Wold v. Hunt Oil Co.

• Citation: 52 F.Supp.2d 1330
• Decision Date: 11 June 1999
• Docket Number: No. 98-CV-196-J.,98-CV-196-J.
• Parties: Jane WOLD, Plaintiff, v. HUNT OIL COMPANY, a Delaware corporation, Defendant.
• Court: United States District Courts. 10th Circuit. District of Wyoming

52 F.Supp.2d 1330

Jane WOLD, Plaintiff, v. HUNT OIL COMPANY, a Delaware corporation, Defendant.

No. 98-CV-196-J.

United States District Court, D. Wyoming.

June 11, 1999.

JN Murdock, Nick Murdock & Associates, Casper, WY, for Jane Wold, plaintiff.

Charles L Kaiser, Charles A Breer, Davis Graham & Stubbs, Denver, CO, for Hunt Oil Company, a Delaware corporation, defendant.

ORDER AND OPINION ON CROSS MOTIONS FOR SUMMARY JUDGMENT

ALAN B. JOHNSON, Chief Judge.

The parties' cross motions for summary judgment came before the Court for hearing and consideration. The Court, having considered the parties' motions and responses one to the other, the arguments of counsel at the hearing, the pleadings of record, the applicable law, and being fully advised in the premises, and in accordance with the Court's oral rulings from the bench at the hearing as enumerated more fully on the record of those proceedings, FINDS and ORDERS as follows:

Background

This is a case that was removed to federal court from state court. The parties have entered into a stipulation that resolves their outstanding dispute regarding the amount in controversy requirement. The pending motion to remand to state court for lack of subject matter jurisdiction is now MOOT.

Now at issue are the parties' cross motions for summary judgment. The legal issue the parties have agreed to submit to the Court is whether charges termed "gathering charges" by both Hunt Oil Company and the owner of the gathering lines are legally deductible under the provisions of Wyo.Stat. §§ 30-5-301 et seq. Plaintiff contends that her overriding royalty interest, an interest carved out of the leasehold, is one that is "free of the costs of production" and that pursuant to the applicable statute, "costs of production" include charges for gathering. She advocates that the Wyoming Royalty Payment Act expressly provides that costs for gathering cannot be deducted from her interest and that costs incurred that are necessary to get the gas to the market pipeline are not post-production costs that can be deducted from her overriding royalty interest. She asserts that costs of production are not deductible until after the product enters the regulated, open-access market pipeline.

The defendant contends that the gathering charges at issue here are post-production costs chargeable to the interest of the royalty owner, such as plaintiff. Defendant urges this Court to construe the Wyoming Royalty Payment Act in pari materia with the Wyoming taxation statutes relating to oil and gas and mineral production. As a result, the defendant contends that the cost of transporting gas downstream from the outlet of the dehydrator must be shared by all interest owners because those are "post-production transportation" costs and not costs of production. The defendant asserts Wyoming has adopted the marketable condition rule, which requires that the lessee bear all costs to put gas into marketable condition and that lessee and royalty owners share proportionately subsequent downstream costs. Defendant asserts no jurisdiction and no law requires that a lessee alone bear reasonable costs incurred after gas is put into marketable condition. In making this argument and advocating construction of the tax and royalty payment statutes in tandem, the defendant argues that the point of demarcation must be that where gas is in marketable condition — which in this case is at the outlet of the dehydrator. Costs incurred after that point are post-production costs that should be shared.

Defendant argues that the Royalty Payment Act and the oil and gas production tax statutes have the same purpose — i.e., determining when the production process for gas is complete — and use many of the same terms, thus, making it appropriate to resort to the tax statutes to construe the royalty payment statute.

Standard of Review Fed.R.Civ.P. 56

Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c); Allen v. Muskogee, Oklahoma, 119 F.3d 837, 839-840 (10th Cir. 1997). A disputed fact is material if it might affect the outcome of the suit under governing law, and the dispute is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. The factual record and reasonable inferences therefrom are construed in the light most favorable to the nonmovant. Id., quoting Anderson v. Liberty Lobby, Ind., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) and Gullickson v. Southwest Airlines Pilots' Assoc., 87 F.3d 1176, 1183 (10th Cir.1996). The moving party need not affirmatively negate the nonmovant's claim in order to obtain summary judgment, but instead bears the initial burden of showing — that is, point out to the district court — that there is an absence of evidence to support the nonmoving party's case. Id., quoting from Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265.

Discussion

The Royalty Payment Act provides the following definitions:

§ 30-5-304. Definitions.

(a) As used in this act:

(i) "Lessee" means the person entitled under an oil and gas lease to drill operate wells, paying the lessor a royalty and retaining the remainder, known as the working interest. The lessee pays all costs of production out of his interest, the lessor's interest being free and clear of all those costs;

(ii) "Lessor" means the mineral owner who has executed a lease and who is entitled to the payment of a royalty on production, free and clear of the costs of production;

(iii) "Operator" means a person engaged in the business of drilling and producing wells for oil and gas;

(iv) "Other nonworking interest" means any interest in an oil and gas lease or well which is not a royalty, overriding royalty or working interest;

(v) "Overriding royalty" means a share of production, free of the costs of production, carved out of the lessee's interest under an oil and gas lease;

(vi) "Costs of production" means all costs incurred for exploration, development, primary or enhanced recovery and abandonment operations including, but not limited to ease acquisition, drilling and completion, pumping or lifting, recycling, gathering, compressing, pressurizing, heater treating, dehydrating, separating, storing or transporting the oil to the storage tanks or the gas into the market pipeline. "Costs of production" does not include the reasonable and actual direct costs associated with transporting the oil from the storage tanks to market or the gas from the point of entry into the market pipeline or the processing of gas in a processing plant;

(vii) "Royalty" means the mineral owner's share of production, free of the costs of production;

(viii) "Working interest" means the interest granted under an oil and gas lease, giving the lessee the right to work on the leased property to search for, develop and produce oil and gas and the obligation to pay all costs of production;

(ix) "This act" means W.S. 30-5-301 through 30-5-305.

(Emphasis supplied).

Defendant has relied heavily on the Colorado case, Garman v. Conoco, Inc., 886 P.2d 652 (Colo.1994). The case merits discussion. The Colorado Supreme Court held in Garman, applying Colorado law, the owner of an overriding royalty interest in gas production was required to bear a proportionate share of post-production costs. In Garman, Conoco held certain leases subject to the Garmans' overriding royalty interests. The leases were located in a unit and were in full force and effect by the production of gas. Conoco operated both the unit and the processing plant, which was located outside of both the lease and unit boundaries. From the wellhead, gas entered a gathering line for transportation to the plant. At the plant, gas from the unit was processed into (1) residue gas; (2) propane; and (3) a combined stream of butane and natural gasoline. Gross proceeds from the sale of the individual products were greater than the revenues that would have been obtained from the sale of raw, unprocessed gas at the wellhead. Garmans argued that post-production costs incurred to convert the raw gas into a marketable product should not be charged against the nonworking interest owners. They conceded, however, that costs incurred after the gas is made marketable, which actually enhance the value of the gas, were to be borne proportionately by all parties benefitted by those operations.

Conoco argued that all post-production costs incurred after the gas is severed from the ground and reduced to possession should be borne proportionately by royalty, overriding royalty and working interest owners. It argued severance occurs at the wellhead and all expenses after severance improve or enhance the value of the gas from its natural, unprocessed state.

The Colorado Court noted that both royalty and overriding royalty interests are non-risk and non-cost bearing interests. Responding to Conoco's objection that Garmans were getting a free ride on certain costs incurred after gas is brought to the surface, the Colorado court stated "that the relationship between the parties specifically provides for a `free-ride' on costs incurred to establish marketable production." Garman, 886 P.2d at 657.

That court then noted no consensus exists regarding the allocation of expenses incurred after discovery of gas. Two lines of thought have developed. The Texas and Louisiana Courts have "adopted the rule that nonoperating interests must bear their proportionate share of costs incurred after gas is severed at the wellhead." Garman, 886 at 657-58. Kansas and Oklahoma have adopted a contrary rule based on an operator's implied duty to market gas produced under an oil and gas lease. "The implied duty to market means a duty to get the product to the place of sale in a marketable form." It noted then that "Wyoming has codified the marketability approach." Id. at 658. It...