Schell v. OXY USA, Inc.
| Decision Date | 29 September 2011 |
| Docket Number | Case No. 07–1258–JTM. |
| Citation | 822 F.Supp.2d 1125 |
| Court | U.S. District Court — District of Kansas |
| Parties | David and Donna SCHELL, Howard Pickens, and Ron Oliver, Individually, and as Representative Parties on Behalf of Surface Owners, Plaintiffs, v. OXY USA, INC., Defendant. |
OPINION TEXT STARTS HERE
Deborah A. Petrotta, Lee Thompson, Thompson Law Firm, LLC, Wichita, KS, M. Moran Tomson, Tomson Law Office, Johnson, KS, Rex A. Sharp, Gunderson Sharp & Walke, LLP, Prairie Village, KS, for Plaintiffs.
Dennis C. Cameron, Lisa T. Silvestri, Gable & Gotwals, Tulsa, OK, Stanford J. Smith, Jr., William Rick Griffin, Martin, Pringle, Oliver, Wallace & Bauer, LLP, Wichita, KS, for Defendant.
The following matters are before the court: Plaintiffs' Motion for Summary Judgment (Dkt. No. 86); Defendant's Cross–Motion for Summary Judgment (Dkt. No. 90); and Plaintiffs' Motion for Permanent Injunction (Dkt. No. 100). After extensive briefing by both parties, the court is prepared to rule. For the following reasons, the court grants plaintiffs' summary judgment motion and denies defendant's motion. The court denies plaintiffs' Motion for Permanent Injunction.
OXY USA, Inc., (OXY) is an international oil and gas company that operates gas wells on plaintiffs' property pursuant to gas leases encumbering the property. Most of the gas leases contain a “free gas clause.” Of the approximately 2,200 class members, around 1,900 do not currently use house gas. Prior to the filing of this lawsuit and during its pendency, OXY has provided the 300 plaintiffs that do use house gas, useable gas free of cost.1 OXY makes a direct tap off the wellhead line itself to create a gas tap for every individual surface owner. OXY installs the tap at its cost, but how the surface owner connects to the tap is not its prerogative. The surface owners use house gas for heat, hot water, cooking, drying laundry, and other things. Presently, OXY has not interrupted, interfered with, or disconnected the named class representatives' homes from the use of free gas. OXY has, however, installed compressors that lower wellhead pressures, which in turn lowers the house gas delivery pressure. Two of the named plaintiffs, Donna and David Shell, have testified that the cost of converting to an alternative energy source in a rural area is expensive. David has testified that he uses electricity to power a stove, the lights, and the air conditioning at their home.
The named plaintiffs either use free gas or own property with a free gas connection. Approximately 2,000 leases contain a free gas clause. Of that number, approximately 300 currently use house gas from the wells. Most of the leases (over 90%) define plaintiffs' entitlement to “house gas” in one of the following ways:
(1) [L]essor to have gas free of charge from any gas well on the leased premises for stoves and inside lights in the principal dwelling house on said land by making his own connections with the well, the use of such gas to be at the lessor's sole risk and expense.
Lessor shall have the privilege at his own risk and expense of using gas from any gas well on said land for stoves and inside lights in the principal dwelling located on the leased premises by making his own connections thereto.
(2) [L]essor to have gas free of cost from any such well for all stoves and all inside lights in the principal dwelling house on said land during the same time by making his own connections with the wells at his own risk and expense.
Dkt. No. 92, Exs. A–C. The remaining leases provided:
The lessor to have gas free of cost from any well on the leased premises where gas only is found for all stoves and inside lights in the principal dwelling house on said premises by making his own connection to said well; such connection, the necessary fittings and pipe shall be furnished and maintained by lessor free from leaks and all without cost, expense or risk to lessee. The use of said gas by lessor at all times shall be at his sole risk.
Dkt. No. 92, Ex. D.
In August 2007, OXY sent letters to free house gas users in Kansas advising them their gas contained high concentrations of hydrogen sulfate (H2S), which is extremely dangerous and potentially hazardous to humans. OXY “strongly encourage[d] [plaintiffs] to convert [their] residence[s] to an alternative energy source as soon as possible.” 2 Dkt. No. 87, Ex. G (alterations added). OXY sent separate letters to users of free house gas advising them of declining pressure, which threatened to interrupt gas supply. In this letter, OXY also “strongly encourage[d] [plaintiffs] to convert [their] residence[s] to an alternative energy source as soon as possible.” 3 Dkt. No. 87, Ex. H (alterations added). Although different, the letters conveyed to plaintiffs that their free gas could be in jeopardy.
Natural gas may have many characteristics as it is extracted from an underground formation. It may have high H2S content or contain other contaminants such as water vapor or liquid water. Natural gas also varies in terms of its hydrocarbon composition and heating value. Gas has high heating value when it contains significant levels of heavier hydrocarbons. These heavy hydrocarbons may be removed from the production stream leaving gas with a lower Btu content than is suitable for home heating. Gas with high heating value must be processed because home furnaces are not designed to burn gas with a Btu content higher than 1,050 to 1,000 Btus per cubic foot. Processing gas requires the construction of plants that are economic only when large volumes of gas from multiple wells are processed at the same location. Often these plants are miles away from individual wells.
All wells have a finite productive life. Wells near the end of that life often experience pressure declines and H2S increases.4 In an effort to extend the life of the wells, OXY uses downstream compression to produce greater volumes for sale than would be otherwise available. Defendant's and third parties' gathering system compressors lower wellhead pressure and lead to higher H2S concentrations.
OXY takes H2S readings of all its wells at least annually for safety reasons. Most of OXY's contracts require the H2S levels be at least 4 parts per million (ppm) and no more than 10 ppm. Anything above 10 ppm is potentially dangerous requiring OXY to post warning signs to protect its employees, independent contractors, and the public, including surface owners. OXY understands that “people may not recognize the issues related to H2S and what it can do to you health wise.” Dkt. No. 87, Ex. A, at 62. As a result, OXY takes H2S issues seriously by monitoring H2S levels and training people on the hazards of that gas. OXY treats the H2S problem in a variety of ways. Most of the concerns are eliminated by blending gas with high H2S content with gas having lower H2S levels. This blending occurs downstream of any individual well. It is not practicable to move the house tap to a location downstream where the blending occurs. In other instances, OXY removes elevated H2S gas by using treating towers. Such towers are typically placed at a central location downstream of the wells so that large volumes of gas can be combined and treated in an economical way. However, house gas would still retain higher levels of H2S. If OXY were required to place treating towers at each individual well, production would likely be uneconomic and may shut down.
As for the low pressure problem, the parties agree the pressures in the Hugoton gas field are declining and that further production reduces pressure. In turn, low pressure increases the risk of H2S problems and the likelihood that the house gas lines will freeze off. A low pressure well is cured either by using compression at the wellhead or on the gathering line. OXY has installed downstream compressors on the gathering line in an effort to keep the gas flowing. A compressor reduces pressure upstream (from the compressor) and increases pressure downstream (from the compressor) regardless of where the compressor is placed between the wellhead and the transmission line. OXY uses mostly gathering line compressors but also has 17 wellhead compressors. Compressors allow OXY to maximize production from the wells by reducing wellhead gathering line pressures and by transporting larger volumes of gas from the wells to buyers or processing facilities.
Wellhead compressors are expensive to buy, install, maintain, and operate. Purchase and installation costs are at or above $50,000. Once installed, OXY's trained mechanics perform the maintenance work. There are no commercially available natural gas compressors that are properly sized to compress the small volume of gas from a particular well to a user's home. Any compressor used in this way would overheat and fail within a short period of time because of insufficient volumes. Smaller air compressors could be modified to compress natural gas, but air compressors usually compress gas to 100 pound-force per square inch (psi) and the typical pressure for natural gas inside a home is less than 1 psi. Even if compression between the well and the home of an individual was feasible, formation of liquids or hydrates would occur after compression and cooling. Condensation of liquids and hydrates can extinguish flames that burn natural gas inside a home leaving unused and pressurized natural gas flowing inside.
Plaintiffs, David and Donna Shell, Howard Pickens,5 and Ron Oliver, filed this action on August 31, 2007, on behalf of others similarly situated seeking a permanent injunction, declaratory judgment, and actual damages based on oil and gas leases entered into with OXY. On November 14, 2008, plaintiffs moved to certify the class under Rule 23. This court certified the following class as a Rule 23(b)(3) class action on July 29, 2009:
[a]ll surface owners...
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