Court Opinion

ID: 9784808
Source: CourtListenerOpinion
Date Created: 2023-08-30 20:54:31.987996+00
Date Added: 2024-06-11T07:35:59.654668
License: Public Domain

*743McAnany, J.,
dissenting: It seems to me that the majority has lost its way by needlessly, but with great effort, following a rather confusing and convoluted trail through frustration of performance, trade usage and custom, and condition precedent. I believe that none of these doctrines applies under the facts of this case. Without dwelling on the various reasons these doctrines do not apply, I would rather cut to the chase.
Upon settling almost all their differences, the parties asked the district court to interpret the first sentence of paragraph. 9 of Exhibit A which was incorporated into the two oil and gas leases. That sentence states: “It is agreed that the Lessor shall bear no cost of gas treatment, dehydration, compression, transportation or water hauling charged to this lease by Lessee in its operations thereon.” The district court was not asked to consider this sentence in a vacuum but together with the context of the provisions of a gas purchase agreement between Key Gas as seller and ONEOK as buyer. The district court had before it both the leases and the gas purchase agreement. The contested lease provision relates to transportation charges “charged to the lease in its operations thereon.” What does that mean?
As a part of its operations on the leasehold, Key Gas laid a gas line across the Davis property as it was entitled to do under the leases. (In fact, one of Davis’ complaints was the manner in which Key Gas laid this line.) Davis did not contest Key Gas’ assertion to the district court that Davis was not charged for any expenses in connection with this gathering line. This is not surprising. Key Gas could not charge Davis for any of this expense since it related to Key Gas’ transportation expenses on the leases, i.e., “in its operations thereon.” (Emphasis added.)
Ten months after the more recent Davis lease, Key Gas entered into the gas purchase agreement with ONEOK. The agreement requires Key Gas to deliver gas from the Davis wells to ONEOK’s receipt point. Key Gas is responsible for the installation of all facilities upstream of the receipt point. All the upstream facilities are owned by Key Gas and operated at its sole expense. The receipt point is defined as “the inlet flange of BUYER’S pipeline facilities installed to take deliveries of Gas from SELLER.”
*744Exhibit A incorporated into the gas purchase agreement spells out the method for computing the purchase price for gas delivered from the Davis leases. That price is computed from a monthly industry publication that identifies prices for spot gas delivered to Panhandle Eastern Pipeline Co.’s Texas-Oklahoma mainline. The price is reduced by a charge for “Transportation and Fractionation.” This relates to transportation of the gas after ONEOK has received it downstream from the gathering line which is owned and operated by Key Gas at a cost in which Davis does not share.
We are confronted here with what seems to me to be a rather straight-forward situation. Davis and Key Gas agree that Davis will not be responsible for transportation costs associated with operations on die leasehold premises. Key Gas honored this by constructing and maintaining at its sole cost the gathering line from the wellheads that ran across Davis’ property. The transportation charges at issue here are not associated with that gathering system but rather transportation expenses incurred downstream from the inlet flange on ONEOK’s system. These charges were not incurred in Key Gas’ operations on the leases.
Davis does not complain that the terms of the gas purchase agreement were in any way suspect, unusual, or contrary to the customaiy way gas is sold on the open market. The district court correctly found that the purchase price for the gas was the product of an arms-length transaction between Key Gas and ONEOK without any collusion whatsoever. It is not in the least bit surprising that gas in a processing plant has a greater value to the buyer than gas delivered to the buyer a great distance from the plant. ONEOK’s recognition of this obvious fact is reflected in its computation of the price of gas when it leaves the Davis leases. ONEOK is in the business of buying gas, not merely transporting it by way of a pipeline for a fee. The transportation charge included in the price calculation is a method of establishing the market value of the gas at ONEOK’s inlet flange rather than at a more distant point where ONEOK resells it to the next purchaser in the line of commerce.
Davis’ argument, and the majority’s conclusion today, is that there really is a free lunch. Davis seeks, and the majority gives, a *745royalty based upon the value of gas from the well at an inflated price that ignores the realities of the market that affect price after the gas has left Davis’ leased property.
I would affirm the sound and common-sense decision of the district court. For this reason, I respectfully dissent.