Rogers v. Westerman Farm Co., No. 99SC293.
| Decision Date | 02 July 2001 |
| Docket Number | No. 99SC293. |
| Citation | 29 P.3d 887 |
| Parties | James P. ROGERS; Estate of Charles R. Brophy; Desmond D. Brophy; Donald R. Brophy; Douglas K. Brophy; James P. Brophy III; Estate of James P. Brophy; Joseph Paul Brophy; Joseph Paul Brophy, Jr.; Martin D. Brophy; Thomas E. Brophy; Todd R. Brophy; Conrad Oil & Gas, Ltd.; Marguerite Conrad; Harris Lett; Otto E. Lueking, Jr.; and Kitzmiller Grazing Association, Inc., Petitioners/Cross-Respondents, v. WESTERMAN FARM COMPANY; Estate of H.G. Westerman; Carl A. Westerman; Loyle P. Miller; Joe Gray; JG-Kansas No. 2 Venture; Dr. Ralph M. Connell; Connell Family Living Trust; Thomas J. Jeffrey; Meredith Mallory, Jr.; the Travis Family Trust B; Rosewood Resources, Inc.; J-W Operating Company; American Exploration Company; American Production Partnership V Ltd.; FMP Operating Co., L.P.; Freeport McMoran Inc.; Mesa Operating L.P.; Mesa Petroleum Company; MTS Limited Partnership; Ninian Oil Company; Samedan Oil Corporation; and Tejay Operating Company, Respondents/Cross-Petitioners. |
| Court | Colorado Supreme Court |
Benedetti & Dee, Robert H. Dee, Wray, CO, Law Offices of George A. Barton, George A. Barton, Kansas City, MO, Attorneys for Petitioners/Cross-Respondents.
Welborn Sullivan Meck & Tooley, P.C., Keith D. Tooley, Brian S. Tooley, Denver, CO, Attorneys for Respondents/Cross-Petitioners Westerman Farm Company, Estate of H.G. Westerman, Carl A. Westerman, and Loyle P. Miller.
Holme Roberts & Owen, LLP, Spencer T. Denison, David S. Steefel, Jan N. Steiert, Denver, CO, Walter H. Sargent, a Professional Corporation, Walter H. Sargent, Colorado Springs, CO, Attorneys for Respondents/Cross-Petitioners Gray-Rosewood.
Ken Salazar, Attorney General, M. Patrick Wilson, Assistant Attorney General, Denver, CO, Attorneys for Amicus Curiae Colorado State Board of Land Commissioners.
McDaniel, Baty, Miller & Robbins, LLC, G.R. Miller, Durango, CO, Attorneys for Amicus Curiae Richard Parry and Linda Parry.
Hall & Evans, LLC, Brooke Wunnicke, Bjork Lindley Danielson & Baker, P.C., Laura Lindley, Colorado Oil & Gas Association, Kenneth A. Wonstolen, Denver, CO, Attorneys for Amicus Curiae Colorado Oil & Gas Association.
Stead & Heath, P.C., Robin Stead, Donald F. Heath, Jr., Oklahoma City, OK, Dufford, Waldeck, Milburn & Krohn, LLP, William H.T. Frey, Flint B. Ogle, Grand Junction, CO, Attorneys for Amicus Curiae National Association of Royalty Owners, Inc.
This case involves a dispute arising from various oil and gas leases over royalty payments made by working interest owners, here the Respondents/Cross-Petitioners (collectively the lessees), to royalty interest owners, here the Petitioners/Cross-Respondents (collectively the lessors). Some of the gas under the leases was sold at the well, some was sold at the interstate pipeline, and some was used "in kind" by the lessors. The leases were executed in the mid to late 1970's. Some of the leases were subsequently assigned to the parties who are now part of this case. The leases pertain to some 200 natural gas wells. The leases all provide, with some variation, for royalties to be paid based on the gas "at the well" or "at the mouth of the well."1 Part of the dispute in this case is whether this general language is significant in determining the allocation of costs between the parties.2 Specifically, the dispute arises over whether this language is sufficiently clear to set forth the proper allocation between the parties of the costs of gathering, compressing, and dehydrating the gas prior to its entry into the interstate pipeline.
In the course of the proceedings in this case, terminology specific to the oil and gas industry has been used, some of which requires explanation and, where used inconsistently, resolution as to its meaning. Accordingly, in the following sections outlining the facts and procedure, we have explained and resolved some differences in the use of terminology where appropriate in order to allow for a better understanding of the relevant facts and to properly analyze the issues raised in this case.
The parties appear to argue about the physical condition of the gas at the well. However, a stipulation contained in the jury instructions reveals that the parties actually agree on the physical condition of the gas, but disagree about the terminology used to describe the gas. Thus, we briefly review the parties' use of the differing terminology and explain how the stipulation indicates that the parties are actually in agreement about the physical condition of the gas.
According to the lessors, when the gas emerges from the well it is "raw gas," meaning to the lessors that it is not in a condition to meet the specifications of the interstate pipeline. The lessors further argue that the gas at the well is at a low pressure (from 15 to 250 pounds per square inch gauge (psig)), and is water-saturated, with 40 pounds of water per million cubic feet (mmcf). The lessors contend that in order for the gas to meet the interstate pipeline specifications, the gas must be "treated," specifically, compressed and dehydrated. To do so, the gas enters a gathering system, a set of low pressure pipes which gathers gas from various wells and moves it to the main line. The gathering system collects gas, which is then compressed from low pressure gas to high pressure gas, sufficient to meet the specifications of the interstate pipeline. The lessors argue that in addition to being compressed, the gas must also travel through a dehydrator, which removes water vapor from the gas in order to meet interstate pipeline specifications. Finally, the lessors suggest that after being dehydrated, the gas is then ready to enter the interstate pipeline.
Although the lessees agree that the gas must be gathered, compressed, and dehydrated before the gas can enter the interstate pipeline, they disagree with the description of the physical condition of the gas as it emerges from the well. The lessees argue that the natural gas at issue is almost pure methane and directly usable in its natural state at the well. Instead of being raw, as the lessors contend, the lessees argue that the gas is dry, that is, virtually free of liquid hydrocarbons, and sweet, that is, free of chemical impurities, such as hydrogen sulfide and other sulphur compounds, when it emerges from the well. Further, the lessees argue that the gas is directly usable at the well both commercially and domestically, and does not require any processing in order to be used. Finally, the lessees emphasize that the gas has been used in its natural state from the well for many years, both by local consumers and by the lessors in lieu of royalty payments.
According to a stipulation by the parties in Jury Instruction 4, the parties agree that the gas at issue is predominantly free of hydrogen sulfide3 and carbon dioxide. Sweet gas is defined as 8 Howard R. Williams & Charles J. Meyers, Oil and Gas Law: Manual of Terms, 1064 (2000) [hereinafter Oil and Gas Terms]. Moreover, the parties agree that some of the gas has been used directly from the wells by the lessors as part of the lease agreements. Accordingly, based on the definition of sweet gas, the use of the gas at the well by the lessors, and the parties' agreement that the gas is predominantly free of hydrogen sulfide, we interpret the parties' stipulation to mean that the parties agree that the gas is sweet gas. Likewise, the parties do not actually disagree that the gas is dry when it emerges from the well. Instead, the parties disagree about the purpose of the dehydration of the gas. Specifically, the lessors suggest that dehydration is necessary in order for the gas to be marketable, and thus, to enter the pipeline. The lessees' view, however, is that dehydration is only required for transportation of marketable gas away from the well.
Dehydration involves the removal of water from fluid produced from wells. Oil and Gas Terms, supra, at 260. The parties agree that the gas in this case is dehydrated after compression to remove liquid prior to the gas entering the interstate pipeline. The parties also agree that the gas is usable by the lessors directly from the well, without requiring any liquid removing processes to be completed prior to the use of the gas. Thus, the parties, through their arguments, agree that the gas is dry when it emerges from the well, irrespective of their disagreement about the purpose of the dehydration process.
Finally, notwithstanding the parties' use of differing terminology to describe the physical condition of the gas, the parties agree that the gas must be gathered, compressed, and dehydrated in order to enter the interstate pipeline. Thus, the actual dispute raised in this case is whether the gas is marketable at the well prior to gathering, compressing, and dehydration, or marketable after these processes have been completed and the gas is ready to enter the interstate pipeline. Since we believe that the parties agree that the gas is both sweet and dry, we will analyze this case with the understanding that the gas here is sweet and dry as it emerges from the well.
There are numerous gas purchase contracts and gathering, dehydration, and compression contracts that were submitted as exhibits in this case. The gas purchase contracts provide specific details for the purchase of the gas both at the well and away from the well. The gathering, compression, and dehydration contracts provide for agreements regarding how the gas is to be processed. Some of these contracts also contain provisions for the sale of...
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