Sternberger v. Marathon Oil Co., 70990

• Decision Date: 17 March 1995
• Docket Number: No. 70990,70990
• Citation: 894 P.2d 788,257 Kan. 315
• Parties: Martha STERNBERGER, individually and as representative of all gas royalty owners to whom defendants have made or should make payment of certain royalties and interest thereon, Appellees, v. MARATHON OIL COMPANY, Appellant.
• Court: Kansas Supreme Court

Page 788

894 P.2d 788

257 Kan. 315

Martha STERNBERGER, individually and as representative of all gas royalty owners to whom defendants have made or should make payment of certain royalties and interest thereon, Appellees, v.MARATHON OIL COMPANY, Appellant.

No. 70990.

Supreme Court of Kansas.

March 17, 1995.

Syllabus by the Court

1.When an oil and gas lease provides that royalties are to be paid based on "market price at the well" and there is no market at the wells, the market price at the well is determined by deducting from the market price received at an available point of sale off the lease the reasonable expense of transporting the gas to the point of sale.

2.The lessee under an oil and gas lease has the duty to produce a marketable product, and the lessee alone bears the expense in making the product marketable.

3.Under a natural gas lease, once a marketable product is obtained, reasonable costs incurred to transport or enhance the value of the marketable gas may be charged against nonworking interest owners.The lessee has the burden of proving the reasonableness of the costs.Absent a contract providing to the contrary, a nonworking interest owner is not obligated to bear any share of production expense, such as compressing, transporting, and processing, undertaken to transform gas into a marketable product.

4.To constitute a violation of the Full Faith and Credit Clause or the Due Process Clause, it is not enough that a state court misconstrue the law of another state.Rather, the misconstruction must contradict law of the other state that is clearly established and that has been brought to the court's attention.

5.Oklahoma and Texas law are construed to permit the lessee of a natural gas lease to deduct the reasonable transportation expense of the gas to a point of sale off the lease where the royalty is payable at the market price at the well but there is no market at the well.

6. K.S.A. 60-223(a) permits an action to be maintained as a class action only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.

7.There is no set number of class members which must be shown to warrant maintaining the action as a class action.Joinder of all parties need not be impossible, just impracticable.

8. K.S.A. 60-223(c)(2) provides that in a class action, the court shall exclude those members who, by a date to be specified, request exclusion, unless the court finds that their inclusion is essential to the fair and efficient adjudication of the controversy and states its reasons therefor.To afford members of the class an opportunity to request exclusion, the court shall direct that reasonable notice be given to the class.

9. K.S.A. 60-223(c)(2) mandates exclusion of only those class members who request exclusion by the date specified by the court.Exclusion of other members, therefore, lies within the district court's discretion.

Evan J. Olson, of Hershberger, Patterson, Jones & Roth, L.C., Wichita, argued the cause, and Marc P. Clements, of the same firm, and John Gunter, of Marathon Oil Company, Oklahoma City, OK, were with him on the briefs, for appellant.

Robert W. Christensen, of Christensen, Johnston & Eisenhauer, Medicine Lodge, argued the cause, and was on the briefs, for appellees.

Richard C. Hite, of Kahrs, Nelson, Fanning, Hite & Kellogg, Wichita, and David E. Pierce, of Shughart, Thompson & Kilroy, Overland Park, were on the brief, for amicus curiae The American Petroleum Institute.

Alan C. Goering, of Goering & Slinkard, Medicine Lodge, and Robin Stead and Donald F. Heath, Jr., of Robin Stead & Associates, P.C., Norman, OK, were on the brief, for amicus curiae National Ass'n of Royalty Owners.

Donald P. Schnacke, Topeka, was on the brief, for amicus curiae Kansas Independent Oil and Gas Ass'n.

Dale M. Stucky, Thomas D. Kitch, Gregory J. Stucky, and David G. Seely, of Fleeson, Gooing, Coulson & Kitch, L.L.C., Wichita, and B.E. Nordling, Wayne Tate, and Erick Nordling, of Kramer, Nordling, Nordling & Tate, Hugoton, were on the brief, for amicus curiae Southwest Kansas Royalty Owners Ass'n.

ABBOTT, Justice:

This is a multistate oil and gas class action suit involving Kansas and non-Kansas plaintiffs who own royalty and overriding royalty interests in oil and gas leases located in Kansas, Oklahoma, Texas, Louisiana, Utah, and Colorado.The Louisiana, Utah, and Colorado leases are no longer in the case and are not in issue on appeal.DefendantMarathon Oil Company's predecessor in interest, TXO Production Corp.(TXO), deducted from the royalties "marketing costs" or "gathering line amortization expenses" to recover a portion of its expenses in constructing and maintaining gas gathering pipeline systems to transport gas from the lease to markets off the lease.The trial court held the deductions improper, and Marathon Oil Company appealed.Other issues include conflict of law issues, whether a class should have been certified, and the notices given to the class members.

The facts are not substantially disputed.PlaintiffMartha Sternberger owns a royalty interest in an oil and gas lease in Barber County, Kansas.She is the named representative of a class of plaintiffs who own royalty and overriding royalty interests in oil and gas leases located in Kansas, Oklahoma, and Texas.The leases were owned and operated by TXO, which was merged into Marathon Oil Company(Marathon) on December 31, 1990.Plaintiffs and Marathon stipulated that the rights of all parties should be construed according to the language of the gas royalty clause in Sternberger's lease, which provides in pertinent part that lessee agrees

"[t]o pay lessor for gas of whatsoever nature or kind produced and sold, or used off the premises, or used in the manufacture of any products therefrom, one-eighth ( 1/8), at the market price at the well, (but, as to gas sold by lessee, in no event more than one-eighth ( 1/8) of the proceeds received by lessee from such sales), for the gas sold, used off the premises, or in the manufacture of products therefrom, said payments to be made monthly."

At issue in this appeal are 19 wells in Barber County, Kansas, involving 38 individual royalty interest owners, and numerous wells and royalty and overriding royalty interests in Oklahoma and Texas.

There was no market for gas at the wellhead, and TXO was unable to induce a gas purchaser to construct a pipeline to the well bore.Historically, about 85% of all gas purchasers paid the cost and built the lines necessary to gather and transport the gas to market.For the plaintiffs' wells, TXO laid its own gas gathering pipeline system to transport gas from the wells to the market; otherwise, the wells would have remained nonproductive and the gas would not have been sold.For the Sternberger wells, the gas was transported from the wellhead through the gas gathering system laid by TXO to the Kansas Gas & Supply (KG & S) pipeline.TXO then paid a transportation fee to KG & S to transport the gas to the purchaser.The transportation fee TXO paid to KG & S was charged back to the royalty owners.That cost is not in dispute and is not an issue in this case.

TXO paid 100% of the cost of constructing the gas gathering pipeline system.The total cost for all wells on the Sternberger line (six wells) was calculated to be $127,995.88.TXO then deducted from Sternberger's royalty payments 12 cents per thousand cubic feet (MCF) for 12 months as a "marketing cost" or "line amortization charge" to recover a proportionate cost of the pipeline.In determining that 12 cents per MCF for 12 or 13 months would yield the proper payback for the proportionate costs of constructing the pipeline ( 1/8 of the cost of the pipeline), TXO considered the entire cost of the pipeline, including maintenance of the pipeline, costs of trucking the pipe from Oklahoma to the lease property, $400.00 per day for the TXO foreman or production superintendent to supervise the work, the costs of a survey, the costs of obtaining the necessary right-of-way, and other such expenses.

In exchange for laying the pipeline to connect the wells to the KG & S transmission system, TXO received from KG & S a 10 to 16 cent (12 cents on the average) discount on the transportation fee KG & S would have charged TXO for transportation from the Sternberger wells had KG & S laid the line.In other words, the 12 cent per MCF savings TXO received from KG & S was charged to the royalty interests in Kansas for one year.However, after the deductions were ceased in 12 months, the royalty owners realized a 12 cent per MCF discount because KG & S continued to charge TXO 12 cents per MCF less than it would have had KG & S laid the line.

Marathon has characterized the amortization charge as a user's fee or a gathering fee.Marathon currently owns the whole of the pipeline.TXO did not seek approval from Sternberger or other royalty or overriding royalty interests before laying the gathering system for the Sternberger or other wells, but TXO did obtain approval from other working interests before doing so.

TXO recovered 12% of its cost in constructing the line from Sternberger and other royalty interests connected with that line.

Sternberger filed suit against TXO in January 1991 to recover the gathering amortization deductions.Sternberger sought to represent a class of plaintiffs who owned royalty and overriding royalty interests in oil and gas leases owned and operated by TXO located in Kansas, Oklahoma, Texas, Louisiana, Colorado, and Utah and from whom TXO deducted "line amortization charges" similar to those it deducted from Sternberger's royalties.The line amortization charges deducted from other...