production of natural gas. The second case, Harold L. DeTar et al. v. Union Gas System, Inc., and the State Corporation Commission, arises from a petition for judicial review filed March 5, 1986. The petition seeks review of the Corporation Commission’s (Commission) orders issued January 13 and February 3, 1986. The district court consolidated the two cases for purposes of all further proceed *82 ings on May 7, 1986. In the meantime, Union amended its petition praying for condemnation. The court issued its final order on June 29, 1988. Union appeals and Glen Carnahan, Harold and Anna DeTar, Bob Terlip, Bob Vena, and Natural Growth Minerals and Resources, Inc., cross-appeal.

Union is a natural gas public utility which has long provided service to Southeast Kansas and the Kansas City metropolitan area. The DeTars own the land beneath which is the natural gas in dispute. The DeTars granted an oil and gas lease to Carnahan et al., who sold Terlip and Vena a 30% working interest. The DeTars receive a 15% royalty under the lease.

During World War II, Union’s supply of local gas ran low and it applied to the War Resources Board (Board) for steel to lay pipelines to the Hugoton gas field to bring new supplies of gas to its customers. Williams Natural Gas Co. (Williams), formerly operating at different times as Cities Service Gas Co. and as Northwest Central Pipeline Corporation, made a similar request of the Board. The Board granted Williams’ request, but, in cooperation with the Federal Power Commission, ordered Williams to provide gas service to Union. Under the order, a special gas purchasing arrangement known as the “P” tariff was established. This allowed Union to purchase gas at favorable rates, but required Union to take its gas at periods of low demand. Thus, the need for a gas storage facility for Union became essential. The “P” tariff provides a savings to Union in the amount of $1,400,000 per year. This is a savings of about $20 a year for each customer.

A subsurface geological reservoir known as the “Squirrel” sandstone formation underlies some of the land in Montgomery County, Kansas. The reservoir was a prolific producer of natural gas in the early part of the century but became depleted by the 1940’s. The formation was abandoned because the low pressure, 9.3 pounds per square inch (psi), prevented further economical recovery of gas.

Union acquired the abandoned wells in the late 1940’s and early 1950’s and obtained gas storage leases from area landowners. The Squirrel Formation became a gas storage reservoir known as the North Liberty Gas Storage Field. Union began injecting gas in the field in 1952. The Squirrel Formation has proven to be well suited for natural gas storage, as it effectively *83 accepts, holds, and returns injected gas with minimal loss. Approximately 4 billion cubic feet of gas is presently stored in the field, with a market value of approximately $10,000,000.

The price Union may charge for gas is regulated by the Commission. The Commission takes into account the cost of the gas purchased by Union, its cost of operations, and its cost of storage, including gas lost in storage or in transmission. The average annual storage loss ranges from approximately 1.1 to 4.3%. The Commission allows Union to recover a maximum of 4% of lost gas from the consumer through its purchase gas adjustment. Thus, the public bears some of the cost of lost gas, but benefits from the savings resulting from Union’s ability to store gas purchased at favorable prices.

The boundaries of the Squirrel sandstone formation are not presently known due to insufficient stratagraphic well tests or control data. The volume of gas in Union’s storage reservoir can be calculated, but not the geologic or stratagraphic boundaries. Best estimates show, however, that the Squirrel sandstone pinches out as it runs north from the center of the storage field, which is 65 to 100 feet thick, to the 096N well located just southeast of the DeTar farm, at which point the sandstone is only 8 feet thick. It thus appears the DeTar farm is close to the north boundary of the field.

The DeTars purchased the farm in 1954, and for the next 13 years, Union unsuccessfully attempted to obtain a storage lease on the land. The DeTars were aware of Union’s storage operations on adjacent property and that Union was concerned some of its injected gas was migrating to the DeTar land. The DeTars were also aware that Union’s storage operations might repressurize old wells drilled many years before on the DeTar land.

As non-native gas is injected into the center of the storage field, it pushes gas to the perimeter of the reservoir, including to the north toward the DeTar farm. Although some commingling occurs, native gas is usually found at the perimeter of the field, while injected gas is found at the center. The parties agree that between 13.7 and 17.7 percent of appellees’ production is native gas.

The opinion of Anderson v. Beech Aircraft Corp., 237 Kan. 336, 699 P.2d 1023 (1985), was filed May 10, 1985. It presented the opportunity the DeTars and Carnahan were looking for. The *84 DeTars had previously leased their land to Carnahan. On June 1, 1985, Carnahan, together with Terlip and Vena, then drilled two wells on the DeTar land, designated as the DeTar No. 1 and No. 2 wells. The DeTars and Carnahan obviously intended to tap the Squirrel sandstone formation in which Union gas was stored.

The newly drilled wells produced significant quantities of gas, which Carnahan, Vena, and Terlip sold to appellees Salem Pipeline Company (Salem) and Scissortail Natural Gas Company (Scissortail). Salem and Scissortail in turn sold the gas to Williams, the supplier of gas to Union. Chemical tests conducted on the gas produced from the DeTar wells indicated it was largely Union gas, mixed with some native gas.

On August 1, 1985, Union filed a petition with the district court seeking (1) to quiet title on the basis of adverse possession; (2) an accounting of the proceeds of appellees’ sale of gas injected by Union; (3) punitive and exemplary damages based on conversion of stored gas; and (4) a temporary and a permanent injunction against the further taking of stored gas. On August 21, 1985, the trial court refused to grant a temporary injunction against further production from the DeTar wells, holding Union had an adequate remedy at law through condemnation pursuant to K.S.A. 55-1201 et seq. and K.S.A.

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774 P.2d 962, 245 Kan. 80, 106 Oil & Gas Rep. 294, 1989 Kan. LEXIS 119, Counsel Stack Legal Research, https://law.counselstack.com/opinion/union-gas-system-inc-v-carnahan-kan-1989.