Opinion ID: 2633380
Heading Depth: 2
Heading Rank: 1

Heading: Condition of Gas

Text: The parties appear to argue about the physical condition of the gas at the well. However, a stipulation contained in the jury instructions reveals that the parties actually agree on the physical condition of the gas, but disagree about the terminology used to describe the gas. Thus, we briefly review the parties' use of the differing terminology and explain how the stipulation indicates that the parties are actually in agreement about the physical condition of the gas. According to the lessors, when the gas emerges from the well it is raw gas, meaning to the lessors that it is not in a condition to meet the specifications of the interstate pipeline. The lessors further argue that the gas at the well is at a low pressure (from 15 to 250 pounds per square inch gauge (psig)), and is water-saturated, with 40 pounds of water per million cubic feet (mmcf). The lessors contend that in order for the gas to meet the interstate pipeline specifications, the gas must be treated, specifically, compressed and dehydrated. To do so, the gas enters a gathering system, a set of low pressure pipes which gathers gas from various wells and moves it to the main line. The gathering system collects gas, which is then compressed from low pressure gas to high pressure gas, sufficient to meet the specifications of the interstate pipeline. The lessors argue that in addition to being compressed, the gas must also travel through a dehydrator, which removes water vapor from the gas in order to meet interstate pipeline specifications. Finally, the lessors suggest that after being dehydrated, the gas is then ready to enter the interstate pipeline. Although the lessees agree that the gas must be gathered, compressed, and dehydrated before the gas can enter the interstate pipeline, they disagree with the description of the physical condition of the gas as it emerges from the well. The lessees argue that the natural gas at issue is almost pure methane and directly usable in its natural state at the well. Instead of being raw, as the lessors contend, the lessees argue that the gas is dry, that is, virtually free of liquid hydrocarbons, and sweet, that is, free of chemical impurities, such as hydrogen sulfide and other sulphur compounds, when it emerges from the well. Further, the lessees argue that the gas is directly usable at the well both commercially and domestically, and does not require any processing in order to be used. Finally, the lessees emphasize that the gas has been used in its natural state from the well for many years, both by local consumers and by the lessors in lieu of royalty payments. According to a stipulation by the parties in Jury Instruction 4, the parties agree that the gas at issue is predominantly free of hydrogen sulfide [3] and carbon dioxide. Sweet gas is defined as [n]atural gas not contaminated with impurities, such as sulphur compounds. Except for removal of any liquid constituents that may be present, sweet gas is ready for commercial and domestic use. 8 Howard R. Williams & Charles J. Meyers, Oil and Gas Law: Manual of Terms, 1064 (2000) [hereinafter Oil and Gas Terms ]. Moreover, the parties agree that some of the gas has been used directly from the wells by the lessors as part of the lease agreements. Accordingly, based on the definition of sweet gas, the use of the gas at the well by the lessors, and the parties' agreement that the gas is predominantly free of hydrogen sulfide, we interpret the parties' stipulation to mean that the parties agree that the gas is sweet gas. Likewise, the parties do not actually disagree that the gas is dry when it emerges from the well. Instead, the parties disagree about the purpose of the dehydration of the gas. Specifically, the lessors suggest that dehydration is necessary in order for the gas to be marketable, and thus, to enter the pipeline. The lessees' view, however, is that dehydration is only required for transportation of marketable gas away from the well. Dehydration involves the removal of water from fluid produced from wells. Oil and Gas Terms, supra, at 260. The parties agree that the gas in this case is dehydrated after compression to remove liquid prior to the gas entering the interstate pipeline. The parties also agree that the gas is usable by the lessors directly from the well, without requiring any liquid removing processes to be completed prior to the use of the gas. Thus, the parties, through their arguments, agree that the gas is dry when it emerges from the well, irrespective of their disagreement about the purpose of the dehydration process. Finally, notwithstanding the parties' use of differing terminology to describe the physical condition of the gas, the parties agree that the gas must be gathered, compressed, and dehydrated in order to enter the interstate pipeline. Thus, the actual dispute raised in this case is whether the gas is marketable at the well prior to gathering, compressing, and dehydration, or marketable after these processes have been completed and the gas is ready to enter the interstate pipeline. Since we believe that the parties agree that the gas is both sweet and dry, we will analyze this case with the understanding that the gas here is sweet and dry as it emerges from the well.