Skelly Oil Co. v. Savage, 45166

• Citation: 38 A.L.R.3d 971,202 Kan. 239,447 P.2d 395
• Decision Date: 07 December 1968
• Docket Number: No. 45166,45166
• Parties: , 38 A.L.R.3d 971 SKELLY OIL COMPANY, Appellee, v. Nelia SAVAGE, Frank Meek and Helen Meek, Appellants, and Clarence W. Ellis and L. Edna Ellis, D. H. Johnson and Marie Johnson, Jean Marple, Thomas J. Morris, Thomas M. Morris, Jr., Individually and Thomas M. Morris, Jr., Attorney in Fact for Richard L. Morris and Marion Frances Sweeney, Appellees, and PETROLEUM, INC., a Corporation, Third Party Defendant and Appellee.
• Court: Kansas Supreme Court

Page 395

447 P.2d 395

202 Kan. 239, 38 A.L.R.3d 971

SKELLY OIL COMPANY, Appellee, v. Nelia SAVAGE, Frank Meek and Helen Meek, Appellants, and Clarence W. Ellis and L. Edna Ellis, D. H. Johnson and Marie

Johnson, Jean Marple, Thomas J. Morris, Thomas M. Morris,

Jr., Individually and Thomas M. Morris, Jr., Attorney in

Fact for Richard L. Morris and Marion Frances Sweeney, Appellees,

and

PETROLEUM, INC., a Corporation, Third Party Defendant and Appellee.

No. 45166.

Supreme Court of Kansas.

Dec. 7, 1968.

Syllabus by the Court

Where an oil and gas lease authorized the unitization or pooling of the leased acreage but 'only as to the gas rights,' and such acreage is pooled with other acreage in adjoining leases to form a gas unit pursuant thereto, the lease is construed and it is held: Condensate or distillate associated with gas produced from a gas well on the lease must be ratably shared with the owners of the royalty interest in the pooled gas unit, and the drillsite lessors were not entitled to be paid for all of the condensate or distillate produced from the well on their leased acreage.

John M. Wall, Sedan, argued the cause and was on the brief for appellants.

W. F. Schell, Wichita, argued the cause, and Richard Randall, Wichita, was with him on the brief for appellees.

SCHROEDER, Justice.

This is an interpleader action by Skelly Oil Company (plaintiff-appellee), the purchaser of liquid hydro-carbons produced from a well located on a unitized leasehold, to construe an oil and gas lease and particularly the pooling or unitization clause therein which provides for the pooling of 'gas rights only' where both natural gas and liquid hydrocarbons are produced from the same well.

The question presented is whether the ownership of the royalty interest in the liquid hydrocarbons is in the owners of the land on which the well is located or is in all of the owners of the pooled gas unit in proportion to their respective acreage contribution. In other words, whether the liquid produced is gas under the terms of the lease and therefore unitized, or is oil and not unitized or pooled.

The facts are not in dispute and are based upon the findings made by the trial court.

Four separate oil and gas leases were executed covering separate lands in Kingman County, kansas, each of which contained pooling or unitization clause which granted the lessee the right 'to pool or consolidate this lease, the land covered by it, or any part thereof, with any other land, lease, leases, mineral estates, or parts thereof, but only as to the gas rights hereunder (excluding casinghead gas produced from oil wells) to form one or more gas operating units of not more than' 180 acres each.

The four leases in question were unitized pursuant to the pooling clause by a declaration instrument dated August 22, 1957, which was duly recorded in the register of deeds office of Kingman County, Kansas.

The unit consists of approximately 180 acres, and on the 22nd day of March, 1957, a well was completed on the Savage lease tract in such unit by the operator thereof, Petroleum, Inc. The owners of the Savage tract are the appellants herein. The well and the unit in question were located within the confines of the Spivey-Grabs Field, which is the subject of a basic proration order entered by the state corporation commission of the state of Kansas.

The trial court found:

'4. Defendant Petroleum, Inc., is the owner of a 1% interest and is the operator of said unit.

'5. Pursuant to the provisions of the Basic Proration Order for the Spivey-Grabs Field, an initial gas-oil ratio test was taken on the above described well known as the Savage No. 1 well, which test showed a producing ratio of hydrocarbons from said well of 93,617 cubic feet of gas per barrel of oil produced. Initial production of the Savage No. 1 well commenced on August 14, 1957, and during the life of said well the gas-oil ratio thereof increased and as of January 1, 1967, the said gas-oil ratio of said of gas per barrel of oil or liquid hydrocarbons.

'6. The Savage No. 1 well is a gas well, by definition under the Basic Proration Order for the Spivey-Grabs Field, having had at all times a producing gas-oil ratio in excess of 15,000 to one. In addition, the economic value of the gas production has greatly exceeded that of the liquid production.

'7. There is no separate oil zone existing in the Savage No. 1 well, and liquids produced from said well are associated with the gas in the upper portion of the Mississippian Formation, and such liquids are produced along with the gas and are transported to the producing formation to the well bore and to the wellhead by the differential in pressure existing in the reservoir and at the wellhead, which causes the flowing of gas through the formation and to the wellhead. No pumping equipment or other artificial or mechanical means of lifting or producing the fluids exists or is used on the well, and the gas cannot be produced without carrying with it the associated liquids.

'8. The liquids are separated from the gas on the lease premises by means of a high pressure separator and water is then separated from the liquid hydrocarbons by means of a heater-treater.

'9. The gravity of the liquids as of the date of the hearing of the case was 47 , which is in the condensate range and in excess of the gravity of crude oil, such liquids being associated with and a component part of the gas in the reservoir.

'10. All of the acreage in the Savage Unit is productive of gas and liquid hydrocarbons in approximately the same gas-oil ratio, and a well drilled anywhere on the unit would be a well substantially identical to the Savage No. 1 well. All of the lands in said unit have been attributed to the Savage well for allowable purposes by order of the State Corporation Commission.

'11. Gas and liquid hydrocarbons have been produced or drained from all of the tracts in the unit into the well bore of the Savage No. 1 well.

'12. Considering the amount of recoverable liquids in the reservoir under the Savage Unit and the cost of drilling, completing and equipping the well in the Mississippian Formation on the Savage Unit, it is uneconomic for the operator of the unit, or any other operator, to drill an additional well or wells on the nondrillsite tracts for the purpose of recovering separately by tract, oil or liquid hydrocarbons existing under such nondrillsite tracts.

'13. The non-drillsite mineral owners have executed a division order for the liquids on a unit basis, tendered to them by the original pipeline purchaser, Skelly Oil Company. The mineral owner under the drillsite (Savage Lease) has refused to execute such division order providing for division of liquids on a unit basis. Proceeds accruing to the royalty interest have been held in suspense by the pipeline purchasers.'

The trial court further found that it was a common situation for wells in the area to produce both gas and liquids. It thereupon determined the proportionate royalty interest of the owners of the various leased tracts in the unit and concluded in part as follows:

'Conclusions of Law

'1. The Savage No. 1 well is now, and has been during its producing life, a gas well.

'2. Under ordinary circumstances the owner of the minerals under the wellsite is entitled to the full share of the royalty from oil produced from this land. Although in this case the owners of the minerals under the Savage No. 1 have not specifically agreed to pool oil and liquid hydrocarbons produced from this well, neither have they specifically agreed that such oil and liquid hydrocarbons should not be pooled.

'3. When the Savage No. 1 well was brought in as a producer within the legally described field limits of the Spivey-Grabs Pool, which was governed by the provisions of the Basic Proration Order for the Spivey-Grabs Field as entered by the State Corporation Commission, and when such well was officially tested and classified as a gas well by the Commission, then the lease contracts including the pooling agreements must be construed in the light of and as a affected by regulations of the Corporation Commission.

'4. The fact that the drillsite oil and gas lease contains no separate pooling clause permitting the pooling of oil from an oil well, does not preclude the pooling of liquids produced in conjunction with and as a by-product of the production of gas from the gas unit.

'5. Considering the physical characteristics of the liquids involved, and the fact that the subject well is a gas well and that the liquids are associated with the gas and recovered and produced by reason of the operation of said well as a gas well, and the same must be separated from the gas only after hydrocarbons have been produced at the wellhead, such liquids should be deemed to be a part of the gas and should be considered as the proceeds from the gas for the purpose of payment of royalty and should be distributed on a unit basis.

'6. The pooling clause under the drillsite Savage Lease in the last sentence thereof, does not specifically limit the spreading of royalty or production from the subject well to gas alone, but permits the distribution of 'royalty on production' from the unit to the separate tracts in the unit area on an acreage basis.

'7. Since all tracts contain liquids, as well as gas, and the various mineral owners are thus contributing liquids under their lands to the production of the Savage well, an equitable construction of the pooling clauses, made in light of the facts and contentions existing at the time of the execution of the leases, requires a spreading of the royalty proceeds of not only the gas, but also the liquids from the Savage well.

'8. Royalty from the sale of the oil and liquid hydrocarbons from the Savage No. 1 well belong to and should be distributed to the persons and in the proportion set forth above in paragraph 18 of Findings of fact. (The distribution is based on the proportionate acreage contributed...