Fawcett v. Oil Producers, Inc. of Kan.Annotate this Case
The lessee-operator of twenty-five oil and gas leases sold its raw natural gas at the wellhead to third parties, who processed the gas before it entered the interstate pipeline system. The price the operator was paid, and the price upon which royalties were calculated, was based on a formula that starts with the price the third parties received for the processed gas and then deducts certain costs incurred or adjustments made. At issue here was whether the operator may take into account the deductions and adjustments identified in the third-party purchase agreements when calculating royalties. The class of royalty owners in this case argued that post-production, post-sale expenses necessary to transform natural gas into the quality required for interstate pipeline transmission were attributable solely to the operator as part of the operator’s sole responsibility to make the gas marketable. The district court grand summary judgment in favor of the class for an as-yet undetermined amount of unpaid royalties. The court of appeals affirmed. The Supreme Court reversed, holding that the class was not entitled to judgment as a matter of law because the duty to make gas marketable is satisfied when the operator delivers the gas to the purchaser in a condition acceptable to the purchaser in a good faith transaction.