CHAPTER 9 TAKING GAS IN KIND ABSENT A BALANCING AGREEMENT
| Jurisdiction | United States |
(May 1990)
TAKING GAS IN KIND ABSENT A BALANCING AGREEMENT
Washburn University School of Law
Topeka, Kansas
TABLE OF CONTENTS
Page
I. INTRODUCTION
II. IDENTIFYING RELATIONSHIPS AND THE APPLICABLE LAW
A. Defining the Precise Nature of the Problem
B. Identifying Cotenant and Cotenant-Like Relationships
1. The Common Law Cotenancy
2. The Contractual Cotenancy
a. Cross Conveyance
b. Cross Conveyance and the 77, 82, and 89 Forms
3. The Statutory Cotenancy
a. Pooling Statutes: Louisiana
b. Special Purpose Statutes: Oklahoma
III. THE RIGHT TO TAKE IN KIND
A. Right to Take in Kind Absent an Operating Agreement
B. Right to Take in Kind Under the Operating Agreement
1. Taking in Kind and the Ownership Clause
2. Facilities and Notices
IV. OPERATOR'S RIGHTS WHEN A PARTY DOES NOT TAKE IN KIND
A. Operator's Options for Dealing with Nonoperator Gas
1. Purchase Nonoperator Gas
2. Market Nonoperator Gas
B. Gas Balancing Among Working Interest Owners
C. Gas Balancing and the Royalty Owner
V. CONCLUSION
FOOTNOTES 25
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I. INTRODUCTION
Most gas production occurs under some version of the A.A.P.L. Model Form Operating Agreement1 —but without a balancing agreement. This may change with the development of a "model" form of gas balancing agreement acceptable to the industry.2 However, for the immediate future it appears most gas balancing disputes will be addressed without the benefit of a gas balancing agreement. To properly address the issues raised in a balancing dispute, we must first define the precise nature of the problem and then identify all the relevant "law" implicated by the issues.
II. IDENTIFYING RELATIONSHIPS AND THE APPLICABLE LAW
A. Defining the Precise Nature of the Problem
The following questions must be posed to define the nature of the balancing problem:
1. Have separate properties been combined under a voluntary pooling agreement to conduct operations?
2. Have separate properties been combined through some form of compulsory pooling?
3. Have all parties with working or unleased mineral interests entered into some form of joint operating agreement?
4. Have all parties with working or unleased mineral interests entered into some form of gas balancing arrangement?
5. Is there any sort of field-wide unit agreement and unit operating agreement?
6. What does your oil and gas lease provide regarding the payment of royalty on gas and gas liquids?
7. What does your lessor's division order provide regarding the payment of royalty on gas and gas liquids?
8. What do assignments creating overriding royalties and other interests in production provide regarding the payment of royalty on gas and gas liquids?
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9. What do your assignees' division orders provide regarding the payment of royalty on gas and gas liquids?
10. What does your gas sales contract provide concerning gas commitment and reservations?
Each question suggests documents that must be reviewed prior to evaluating gas balancing issues. A review of the relevant documents will disclose the possible cotenant or cotenant-like relationships which may govern gas balancing rights.
B. Identifying Cotenant or Contenant-Like Relationships
Once it is determined how the properties have been assembled, we can identify whether an actual cotenancy exists between any of the parties. For example, suppose A owns all the minerals in the South Half of Section 30. B and C each own an unidivided one-half of the minerals in the North Half of Section 30. A leases to X, B leases to Y, and C leases to Z. Y and Z are "common law"3 cotenants of the working interest in the North Half of Section 30. X is not a common law cotenant of any party. However, X may, under certain circumstances, become a "contractual" cotenant4 or a "statutory" cotenant5 . If we assume conservation regulations limit Section 30 to one gas well, the interests of X, Y, and Z must be combined in some fashion for development. Depending upon the terms of any voluntary pooling agreement and joint operating agreement, and the state in which Section 30 is located, a cotenancy-like relationship among X, and Y and Z, may be created.
1. The Common Law Cotenancy
If the parties have a common law cotenancy relationship, in most jurisdictions any cotenant can develop the property and produce all the oil and gas without the consent of the other cotenants.6 The key element of a common law cotenancy is the "unity of possession;" the right of each cotenant to occupy the entire undivided interest in the property. Each cotenant has a right to immediate, but nonexclusive, possession of the property.7 Therefore, if X conveys to W an undivided interest in X's lease covering the South Half of Section 30, X and W will each have the nonexclusive right to develop the South Half. As to the leasehold rights in the South Half, X and W become common law cotenants.
The only limitation on a cotenant's right to extract minerals is the obligation to ultimately "account" to nonproducing cotenants for their share of net profits.8 When dealing with extraction of a mineral from an estate held in cotenancy, the mineral is owned solely by the mining cotenant. Removal and sale of minerals by the producing cotenant is not conversion or actionable waste.9 In addition to the right to
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an accounting, common law cotenants also enjoy another basic cotenancy right: the right to end the cotenancy through partition.10 Therefore, the arsenal of cotenant remedies at common law include an accounting for net profits and the ability to end the cotenancy by partition.11
The reported cases fail to clearly distinguish between the common law cotenancy and cotenant-like relationships created by contract or statute.12 For example, in Anderson v. Dyco Petroleum Corp.,13 the court considered whether Dyco, and Dyco's gas purchasers, were liable for converting gas belonging to other working interest owners in the well. The complaining working interest owners were not marketing gas from the well; Dyco was selling more than its 47% share of the well's production to its gas purchasers. Dyco's gas purchasers refused to buy gas from the complaining working interest owners.14 The court in Anderson does not indicate whether any of the parties are lessees or assignees of undivided mineral or leasehold interests, nor does it reveal the existence of any operating agreement, pooling agreement, pooling order, or statute that would create a cotenant-like relationship. Without disclosing the source of the relationship, the court concludes:
Under Oklahoma law Appellants [Anderson] and the other working interest owners in the well [including Dyco] are tenants in common. As cotenants each is entitled to market production from the well and the sale of gas to a purchaser by one or more cotenants without consent of other cotenants is lawful. Under ordinary circumstances it does not involve tortious conduct, i.e. conversion, on the part of either the purchaser or on the part of the working interest seller because each cotenant has the right to develop the property and market production under the common law.15
The court cites Demik v. Cargill,16 Moody v. Wagner,17 and Mullins v. Ward,18 to support its conclusions. Each of these cases concerned the rights of common law cotenants.
In the recently mandated case of Teel v. Public Service Co. of Oklahoma,19 the court acknowledges that the parties are common law cotenants. Teel entered into farmout agreements with Siegfried, Siegfried, Inc., and Collins (the "operators"). The operators complied with the terms of the farmout agreements and Teel assigned them undivided interests in the farmout properties. Some of the wells were subject to an operating agreement, others were not.20 The operators entered into a gas sales contract with Transok. Upon pay-out under the farmout agreement Teel apparently converted a nonoperating interest into an undivided working interest in the farmout properties, thereby becoming a cotenant in the working interest with the operators. Teel refused to sell its share of the gas to Transok and revoked the operators' authority to market Teel's gas to Transok.
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Transok was aware of Teel's actions but continued, at the operators' request, to credit Teel's account with a proportionate share of the gas proceeds from the operators' gas sales.21
Teel brought suit contending Transok and Public Service Company of Oklahoma ("PSO")22 had converted Teel's gas. The alleged act of conversion occurred when Transok purported to buy Teel's portion of the gas stream with notice that Teel didn't want to market its gas under the terms offered by Transok. Since Transok purchased the entire gas stream tendered by the operators, who were the other cotenants in the well, it is difficult to understand how Transok could be held liable for conversion. Teel's claim is against its cotenant operators for an accounting. Transok, on its books, may have credited a share of production to Teel, but this can be corrected once the rights of Teel and its cotenants are determined.
The Oklahoma Supreme Court holds Transok converted Teel's gas when it received notice Teel had revoked the operators' right to market Teel's gas to Transok.23 However, Teel cannot revoke the right of its cotenants to market the full gas stream. When Teel indicated to the operators he wanted his gas to stay in the ground, that did not alter the ability of the other cotenants to pass title to the entire gas stream to Transok. Nor would Transok's accounting entries affect Teel's rights against the producing cotenants. The court confuses Teel's situation with one where Teel tells the operators to deliver Teel's share of the gas to purchaser X. Instead the operators deliver it to Transok and Transok takes the gas knowing the operators were instructed to deliver the...
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