Title: Skelly Oil Co. v. Savage
Citation: 202 Kan. 239, 447 P.2d 395
Docket Number: 45,166
State: Kansas
Issuer: Kansas Supreme Court
Date: December 7, 1968

202 Kan. 239 (1968)
447 P.2d 395
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. 45,166

Supreme Court of Kansas.
Opinion filed December 7, 1968.
John M. Wall, of Sedan, argued the cause and was on the brief for the appellants.
W.F. Schell, of Wichita, argued the cause, and Richard Randall, also of Wichita, was with him on the brief for the appellees.
The opinion of the court was delivered by
SCHROEDER, J.:
This is an interpleader action by Skelly Oil Company (plaintiff-appellee), the purchaser of liquid hydrocarbons 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.
*240 Four separate oil and gas leases were executed covering separate lands in Kingman County, Kansas, each of which contained a 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:
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
The trial court thereupon entered judgment for the respective parties distributing the proceeds from the sale of liquid hydrocarbons produced, as to the royalty interest, to the mineral owners under all of the tracts in proportion to the contributed acreage under each tract in the unit.
Petroleum, Inc., in its answer says:
The lease here in question contained a pooling agreement granting the lessee the right to consolidate the lease in question to form "one or more gas operating units." The right to pool the lease was limited in that the leasing agreement authorized only the pooling of "gas rights" granted therein. We are confronted with the proposition, however, that nowhere in the lease is the term "gas rights" defined.
The lease further provided:
The gas from the unit in question was sold to the Kansas Power and Light Company at a quoted rate per thousand cubic feet. The liquid produced was sold to the Skelly Oil Company at a quoted rate per barrel. The landowners in the unit, other than the appellants who are the drillsite landowners, claim the liquid produced is gas. The appellants, relying upon the foregoing language in the lease, and in particular the emphasized portion, contend the liquid produced is oil or liquid hydrocarbons and that this product was not unitized.
The basic consideration concerns the meaning of the terms used in the lease and the intent of the parties who executed the leases in question. The appellants argue in construing the lease, the court must apply the commonly-known and used meaning of the words rather than the scientific or technical meaning. (Citing, Wolf v. Blackwell Oil &amp; Gas Co., 77 Okla. 81, 186 Pac. 484; and 17 Am.Jur.2d, Contracts, § 252, p. 644.)
They also rely upon 17 Am.Jur.2d, Contracts, § 247, p. 637; and Collier v. Monger, 75 Kan. 550, 89 Pac. 1011, for the proposition that the language in an oil and gas contract will be given its ordinary and commonly understood meaning where no reason appears for doing otherwise.
The appellants rely upon the commonly accepted meaning of "gas" and "oil" and quote from various authorities in other jurisdictions discussing such definitions. Most of the cases upon which the appellants rely arise under the royalty clauses of oil and gas leases wherein the courts were attempting to determine whether the oil or gas royalty clauses should be applied. For example, Vernon v. Union Oil Company of California, 220 F.2d 441 (5th Cir.1959) involved the shut-in royalty clause, and more particularly whether the payment of shut-in royalty was countenanced by the lease referring to a well "producing gas only" where the well in question produced some liquid condensate.
The authorities touching the point here under consideration are scant. The decision is complicated by the fact that the liquid hydrocarbons with which we are concerned in the instant case change *244 from the gaseous state to the liquid state at some point in the production process prior to sale.
Distillate is spoken of in Volume 1 of The Law of Oil and Gas Leases by Earl A. Brown (2nd Ed.) in Section 6.07 as follows:
A noted author of the Oklahoma Bar in his work on oil and gas speaks of distillate in the following manner:
The work of Leo J. Hoffman, a member of the Texas Bar, entitled "Voluntary Pooling and Unitization," contains a section "Defining Pooled Substances" in which the following is stated:
Analogous to the present case on factual grounds is Blocker v. Christie, Mitchell &amp; Mitchell Co., 340 S.W.2d 320 (Tex. Civ. App. 1960). There the land of the mineral owner was pooled under an agreement with other lands, which restricted the right to pool gas to a situation where the gas zone showed an oil-gas ratio test of one barrel or less per 10,000 cubic feet of gas. The agreement also provided that the acreage covered by the lease should not be pooled with other acreage as to oil. The drillsite mineral owner claimed that he was entitled to be paid for all of the liquids referred to in the opinion as condensate or distillate, produced from gas wells on his land, and the lessee appears to have claimed that such production should be ratably shared with those in the gas unit. The evidence disclosed that the liquids involved looked like oil, tasted like oil, smelled like oil, and that they were stored and sold like oil, although the gravity of the liquid was considerably higher than *246 that of frac oil. The court, after quoting the Hoffman citation set out above, stated as follows:
..............
The appellants attempt to distinguish the Blocker case on the ground that it is a Texas case where the "in place" theory as to minerals is adopted. Oil and gas in Texas are subject to sale "in place." Therefore, the form of the substance as it exists "in place" determines its classification.
In Kansas the law is well settled that an oil and gas lease conveys no interest in real estate or the minerals in place, but that the lease is merely a license to explore. (Shields v. Fink, Executrix, 190 Kan. 17, 372 P.2d 252; Denver National Bank v. State Commission of Revenue &amp; Taxation, 176 Kan. 617, 272 P.2d 1070; and State, ex rel., v. Board of Regents, 176 Kan. 179, 269 P.2d 425.)
Based upon this distinction the appellants argue the royalty provisions of the oil and gas lease here in question must apply to the hydrocarbons produced, and not the "in place" theory. The appellants pursue this point by citing Carlock v. Krug, 151 Kan. 407, 99 P.2d 858, for the proposition that liquid hydrocarbons belong to the owners of the land. There, however, the court was concerned with a lease on a quarter section of land where there was a subsequent division of ownership. The court held the owner of the separate parcel of land upon which the well was drilled, in the absence of specific provision or agreement to the contrary, was entitled to all of the royalties on oil production therefrom. In the opinion the court stated the Kansas rule to be that the owner of the land and those claiming under him own all of the oil produced from wells located on the land, and that owners of adjoining tracts must protect themselves by development of their own land.
Clearly, the Carlock case does not involve pooling rights under oil and gas leases, and as a consequence has little bearing on the question as to whether "gas rights" should include the associated liquids removed from the gas away from the well bore in the instant case.
*247 The Texas court in Blocker refers to the liquid production as condensate or distillate, and it is clear from the facts in the instant case that the liquid hydrocarbons here in question are condensate or distillate, having a specific gravity higher than crude oil.
We see no valid grounds to distinguish the Blocker case which was decided on the "in place" theory in Texas from the facts in the instant case, even though Kansas does not adopt such theory. On the conceded facts in the instant case the production of the well on the Savage unit was captured at the wellhead in the gaseous form, and it was not until the associated liquids were separated from the gas away from the well bore that liquid hydrocarbons were available for sale. (See, Matzen v. Hugoton Production Co., 182 Kan. 456, 321 P.2d 576.)
Based upon the facts in this case, as shown by the findings of the trial court, we are persuaded by the foregoing authorities and hold that "gas rights" as used in the Savage lease should be deemed to include the associated liquids produced as a constituent element with the gas.
The unitization clause in the Savage lease by inference permits the inclusion of liquid hydrocarbons as being within the meaning of the term "gas rights."
The only exclusion from the term "gas rights" is casinghead gas produced from oil wells. Nothing else limits such term. In the last sentence of the pooling clause of the lease reference is made to "royalties" on "production" from the unit. Had the parties intended to exclude associated liquids produced from a gas well this sentence, which spreads the royalty on a unit basis, could have been clarified.
The foregoing construction of the lease is further fortified by a disclosure in the lease that the parties were all aware that a well capable of producing natural gas in the Spivey-Grabs Field would also produce condensate, distillate and other gaseous substances. This is indicated by the shut-in provision under the royalty clause of the lease which provides:
The appellants argue the royalty clause in the lease which provides that royalties should be paid "(a) on oil, and on other liquid *248 hydrocarbons saved at the well" indicates an intention that liquid hydrocarbons are to be classified as oil. This is answered by a succeeding provision concerning gas to the effect that royalties should be paid "(b) on gas, including casinghead gas and all gaseous substances." (Emphasis added.)
If a written contract is actually ambiguous concerning a specific matter in the agreement, such as the meaning of "gas rights" used herein, facts and circumstances existing prior to and contemporaneously with the execution of such contracts are competent to clarify the intent and purpose of the contract in this regard, but not for the purpose of varying and nullifying its clear and positive provisions. (Maltby v. Sumner, 169 Kan. 417, 219 P.2d 395; and Oliver v. Nugen, 180 Kan. 823, 308 P.2d 132.)
In this case all the leases in the unit were given and granted on lands within the legally described field limits of the Spivey-Grabs Pool in Kingman County, Kansas, which was governed by the provisions of the basic proration order for the Spivey-Grabs Field as entered by the state corporation commission of the state of Kansas. This order recognized that gas and oil or other liquids were associated together in the same Mississippian Reservoir, and that a need existed for classifying wells in the area. Had it therefore been desired and required by the lessors that liquids, known to exist in the area, be excluded from the term "gas rights" (as casinghead gas was), this could easily have been accomplished, but no such provisions were added.
The facts in the instant case disclose that liquid hydrocarbons existed along with the gas under all of the tracts in the unit, and that they have been and would continue to be produced into the well bore of the Savage No. 1 well. The fact that only small amounts of recoverable liquids were produced made it uneconomic for the operator of the unit, or any other operator, to drill any additional well or wells on the non-drillsite tracts for the purpose of recovering separately by tract oil or liquid hydrocarbons existing under such non-drillsite tracts. Obviously, the non-drillsite mineral owners would have no adequate remedy to protect themselves from drainage, if they did not share in the production of the associated liquids produced from the Savage well. The lands in the unit have been fully developed for gas purposes, and any attempt by the lessees of the non-drillsite tracts in the unit to cancel those leases for violation of the implied covenant to further develop would fail, considering *249 the oil alone, because it would not be economic to drill a further well for this purpose. (Myers v. Shell Petroleum Corp., 153 Kan. 287, 110 P.2d 810.) Furthermore, if the present lessee should release the non-drillsite leases as to the oil rights only, the economic failure to warrant further drilling continues to exist, and anyone drilling a well on the non-drillsite tracts could not produce the gas, since those rights belong to the present lease owners.
Equity thus suggests a construction of the lease which would spread the royalties from liquid hydrocarbons ratably to all of the parties having an interest in the gas unit.
In conclusion we hold the condensate or distillate, on the admitted facts before us, was a constituent element of the gas produced and under the pooling clause of the lease payment therefor should be made proportionately to all of the parties having an interest in the gas unit.
The judgment of the lower court is affirmed.