Opinion ID: 1225461
Heading Depth: 1
Heading Rank: 6

Heading: TXO v. State ex rel. Comm'rs of the Land Office

Text: ¶ 13 In CLO, the court held that compression, dehydration and gathering costs are not deductible from royalty interests but are the lessee's responsibility as part of the implied duty to market. While concentrating on the language of the lease, [28] the court expressly adopted the Wood test: cost deductibility turns on whether the process is necessary to prepare the product for market. [29] If so, the lessee's implied duty to market the gas requires him to bear the costs of these processes alone. ¶ 14 Applying this test, the court reasoned that without compression gas is completely unmarketable. [30] Turning to dehydration costs, the court held that the removal of moisture from gas is another process necessary to make the product marketable. [31] The opinion treated gathering  the process of collecting gas at the point of production (the wellhead) and moving it to a collection point for further movement through a pipeline's principal transmission system [32]  in the same manner. Since gathering costs are incurred before the gas enters the purchaser's pipeline, the court deemed these costs to be necessary to obtain a marketable product. [33] The lessee was held responsible for all of these costs as part of the implied duty to market oil and gas.