REPORTS FROM THE COURTHOUSES IN SELECT STATES WITH RECENT ROYALTY LITIGATION ACTIVITY KANSAS
| Jurisdiction | United States |
(Dec 2008)
REPORTS FROM THE COURTHOUSES IN SELECT STATES WITH RECENT ROYALTY LITIGATION ACTIVITY KANSAS
Triplett, Woolf & Garretson, LLC
Wichita, Kansas
Tim McKee is Triplett, Woolf & Garretson, LLC's senior energy and regulatory attorney, having served as a Commissioner and as Chairman of the Kansas Corporation Commission. Mr. McKee, a Wichita native, received his B.A. from Wichita State University in 1965, served in the Peace Corps with his wife Barbara in Brazil from 1965-1967, and received his J.D. from the Washburn University School of Law with honors in 1970 where he served as an editor of the Law Journal. Mr. McKee began his legal career in Wichita in 1970 and joined Martin, Pringle et al. in 1977, where he was a partner. In 1985, he became one of the founding partners of Triplett, Woolf and Garretson, remaining with the firm until his appointment by Governor Graves as a Member of the Kansas Corporation Commission (KCC) in 1995. Since the early 1970's, Mr. McKee's legal practice has focused on representation of business clients in litigated and regulated matters involving oil and gas and utility issues. He is a member of the Rocky Mountain Mineral Law Foundation, and has been a frequent presenter at numerous seminars dealing with natural resource and energy law. He served as the Chairman of the Oil, Gas and Mineral Law Section of the Kansas Bar Association for 1995-96. While Chairman of the KCC, Mr. McKee served on the National Association of Regulatory Utility Commissioners' Committee on Natural Gas and the International Ad Hoc Committee. He was also Kansas' official representative to the Interstate Oil and Gas Compact Commission and organized the IOGCC's Committee on gas gathering regulation. As KCC Chairman, Mr. McKee was a member of the gas gathering task force created by the Kansas Legislature to study and recommend policy for Kansas with respect to gas gathering legislation. He was the spokesman for the KCC's effort to establish a system of open access to gas gathering lines for all producers in the state, while minimizing through as "light handed" regulation as possible, the burden on the gas gathering industry, which supported his efforts. Mr. McKee was also responsible for the Commission's efforts to obtain highly qualified and unbiased expertise for the preparation of a study and special report for submission by the KCC to the Kansas Legislature's Retail Electric Wheeling Task Force. In his private practice, Mr. McKee has made numerous appearances before the KCC and handled both litigation and regulatory matters for Kinder Morgan Energy Partners, L.P., PetroSantander (USA) Inc., Lario Oil & Gas, Southwestern Bell Telephone, L.P., Barrett Resources Corporation, Beren Corporation, Zenith Drilling Company, Inc., Wichita Area Builders' Association, Vess Energy, L.L.C., Electric Cooperatives and the City of Wichita and other municipal utilities. He has also consulted for the Kansas Independent Oil and Gas Association and the City of Wichita with respect to electric energy matters. Mr. McKee has also appeared as an expert witness on natural gas and gas gathering issues. Equally important to substantive knowledge of the law is knowledge of the structure, function and personalities of the courts and regulatory bodies. In this regard, Mr. McKee has created and maintains an outstanding relationship with the employees and officials of Kansas' regulatory and governmental agencies. Mr. McKee has been active in civic affairs having served as President of the Board of Rainbows United, the Mental Health Association of South Central Kansas and currently serves as a board member of Kansas Big Brothers Big Sisters, Inc. and as a board member of the Kansas Health Foundation. In early 2006, Mr. McKee was appointed to the Kansas Electric Transmission Authority (KETA) by Governor Kathleen Sebelius confirmed and by the Kansas Senate to serve a four-year term.
OUTLINE OF REPORT
REPORT FROM THE KANSAS COURTHOUSES REGARDING RECENT ROYALTY LITIGATION SINCE 2003
First, I would like to thank and highly recommend Professor Bruce N. Kramer's (the Maddox Professor of Law at Texas Tech University School of Law) paper "Interpreting the Royalty Obligation By Looking At the Express Language: What a Novel Idea?"; and Professor John S. Lowe's (the George W. Hutchison professor of energy law at Southern Methodist University) paper "Interpreting the Royalty Obligation of the Rule of the Implied Covenant to Market," both of which papers were presented in the 2003 program. These papers provide an excellent orientation to the subject matter, as well as history leading us to some of the litigation questions presented in current times.
The last five years, royalty litigation in Kansas has presented something of a desert landscape, although there are a few clumps of interesting foliage here and there.
Actually, during the period of time from 2003 to present, there have been three Kansas Court of Appeals' reported decisions and none from the Kansas Supreme Court although there is one worthy of some mention that was a 2001 decision.
There are numerous royalty litigation cases awaiting decision both at the district court level and before the Court of Appeals, as well as the Kansas Supreme Court as we speak. In that regard, I will speak to some of the issues that are awaiting decision.
Last, I will cover a statute in Kansas that was effective in 2006, bearing on the information a producer is obligated to provide a royalty owner.
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Background
As further background, I would bring your attention to a case that was in existence during the last oil and gas royalties program in 2003 but is the current foundation stone for gas royalties in Kansas, that being Sternberger v. Marathon Oil Company, 257 Kan. 315, 894 P.2d 788 (1995). Sternberger was a class action brought by a royalty owner in Barber County, Kansas, on behalf of royalty and overriding royalty owners in Kansas, Oklahoma, and Texas, which sought recovery of "marketing costs or gathering line amortization expenses" which had been deducted from the plaintiff's payments by the lessee operators to recover expenses for transporting the gas from the lease to the point of sale. The case came out of the Barber County, Kansas District Court in favor of the royalty owners and was appealed by Marathon Oil Company to the Kansas Supreme Court, which reversed, holding that the lessors were required to bear their proportionate share of reasonable expenses of transporting gas through gathering systems to a distant market. The case was then remanded for determination of the reasonableness of the particular charges in the case.
In Sternberger, there was no market for the gas at the wellhead, and TXO (the predecessor of Marathon) was unable to interest a gas purchaser in constructing a line to the well. Thus, TXO built its own gathering system to gather the gas from six wells and transport it to the pipeline. TXO, the lessee producer, then paid a transportation fee to Kansas Gas Supply, the pipeline, which it charged back to the royalty owners, as well as a 12-cent per MCF amortization of the cost of the construction of the pipeline, which it called a "marketing cost" and a "line amortization" charge which appeared to result in a retirement of the cost of the gathering system over approximately 12 to 13 months.
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These costs included maintenance, trucking of the pipe, a per diem charge for the foreman, survey, and right-of-way costs for the gathering system. TXO received a 12-cent discount on the transportation fee charged by Kansas Gas Supply, and apparently the royalty owners benefitted from this 12-cent...
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