N. Natural Gas Co. v. Oneok Field Servs. Co.

• Court: United States State Supreme Court of Kansas
• Citation: 448 P.3d 383
• Docket Number: No. 118,239,118,239
• Parties: NORTHERN NATURAL GAS COMPANY, Appellant, v. ONEOK FIELD SERVICES COMPANY, LLC; ONEOK Midstream Gas Supply, LLC ; Lumen Energy Corporation; and Lumen Midstream Partnership, LLC, Appellees, v. Nash Oil & Gas, Inc. and L.D. Drilling, Inc., Appellees, and Val Energy, Inc., Intervenor/Appellee.
• Decision Date: 06 September 2019

448 P.3d 383

NORTHERN NATURAL GAS COMPANY, Appellant,
v.
ONEOK FIELD SERVICES COMPANY, LLC; ONEOK Midstream Gas Supply, LLC ; Lumen Energy Corporation; and Lumen Midstream Partnership, LLC, Appellees,
v.
Nash Oil & Gas, Inc. and L.D. Drilling, Inc., Appellees,
and
Val Energy, Inc., Intervenor/Appellee.

No. 118,239

Supreme Court of Kansas.

Opinion filed September 6, 2019.

Richard A. Olmstead, of Kutack Rock LLP, of Wichita, argued the cause and was on the briefs for appellant Northern Natural Gas Company.

James M. Armstrong, of Foulston Siefkin LLP, of Wichita, argued the cause on behalf of all appellees, and Jim H. Goering and Daniel J. Buller, of the same firm, and Larry E. Keenan and Timothy R. Keenan, of Keenan Law Firm, P.A., of Great Bend, were with him on the brief for appellee L.D. Drilling, Inc.

Robert R. Eisenhauer, of Johnston & Eisenhauer, of Pratt, and Brad Welsh, pro hac vice, of Gable & Gotwals, of Tulsa, Oklahoma, were on the brief for appellees ONEOK Field Services Company, LLC and ONEOK Midstream Gas Supply, LLC.

Robert Christensen, of Law Office of Robert W. Christensen, of Medicine Lodge, and Mark Banner, pro hac vice, of Hall Estill, of Tulsa, Oklahoma, were on the brief for appellees Lumen Energy Corporation and Lumen Midstream Partnership, LLC.

Brian J. Madden, of Wagstaff & Cartmell, LLP, of Kansas City, Missouri, was on the brief for appellee Nash Oil & Gas, Inc.

Jeffery L. Carmichael and Will B. Wohlford, of Morris, Laing, Evans, Brock & Kennedy, Chtd., of Wichita, were on the brief for appellee Val Energy, Inc.

David G. Seely, of Fleeson, Gooing, Coulson & Kitch, L.L.C., of Wichita, was on the brief for amicus curiae Eastern Kansas Royalty Owners Association, and Gregory J. Stucky, of the same firm, was on the brief for amicus curiae Southwest Kansas Royalty Owners Association.

The opinion of the court was delivered by Biles, J.:

Northern Natural Gas Company injects into underground storage reservoirs large quantities of previously produced natural gas acquired from distant locations so it can remove, transport, and resell that gas later

448 P.3d 386

during peak market conditions. Some of its storage gas migrated beneath the earth to nearby wells in areas Northern did not control through eminent domain or contract. The wells' operators extracted that gas and sold it. A legal struggle has waged for more than a decade over the disputed right to produce Northern's migrated storage gas. This is yet another round in that high-dollar subsurface prize fight.

In a previous appeal, we applied the common-law "rule of capture" to conclude the operators lawfully produced and sold Northern's storage gas taken before June 2, 2010. Northern Natural Gas Co. v. ONEOK Field Services Co. , 296 Kan. 906, 296 P.3d 1106 (2013) ( ONEOK I ). That was the date when Northern received a certificate from the Federal Energy Regulatory Commission permitting it to expand the authorized boundaries of its then-existing underground storage field to encompass the offending wells. We now consider whether that certification changes the right-to-produce analysis for gas taken after June 2, 2010. We hold it does.

Once those new boundaries were certified, Northern's identifiable storage gas within that designated area was no longer subject to the rule of capture—even though Northern had not yet acquired storage rights through eminent domain or contract. See Union Gas System, Inc. v. Carnahan , 245 Kan. 80, 88, 774 P.2d 962 (1989) ("[A]s soon as Union's storage operation became authorized and its gas identifiable, the gas was no longer ferae naturae and subject to the rule of capture. The title to Union's captured gas remained in Union."). The district court erred when it granted judgment against Northern by holding otherwise. We reverse and remand to the district court for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

As mentioned, state and federal courts have wrestled with this controversy before. The facts and interrelated procedural twists are detailed in other court decisions. See, e.g., ONEOK I , 296 Kan. at 911-16, 296 P.3d 1106 ; Northern Natural Gas Co. v. L.D. Drilling , 862 F.3d 1221 (10th Cir. 2017), cert. denied ––– U.S. ––––, 138 S. Ct. 747, 199 L.Ed.2d 617 (2018) ; Northern Natural Gas Co. v. Appx. 9,117 Acres in Pratt , No. 10-1232-MLB-DWB, 2015 WL 471244 (D. Kan. 2015). For our purposes, the relevant facts can be concisely described.

Northern has an underground natural gas storage facility known as the Cunningham Storage Field in Pratt and Kingman counties. Northern holds certifications from the Kansas Corporation Commission and FERC to inject and store previously produced natural gas that is transported to the Field to await favorable market conditions and resale. Nash Oil & Gas, Inc. and L.D. Drilling, Inc. operated oil and gas wells about two to six miles from the Field's northern certificated boundary as it existed before June 2, 2010. ONEOK and Lumen were third-party purchasers of gas produced by Nash and L.D.

In 2008, Northern sued Nash, L.D., and another producer, Val Energy, Inc., in the United States District Court for the District of Kansas, alleging they aggravated the subsurface movement of Northern's storage gas beyond the Field's then-certificated boundaries by pumping atypical quantities of water to create artificial pressure sinks. This, the allegation continued, drew Northern's storage gas from the Field toward the producers' wells, where it was extracted and sold.

While that federal litigation progressed, Northern filed this state lawsuit in Pratt County District Court against ONEOK and Lumen alleging they participated in converting Northern's storage gas by buying it from Nash and L.D. Its conversion claims state:

"43. Producers have produced and sold, and will continue to produce and sell Northern's previously injected storage gas which migrated on or after July 1, 1993.

"44. Northern holds title to, and is the lawful owner of, all such previously injected, but migrated storage gas.

"45. Based upon belief and recently acquired information and data, [ONEOK and Lumen] have purchased from the Producers , or caused others to purchase from the Producers, such migrated storage gas and, upon information and belief, transported and re-sold such migrated storage gas.

448 P.3d 387

"46. [ONEOK's and Lumen's] acts and/or omissions, including, but not limited to, purchasing, transporting, and reselling Northern's migrated storage gas constitute the unauthorized exercise of ownership rights by [ONEOK and Lumen] over Northern's migrated storage gas, to the exclusion of Northern's rights.

....

"48. [ONEOK's and Lumen's] unauthorized exercise of ownership and control over Northern's storage gas ... is an unlawful conversion ." (Emphases added.)

In response, ONEOK and Lumen admitted purchasing gas from Nash and L.D., denied Northern's conversion allegations, and asserted third-party indemnification claims against Nash and L.D. as a precaution against the conversion claims. ONEOK and Lumen insisted they were innocent good-faith purchasers for value; and "[a]s a matter of public policy, innocent purchasers of previously injected storage gas can have no liability for conversion because purchasers must be entitled to rely upon the assurances of title made by sellers."

Nash and L.D. moved for summary judgment, asserting a legal right to produce the migrated gas from their wells. They noted the Underground Storage of Natural Gas Act, K.S.A. 55-1201 et seq., sets out circumstances when natural gas public utilities can acquire property rights through condemnation for underground natural gas storage and addresses ownership of storage gas migrating outside a designated area. But, they argued, the Storage Act did not apply to the migrated gas they took and this statutory gap left in place common-law principles permitting their operations.

The district court granted the motion, ultimately resolving not only ONEOK and Lumen's third-party claims against Nash and L.D., but also Northern's conversion claims against ONEOK and Lumen. The court agreed with Nash and L.D. that the Storage Act did not apply because it expressly dealt only with gas that "migrated to adjoining property or to a stratum, or portion thereof, which has not been condemned as allowed by law or otherwise purchased." (Emphasis added.) K.S.A. 55-1210(c). And because the producers' wells were not on land adjoining the Field, the court held the common-law rule of capture applied and allowed Nash and L.D. to produce and sell migrated storage gas taken from their wells.

Shortly thereafter, FERC issued the June 2, 2010 certificate authorizing Northern to expand the Field's boundaries. The FERC order gave Northern authority to acquire rights to property within the newly certificated boundaries. This effectively extended Northern's buffer zone to better protect its migrating gas from capture by others.

The FERC certification caused the district court to modify its judgment to limit its application to the time before June 2, 2010. The court also ordered ONEOK and Lumen to suspend payments to Nash and L.D. for gas produced from their wells until further court direction.

On appeal, the ONEOK I court affirmed the district court's ruling. It then remanded the case to resolve "any remaining claims that...