Gilmore v. Superior Oil Co.
| Decision Date | 25 January 1964 |
| Docket Number | No. 43424,43424 |
| Citation | 192 Kan. 388,388 P.2d 602 |
| Parties | Faye GILMORE and Ruth Chapin, Appellants, v. The SUPERIOR OIL COMPANY, a Corporation, Appellee. |
| Court | Kansas Supreme Court |
Syllabus by the Court
1. In an action to determine the interests of certain royalty owners who, under the terms of the leases in question, were to receive one eighth of the proceeds from the dale of gas at the mouth of the well if such gas was produced and sold by the lessee, as more fully narrated in the opinion, it is held, the trial court erred (1) in its order sustaining defendant's demurrer to plaintiffs' amended petition and (2) in entering judgment in favor of defendant for costs.
2. Construction of oil and gas leases containing ambiguities is in favor of the lessor and against the lessee for the reason that the lessee usually provides the lease form or dictates the terms thereof and if such lessee is desirous of more complete coverage, the lessee has the opportunity to protect itself by the manner in which it draws the lease.
3. Under the facts and circumstances of this case the lessee, following the authorities cited in the opinion, has the duty of making the gas marketable and cannot recover from the lessors for the expense of installing a compressing station used to compress all gas produced on the leases because such installation was a necessary expense in the process of making such gas marketable.
4. Where a lessee, as here, in extracting oil from the ground also extracts gas and in order to carry out its duty to find a market for such gas and prevent the waste thereof, separates the oil from the gas and compresses the gas to make it marketable, when such gas is sold the lessee has title and possession thereof as its personal property and under the terms of the leases here being considered, it is required to pay one eighth of the gross proceeds to the lessors.
5. When a record reflects such circumstances as we presently have before us, a lessee who fails to use reasonable diligence in finding a market for gas produced and further fails to see that such gas is prepared for market, runs the risk of causing the lease to lapse or to be declared to be abandoned.
W. Luke Chapin, Medicine Lodge, argued the cause and was on the briefs for appellants.
Richard Jones, Wichita, argued the cause, and A. W. Hershberger, Wm. P. Thompson, H. E. Jones, Jerome E. Jones, Robert J. Roth, and William R. Smith, Wichita, Ralph C. Hall, Medicine Lodge, and Robert D. Poulson, Denver, Colo., were with him on the briefs for appellee.
This is an appeal from the trial court's judgments and orders of October 22, 1962, and November 8, 1962, sustaining defendant's demurrer to plaintiffs' amended petition and granting judgment for defendant.
A petition was filed on June 28, 1962, and on September 7, 1962, the trial court permitted amendments to paragraphs 4, 11, and 13(c), and on October 22, 1962, permitted plaintiffs to amend paragraphs 5 and 6 and attach thereto exhibits 'C' and 'D'.
Pertinent allegations of the amended petition were that on December 6, 1946, plaintiffs and their husbands made, executed, and delivered oil and gas leases to defendant covering certain described land. Certified copies of the leases were attached and marked exhibits 'A' and 'B'. All royalties from the land were owned by plaintiffs. Within the primary term of the leases, oil and gas was discovered and this action pertains to the royalties on the gas.
Prior to November, 1956, large amounts of gas were vented and wasted by defendant's production of oil from the wells on the land. There was market demand for such gas and complaints had been made by some of the royalty owners to producing companies which resulted in an investigation by the state corporation commission concerning the waste of such gas.
In November, 1956, defendant installed a large compressor station on the leased premises in order to compress thereby all the gas produced from such premises rather than installing small compressors at the mouth of each well and at that time defendant commenced compressing such gas and selling it to Cities Service Gas Company at twelve cents per 1,000 cubic feet. In May, 1957, defendant, for the first time, sent to each of the royalty owners an instrument designated as a division order whereby they were requested to contribute to be cost of compressing the gas estimated at three cents per 1,000 cubic feet. A photostatic copy of the letter and one of tha gas division orders were attached to the petition, made a part thereof and marked exhibit 'C'.
At the time the trial court heard and sustained defendant's general demurrer to plaintiffs' petition as then amended, it entered judgment for defendant and made some comments which, in pertinent part, were that prior to the installation of the compressor, there was no market for the gas; the gas was being vented and wasted and the state corporation commission was conducting an investigation of such waste; defendant thereafter installed a compressor station whereby the gas was made marketable; under the terms of the lease the lessee was required to pay one eighth of the proceeds from the sale of gas at the mouth of the well where gas only was found; at the mouth of the well the gas was unmarketable and had no market value; it was only after the gas was taken from the mouth of the well, either immediately into a compressor or at a gathering compressor farther out in the field, that it became marketable; the agreed price was 'what it was worth at the mouth of the well' or, as in this case, 'what it was worth when made marketable as the defendant did through his compressor system'; other oil companies, including the Barbara Oil Company, may have created a custom and practice of paying compression charges insofar as those companies were concerned, but the trial court did not believe that such custom and practice was binding upon this defendant under the lease; the only issue involved was whether defendant was entitled to deduct three cents per 1,000 cubic feet for taking the gas from the mouth of the well to the compressor and making it marketable.
The trial court further stated it did not know what more could be shown relative to the issue since counsel candidly admitted the amended petition presented the sole issue.
The trial court stated it recognized this case as a very close one but under Matzen v. Hugoton Production Co., 182 Kan. 456, 321 P.2d 576, 73 A.L.R.2d 1045, and other authorities cited, the court concluded the weight thereof was to the effect that defendant was entitled to deduct the cost of making the gas marketable and was liable only for the remainder of the proceeds after making the gas marketable. The court stated a second time that the question was a close one but it would be best to decide it as early as possible and that 'probably the cheapest way to get a determination of this is to appeal the demurrer to the supreme court and let them decide it.' The trial court entered its formal journal entry of judgment on November 8, 1962, sustaining the general demurrer of defendant to plaintiffs' amended petition and entered judgment for defendant for costs. It is from this...
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