Energy is so reliable and available, some think we no longer require it By Edward Cross, President, Kansas Independent Oil & Gas Association. Editor’s Note: Mr. Cross wrote the following commentary which was published in The Wichita Eagle on January 14, 2021. Its message is simple, but not well relayed by media. It is reproduced here with Mr. Cross’ permission.
nergy is so thoroughly woven into our daily lives that few ever question whether it will be there, or where it comes from. Oil-based products are likely the first thing you touch at the beginning and end of each day, whether it is your alarm clock, cell phone, or even the toothpaste and toothbrush you use to brush your teeth. As a key component in heart valves, seat belts, helmets, and even Kevlar, petroleum is saving tens of thousands of lives daily. Furthermore, oil and gas are key components in many medicines and antibiotics such as antiseptics, antihistamines, aspirin, and sulfa drugs. The oil and gas industry has done such a good job of creating abundant, affordable, always-available energy that the world takes it for granted. Because energy is so reliable and available, some think we no longer require it. We encounter this paradox anytime we hear from those who want to end oil and gas production but still want to benefit from oil and gas based materials and fuels. What Americans expect and deserve are the facts. Today, the U.S. is not only the world leader in energy production, but we also lead the world in environmental quality. The six major pollutants monitored by the Environmental Protection Agency have plunged 77% since 1970. Over the same period the U.S. economy grew by 285%, vehicle miles traveled increased 195%, population increased by 60%, and energy use increased by 48%. The oil and natural gas industry has proven that over the long-term, we can lead the world in energy production and environmental stewardship. What would it mean for consumers, the economy, and future job creation if we substantially limited exploration, development, and use of fossil fuels in America’s energy supply mix? A recent study by the Energy Information Administration indicates the average American family would see their energy costs increase by $4,550 per year. It could mean a cumulative loss of $11.8 trillion in the nation’s GDP and the loss of 6 million jobs. Recent studies indicate that if the U.S. eliminated all carbon dioxide emissions immediately, it would avert 0.07 degrees of warming by 2050. If Kansas alone eliminated all CO2 emissions, it would avert 0.001 degrees of warming by 2050. How many lost jobs is that worth? Inexpensive energy is necessary for economic advancement by the world’s poor and for recovery from the staggering economic effects of the COVID-19 pandemic. Ideological opposition to fossil fuels is an anti-human stance that views ordinary people not as problem-solving sources of ingenuity, but as only mouths to feed producing environmental damage. The choices policymakers make in 2021 and beyond will determine whether we build on America’s energy progress or shift to foreign energy sources with lower environmental standards. You can’t address the risks of climate change
Winter 2021 In This Issue...
Energy is so reliable and available, some think we no longer require it By Edward Cross, President •KIOGA
President’s Memo By Jonathan Schlatter • Morris, Laing, Evans, Brock & Kennedy, Chtd., Wichita
Proposed Abandoned Well Legislation
What’s with Kansas and the Accommodation Doctrine? By Reed Ripley • Morris, Laing, Evans, Brock & Kennedy, Wichita
Oil and Gas/Minerals PSA Nuances: Have You Missed Anything? By Nate Jiwanlal • Trans Pacific Oil Corporation, Wichita
Hoedel v. Kirk: KCC Commissioners Entitled to Immunity By Lauren Wright • Klenda Austerman LLC, Wichita
By Ryan Hoffman Kansas Corporation Commission, Wichita
Terms of Oil and Gas Lease Modified from Course of Action By Bob McFadden • Foulston Siefkin LLP, Wichita
Obtaining Water Supplies for Oil and Gas Operations in Kansas By Burke W. Griggs • Washburn University School of Law, Topeka
The Kansas Court of Appeals interprets and applies the Kansas Supreme Court Decision in Fawcett v. Oil Produces, Inc. of Kansas 302 Kan. 350, 352, P.3d 1032 (2015) By David E. Bengtson & Matthew J. Salzman • Stinson LLP, Wichita
Recent Kansas Cases Highlight the Importance of Meticulous Drafting Regarding Minerals By Jessica Freeman, Erik Hageman, & Caroline Kordes, • Washburn Law School Students, Topeka
without America’s oil and natural gas industry, which continues to lead the world in emissions reductions while delivering affordable, reliable, and cleaner energy to all Americans. The U.S. has a unique opportunity to show the world how energy abundance can be used as a positive force to lift people up, which is different than a zero-emissions world. We should work to ensure more people have access to safe, affordable, and reliable energy. Because to rise out of poverty and enjoy health and safety, people need more energy, not less.
President’s Memo by Jon Schlatter • Morris, Laing, Evans, Brock & Kennedy
ot since the year 2000, a/k/a “Y2K”, has a new year been as anxiously anticipated as the year 2021. As I recall, many people were terrified that the lights would go out and chaos would ensue as the clocks on our Gateway 2000 computers rolled from 12/31/99 to 1/1/00 (the year only has two digits!!!). And while the changes brought on by 2021 were never expected to be as abrupt, I think everyone is eager to be back among friends, family, and even colleagues, on a normal basis. I personally cannot wait to take in a game at the new Riverfront Minor League Ballpark built in downtown Wichita. Knock on wood, but things are also looking up in the oil patch. As I type this letter, WTI is sitting above $52 and my sense is that the industry is itching to get back to exploration. I hope everyone is as optimistic and excited for the future as I am.
About the Author Edward Cross is president of the Kansas Independent Oil & Gas Association.
top of things and will do a great job. We’ve also brought some new members to the executive committee, including some industry representatives that I hope can bring unique perspectives to the committee. The entire executive committee member roll is listed on page 3. Finally, I cannot thank Karl Hesse and Bob McFadden with Foulston Siefkin enough for their hard work in assembling and editing this newsletter. The content is always fabulous, and our volunteer writers do a wonderful job keeping our section abreast of important happenings in the law. About the Author Jon Schlatter has a unique skill set and years of experience in the complex worlds of oil and gas law, bank regulation, and real estate law. Mr. Schlatter has been involved in permitting numerous secondary and tertiary recovery projects, including the State’s first underground pad drilling project, and he has participated in many KCC matters, acquisitions, and other transactions. He has also represented clients in multiple lease termination cases, terms mineral and royalty interest cases, lien rights cases, and other oil and gas litigation.
Speaking of the future, a newly installed executive committee will be leading this section for a two-year term beginning July 1, 2021. Keith Brock of Anderson Byrd in Ottawa will take over as section President. If you know Keith, you know that he is on
Proposed Abandoned Well Legislation by Ryan Hoffman • Kansas Corporation Commission
uring the 2020 legislative session, the Kansas Corporation Commission (KCC) supported legislation that would make several statutory changes to the abandoned well plugging program and operator responsibility. The proposed changes to the program included combining the two separate statutory abandoned well plugging funds into a single fund and directing the KCC to establish regulations for an abandoned well plugging reimbursement process. The legislation also included a redraft of K.S.A. §55-179 to help clarify prior ambiguities by limiting the types of parties who can be responsible for plugging abandoned wells. Finally, the legislation included termination of statutory language requiring the KCC and the Kansas Department of Health and Environment to enter into an agreement for the joint regulation of the oil and gas industry, as it is no longer applicable. The legislation was passed out of
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the House Appropriations Committee but fell victim to the pandemic-shortened legislative session. The legislation has been pre-filed for the 2021 legislative session and we will provide an update in a later publication to outline what the final legislation looks like should it pass and be signed into law. About the Author Ryan Hoffman joined the Kansas Corporation Commission as a Litigation Counsel for the Conservation Division in 2007. He has served the Commission as Director of the Conservation Division and as Chairman of the Oil and Gas Advisory Committee since 2013. Ryan is the Associate Representative for Kansas on the Interstate Oil and Gas Compact Commission. He is also a past Chairman and current member of the Legal and Regulatory Affairs Committee of the Interstate Oil and Gas Compact Commission. Ryan also serves on the Board of Directors for the Groundwater Protection Council and the Advisory Committee to the State Oil and Gas Regulatory Exchange.
Terms of Oil and Gas Lease modified from course of action (Thoroughbred Assocs., L.L.C. v. Kansas City Royalty Co., L.L.C., 58 Kan. App. 2d 306, 469 P.3d 666 (2020)).
nother opinion is in the books for the 18-year saga between Thoroughbred Associates, L.L.C. (“Thoroughbred”) and Kansas City Royalty Company, L.L.C. (“KC Royalty”) as to whether an oil and gas lease between Thoroughbred and KC Royalty’s predecessor (the “Lease”) was unitized. The facts leading up to this battle began almost immediately after the Lease was signed in July 1998 and circle around the conditions precedent in the Lease for Thoroughbred’s right to unitize. Those conditions where that one of the following had to be met in order to unitize the Lease: the unit was necessary to either (1) conform with regular spacing patterns, or (2) maximize production where a governing body had established a spacing pattern or allowable. In August 1998, Thoroughbred drilled the Rietzke Well on land neighboring property under which KC Royalty owned the minerals (the land covered by the Lease). A month later, Thoroughbred created the 640-acre Rietzke Unit and recorded two documents: (1) a Declaration of Unitization creating the Unit comprised of the “gas rights” under several leases, including the Lease; and (2) an Affidavit of Commencement of Operations stating that production from the Rietzke Well extended all Unit leases, including the Lease, beyond their respective primary terms. Another month later, in October 1998, Thoroughbred obtained a title opinion stating that the Lease was in the Unit. Over the next few years, Thoroughbred drilled five successful wells on the Unit, none of which were on the neighboring KC Royalty tract. KC Royalty signed a division order (or ratified the division order signed by its predecessor) for each of the wells. Thoroughbred made thirty royalty payments to KC Royalty over the next two-and-a-half years. Then, in late 2001, the relationship between KC Royalty and Thoroughbred began to deteriorate. In March 2002, Thoroughbred’s attorney sent KC Royalty a letter stating that conditions required to unitize the Lease had not been met and, if KC Royalty did not waive the conditions, Thoroughbred would drop the Lease from the Unit and request a repayment of royalties. Litigation ensued. Fast forward to 2013: The pair made it to the Kansas Supreme Court which held that, because conditions for unitization had not been met, the plain language of the Lease precluded unitization; however, the Court remanded the case to determine whether KC Royalty could establish that the Lease had been unitized under an alternative theory such as modification, waiver, or equitable estoppel. On remand, the district court ruled that the Lease had been unitized under any one of those theories. Thoroughbred appealed leading us to the case at hand. The Kansas Court of Appeals affirmed. The Court held that Thoroughbred and KC Royalty had modified the Lease and waived the conditions by their conduct after entering the Lease, e.g., recording the Declaration and Affidavit listing the Lease as being in the Unit, not objecting to those documents being filed, (Cont’d on next page)
2020-2021 Oil, Gas & Mineral Section Officers President Jonathan Schlatter Morris, Laing, Evans, Brock & Kennedy, Wichita firstname.lastname@example.org President-Elect Keith A. Brock Anderson & Byrd LLP, Ottawa email@example.com Secretary-Treasurer Cody Phillips Ritchie Exploration, Inc., Wichita firstname.lastname@example.org CLE Liaison Prof. David E. Pierce Washburn University School of Law, Topeka email@example.com Legislative Liaison Diana G. Edmiston Edmiston Law Office LLC, Wichita firstname.lastname@example.org Co-Editor Karl N. Hesse Foulston Siefkin LLP, Wichita email@example.com Co-Editor Bob McFadden Foulston Siefkin LLP, Wichita firstname.lastname@example.org Past President Tyler Turner Jeter, Turner Sook Baxter LLP, Hays email@example.com Member at Large David E. Bengtson Stinson LLP, Wichita David.Bengtson@stinson.com Member at Large Tyson R. Eisenhauer Johnston Eisenhauer Eisenhauer & Lynch LLC, Pratt firstname.lastname@example.org Member at Large Ryan Hoffman Kansas Corporation Commission, Wichita email@example.com Member at Large Nate Jiwanlal Trans Pacific Oil Corporation, Wichita firstname.lastname@example.org Member at Large Josh Nicolay Stull, Beverlin, Nicolay & Haas, LLC email@example.com
Oil, Gas, & Mineral Law
(Cont’d from previous page) being in the Unit, not objecting to those documents being filed, signing or ratifying division orders, and paying and accepting royalty payments for Unit production. Lastly, the court held that Thoroughbred was equitably estopped from claiming the Lease was not included in the Unit. On the equitable estoppel claim, the first two elements--whether Thoroughbred’s actions induced KC Royalty to believe the Lease was unitized and whether KC Royalty reasonably relied on those representations--were met through the foregoing actions. The Court determined that KC Royalty had detrimentally relied on the representations because, by Thoroughbred claiming the Lease was held by Unit production, KC Royalty was prevented from developing its mineral interest.
About the Author Bob McFadden is an attorney at Foulston Siefkin LLP in Wichita where he practices in areas of oil and gas, wind and solar energy, real estate development, and natural resource mining.
The moral of the story is that if one is not careful, the negotiated terms of an oil and gas lease can be unintentionally modified.
What’s with Kansas and the Accommodation Doctrine? by Reed Ripley • Morris, Laing, Evans, Brock & Kennedy, Wichita
n the legal community, the balance of competing rights tends to spawn grand theses on equity and frameworks for analysis, but when boiled down to its essence, the base concept is quite simple. Take for example a sporting event, say a Chiefs game: when you purchase a ticket to attend a game at Arrowhead, your purchase grants you certain rights, including the right to sit in the seat printed on the ticket and overspend on a mediocre hot dog. However, said right to sit and enjoy your seat is not unlimited; the Raiders fan in front of you also holds a right to enjoy the game in his seat, and that enjoyment probably does not include your stretched out feet occupying the spaces immediately adjacent to his ears. You and the Raiders fan in Row K accommodate each other’s rights, giving both the opportunity to enjoy the game in a mutually beneficial manner, at least until the on-field results dictate otherwise. The realm of oil and gas development adheres to the same base concept. There are many sets of competing interests inherent to a typical oil and gas development project (e.g., tenant farmer v. operator), all representing competing rights to the same land. This article focuses on one set of competing rights: those of surface owners and oil and gas lessees and severed mineral owners. The surface owner holds the right to enjoy the use of his land as he sees fit, and the lessee-developer holds the right to enter the land to produce and carry on production activities, a right that flows from the mineral interest. Rucker v. DeLay, 44 Kan. App. 2d 268, 273 (2010) (quoting Stratmann v. Stratmann, 204 Kan. 658, 662 (1970). The owner of a severed mineral interest, and subsequently the oil and gas lessee, has the implied right to enter onto the overlying surface of the land to make reasonable use of the surface to explore and develop the mineral estate. Mai v. Youtsey, 231 Kan. 419, 424 (1982).
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Surprisingly, it took until the early 1970s for a rule to formulate purporting to govern this specific, yet omnipresent, rights conflict. In Getty Oil Co. v. Jones, 470 S.W.2d 618 (Tex. 1971), the Texas Supreme Court first established a rule that’s come to be known as the “accommodation doctrine” recognizing the rights implied in favor of the mineral estate (and subsequently the oil and gas lessee) must be exercised with due regard for the surface owner’s rights. Simply stated, the accommodation doctrine requires that an oil and gas lessee make accommodations to the surface owner’s land use where there is a reasonable alternative method that will still enable the development and production of the oil and gas. If there is only one manner of surface use whereby the minerals can be produced, then the lessee is within its right to utilize that method regardless of the damage to the surface owner. Getty, 470 S.W.2d at 622 (citing Kenny v. Texas Gulf Sulphur Co., 351 S.W.2d 612 (Tex.Civ.App.—Waco 1961)). Other states that have incorporated accommodation language into decisions involving similar surface use conflicts include Arkansas, Colorado, North Dakota, Utah, and West Virginia. Williams & Meyers Oil and Gas Law, Vol. 1, § 218.8, p. 256.8–256.9 (2019). Although Kansas has not expressly adopted the accommodation doctrine, case law suggests its courts are amenable to the same underlying principles. Most prominently, in Rostocil v. Phillips Petroleum Co., 210 Kan. 400 (1972), decided nearly a decade after Getty, the Kansas Supreme Court went out of its way to flatly hold an oil and gas lessee, under a standard lease, “does not own a dominant easement” and is obligated “not to interfere with the lessor’s normal and accepted practices.” Rostocil, 210 Kan. at 401–02. Other Kansas cases demonstrate the courts’
readiness to step in and impose negligence liability where the lessee overextends its implied right of surface use and becomes injurious to the lessor’s agricultural pursuits, despite lack of any express provision in the lease prohibiting the conduct. Thurner v. Kaufman, 237 Kan. 184, 188–89 (1984); Norton Farms, Inc. v. Anadarko Petroleum Corp., 32 Kan. App.2d 899 (Kan. App. 2004). These holdings are not just a modern trend, either; Kansas courts have long shown a preference toward reasonable accommodation of the surface owner’s rights. See, e.g., Walsh v. Fuel Co., 91 Kan. 310 (1914) (upholding damages to the surface owner, from sink holes and depressions caused by coal mining operations, pursuant to surface owner’s right to subjacent support absent express waiver of such right); Audo v. Western Coal & Mining Co., 99 Kan. 454 (1917) (upholding damages under substantially similar facts as Walsh); Commercial Asphalt, Inc. v. Smith, 200 Kan. 362 (1968) (holding sand mining lessee responsible for damages for removal of top soil and enjoining lessee from removal of any top soil beyond that “necessary or incidental” to removal of sand). The most explicit approval of the accommodation doctrine in Kansas case law is found in Barnhardt v. Hugoton Energy Corp. (1995 Kan. App. Unpub. LEXIS 717). The landowner sued for damages that occurred when his pivot irrigation system collided with the oil and gas lessee’s pumping unit. Although the surface owner asked the lessee to install steel ramps under the irrigation system’s wheels to clear the height of the pumping unit, the lessee elected instead to construct earthen ramps, which failed after the first growing season. As a result, the sprinkler hit the pumping unit causing damage to the irrigation system. The lessee’s principal line of defense was that any liability on its part must rest on some explicit breached covenant in the lease. The court of appeals, however, rejected that argument, holding that a lessee has implied duties to the surface owner under an oil and gas lease. The Barnhardt decision also directly cited Getty to support its conclusion that the lessee owed the surface owner a duty with respect to the surface usages, stating “where there is an existing use by the surface owner which would otherwise be precluded or impaired, and where under the established practices of the industry there are alternatives available to the lessee whereby the minerals can be recovered, the rules of reasonable
usage of the surface may require the adoption of an alternative by the lessee.” (quoting Getty, 470 S.W.2d at 622). Although there is no other Kansas decision directly referencing Getty or the accommodation doctrine, Barnhardt comports with the reasoning supporting the published Kansas case law cited above, and it is not a stretch to presume Kansas will expressly adopt the doctrine if given the opportunity. The authors of Williams & Meyers identify a trend since the second half of the 20th Century wherein courts move away from a unidimensional analysis of whether the surface use is “reasonably necessary” for the full enjoyment of the mineral estate, to a multidimensional approach additionally analyzing the mineral developer’s “due regard” for the rights and interests of the surface owner. Williams & Meyers, Vol. 1, § 218.8, p. 256.7–256.13. The analysis under this trend differs from state to state, but whether the mineral owner can make reasonable accommodations to lessen the impact of the mineral development activities on the surface owner’s use is consistently considered. In discussing the emerging multidimensional approach, the authors of Williams & Meyers specifically cited the Norton Farms decision, supra, as an indication Kansas may head toward the multidimensional “reasonable accommodation” doctrine. Williams & Meyers, Vol. 1, § 218.8, p. 256.10. As it stands, Kansas courts have neither recognized the mineral estate as dominant nor rejected the accommodation doctrine, and the tea leaves tend to forecast the accommodation doctrine is the preferred avenue. So, returning once more to our football analogy, the referee may be still under the hood, but the replays sure look like the sideline accommodated the receiver’s two feet. Come for the doctrine analysis, stay for the wit. About the Author
Reed W. Ripley is an associate at Morris, Laing, Evans, Brock & Kennedy in Wichita and practices primarily in real estate law, oil and gas law, and corporate law. Mr. Ripley graduated from Oklahoma State University and the University of Kansas School of Law where he served as Articles Editor for the Kansas Journal of Law & Public Policy.
Oil, Gas, & Mineral Law
Oil and Gas/Minerals PSA Nuances: Have You Missed Anything? by Nate Jiwanlal• Trans Pacific Oil Corporation
n 2019, there were 2,113 licensed oil and gas operators in the state of Kansas.1 Of the top 50 oil producers in the state, only 14 accounted for more than 1% of the state’s total cumulative production and none exceeded more than 9% of total cumulative production.2 The reality of the Kansas oil patch is that numerous small operators account for the approximately 35.3 million barrels of oil and 185 billion cubic feet of natural gas produced each year.3 These operators consistently engage in transactions related to their oil and gas leases. Operators often make “handshake deals” or use a standard form purchase and sale agreement to memorialize the terms of these transactions. While this strategy may result in deals getting done quickly and at little cost, it can result in post-closing issues and disputes that could have easily been addressed in the purchase and sale agreement (PSA). Oil in stock calculations are commonly overlooked in oil and gas transactions. Nevertheless, oil currently in storage on a lease can account for significant value being transferred to the buyer or retained by the seller. When a PSA does not contain terms addressing oil in stock, ownership of that oil will be transferred to the buyer on the effective date along with the other personal property associated with the lease. Sellers that wish to retain ownership of the oil in stock have two ways to effectively address this in the PSA. First, the seller can include terms that increase the purchase price to account for oil in stock based on a price agreed to by the parties. Secondly, the seller can ensure any oil in stock is sold prior to the effective date. All oil and gas leases and wells producing or capable of producing oil or gas, together with all casing, tubing, and other associated equipment, are subject to ad valorem taxes.4 The first half of these taxes for the current calendar year are due by December 20 of that year. The second half are due May 10 of the following year. Despite this, many operators execute PSA’s without accounting for which party will be liable for these taxes. Accordingly, a buyer who purchases a lease with a November effective date may be accountable for half of the ad valorem taxes despite owning the property for two months of the calendar year. To address this, PSAs should specifically state which party will be responsible for the payment of ad valorem taxes. The most equitable option is to pro-rate them based on the duration of time each party owned the lease during the calendar year of the transfer. To avoid having to bill the seller for its share of the ad valorem taxes after closing, parties can estimate the ad valorem taxes based on the previous year’s assessment and adjust the purchase price at closing. The PSA memorializes the terms of the transaction but does not convey title to the assets. Title is conveyed through the assignment of oil and gas lease which is executed by the seller. Nonetheless, parties often ignore the assignment when drafting
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their PSA. This allows sellers to take liberties with the language of the assignment without the buyer’s input and adds an additional opportunity for dispute after the PSA is executed. The most effective way of addressing this is to incorporate the specific form of the assignment into the PSA as an exhibit. PSAs are generally executed prior to the buyer conducting title due diligence. Further, operators frequently execute PSAs on behalf of working interest owners who have not yet agreed to the terms and have not yet executed assignments conveying their interest to the operator. Accordingly, the working interest and net revenue interests that are actually being conveyed at closing are not equal to the working interest and net revenue interest on which the purchase price provided for in the PSA was based. To account for this, all PSAs should include proportionate reduction language that allows for the purchase price to be adjusted at closing in the event the working interest or net revenue interest being delivered is less than the PSA contemplates. If the seller does not wish to consummate the transaction due to a lower working interest or net revenue interest, this should be an express condition to closing in the PSA. K.A.R. 82-3-136 requires operators to file a form T-1 “Request for Change of Operator” within 30 days of a transfer of operator responsibility. Violation of this regulation is punishable by a fine of up to $1,000 for the first violation.5 Beyond the penalty for late filing, if the seller is still the operator of record when a different violation occurs, it will be responsible for any penalties from the perspective of the Kansas Corporation Commission. To avoid this potential liability, the seller should ensure the PSA contains language requiring that the form T-1 be delivered and executed by both parties at closing. Given that the T-1 is a form that must be executed using the online KOLAR system, the parties are required to submit the form via electronic signature. Nonetheless, it should occur at closing. When parties sell oil and gas leases, they often include the geophysical seismic data associated with those leases. However, buyers often fail to include terms restricting the seller’s ability to use or disclose that data after closing. Absent non-compete and non-disclosure provisions relating to this data, the seller can continue to utilize the data in a manner that conflicts directly with the buyer’s interests. Even in situations when seismic data is not being transferred, the buyer should consider including non-compete terms if it wishes to prevent the seller from actively engaging in exploration and production activities in the vicinity of the leases being sold. Although transactions for oil and gas leases may appear simple on the surface, there are numerous nuances that can cause issues if they go unaddressed. The buyers and sellers of interests in oil and gas leases should ensure PSAs contain terms that address
these nuances. Ultimately, additional time spent negotiating and enumerating terms in the PSA on the front end can save both parties time, and potentially money, after closing. 1. https://www.kioga.org/communications/brochures/2016-facts-figures/view 2. https://chasm.kgs.ku.edu/ords/oil.ogop5.TopOil 3. https://www.kioga.org/communications/brochures/2016-facts-figures/view 4. K.S.A. 79-329 5. K.A.R. 82-3-136
About the Author Nate Jiwanlal serves as Legal Counsel and Land Manager at Trans Pacific Oil Corporation, a Kansas based independent exploration and production company. Mr. Jiwanlal advises the company on all land and legal matters. He graduated from Claremont McKenna College and Washburn University School of Law with a Certificate of Concentration in Oil and Gas Law. He currently serves as President of the Wichita Association of Petroleum Landmen.
Hoedel v. Kirk: KCC Commissioners Entitled to Immunity by Lauren Wright • Klenda Austerman LLC
n August of 2019, the American Civil Liberties Union (“ACLU”) filed a lawsuit against former KCC deputy general counsel, Dustin Kirk (“Kirk”), in his individual capacity. The lawsuit was filed on behalf of two local environmental activists, Cindy Hoedel and Scott Yeargain. Hoedel and Yeargain were active participants in groups of protestors that opposed oil and gas activities across Kansas. The lawsuit alleged that Hoedel and Yeargain’s First and Fourteenth Amendment rights were violated when Kirk reported them to the Attorney General’s office for the unauthorized practice of law. Hoedel and Yeargain claimed that Kirk made the report in retaliation for their continued protest of injection well applications, and to silence their activist efforts. Hoedel and Yeargain sought punitive and compensatory damages for emotional distress and loss of income they claim resulted from Kirk’s allegations and the subsequent AG’s office investigation. The ACLU’s lawsuit centered on Kirk as there was no evidence that other KCC staff or Commissioners were involved in the complaint Kirk made to the AG. The KCC continuously took the position that it was unaware of Kirk’s complaint to the AG, having only discovered it following his departure from the agency. In April 2020, the ACLU filed an amended complaint naming current and former Commissioners of the KCC, Susan Duffy, Dwight Keen, Shari Feist Albrecht, and Jay Emler as defendants in their professional capacity and/or individual capacity. The amended complaint followed Kirk’s deposition where he testified that he met with each KCC commissioner prior to forwarding his concerns to the AG’s office. In response to the amended complaint, defendants Duffy, Keen, Albrecht, and Emler filed a motion to dismiss. The motion to dismiss argued that Defendants Keen, Albrecht, and Emler were entitled to absolute or qualified immunity on all individual capacity claims. Duffy, Keen, and Albrecht were also
sued in their official capacity and argued that plaintiffs were not entitled to any prospective injunctive relief as permitted under the Eleventh Amendment. On August 20, 2020, the court granted the motion to dismiss all claims against the current and former Commissioners without prejudice, finding that Defendants Keen, Albrecht, and Emler were in fact entitled to absolute immunity, or in the alternative, qualified immunity on the individual capacity claims. The court also found that the plaintiffs lacked standing as to the official capacity claims which were dismissed for failure to state a claim upon which relief could be granted. On September 7, 2020, a stipulated dismissal was filed dismissing all remaining claims with prejudice. Hoedel v. Kirk, ---F. Supp. 3d---, WL 4904051 (Case No. 2:19-cv-02443-HLT-JPO; D. Kan., August 8, 2020).
About the Author Lauren N. Wright has been associate at Klenda Austerman LLC since July 2019, where she practices primarily in commercial litigation, bankruptcy, and oil and gas law. Prior to working at Klenda Austerman LLC, Lauren started her legal career as Litigation Counsel for the Conservation Division of the Kansas Corporation Commission (KCC). This role included representing Conservation Division Staff in all matters before the KCC and acting as a state regulator of the Kansas oil and gas industry.
Oil, Gas, & Mineral Law
Obtaining Water Supplies for Oil and Gas Operations in Kansas1 by Burke W. Griggs • Washburn University School of Law
btaining real property rights in the use of water or in the water supply itself can present a number of difficulties and complications for the oil and gas producer. Producers are substantially different water users from irrigators, and have substantially different needs. The geophysical aspects of water usage for oil and gas production are also different, especially regarding hydraulic fracturing (fracking). Irrigation applies very large amounts of water to the surface, and generates return flows to the surface and recharge to groundwater. Fracking injects comparatively less water into deep hydrocarbon formations, but generates substantial amounts of produced water back to the surface, water that must be disposed of by injection into deep formations, recycled for subsequent use, or released, post-treatment, into surface waters. Because of these distinct operational differences in the use of water, courts wrestle with how to reconcile such usage with legal regimes that are largely predicated upon agricultural usage. These exceptional aspects of water use, and the much greater economic value of water used for oil and gas production compared to irrigation, have led state legislatures and state agencies to establish distinct permitting regimes for water usage related to oil and gas production. This article provides an overview of Kansas’s permitting regime for that usage, which substantially departs from the standard laws and doctrinal rules that apply to other uses of water in the state. Kansas places the jurisdiction over all of the water supplies of the state within one agency, the Division of Water Resources (DWR) of the Kansas Department of Agriculture, whose chief engineer regulates water usage pursuant to the doctrine of prior appropriation. Kansas’s permitting regime is generally similar to that of Wyoming, New Mexico, and other “pure” prior appropriation states in the West that place the administration and adjudication of water resources within a state agency (rather than placing adjudication matters within a water court, as Colorado does).2
The basic permitting rule and its exceptions
The most important rule to follow in Kansas is this: an oil and gas producer must obtain a permit to use water for its operations. It is illegal to appropriate water or threaten to appropriate water in Kansas without a valid water right or other water use permit issued by the chief engineer of DWR.3 Despite lease language to the contrary, an oil and gas lessee does not have an implied right to use water found on the premises of the lease. Therefore, an oil and gas producer will need a state permit for the water required for its lease operations. Oil and gas operators who assume otherwise, perhaps because they originate from Texas, can place their operations at significant peril if they do not heed the permit requirement. Appropriating water or threatening to
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appropriate water without a permit is a Class C misdemeanor,4 and every day a violation occurs after notice is given by the chief engineer, constitutes a separate offense.5 Civil penalties include fines, which may not be sufficient to deter an unscrupulous oil and gas operator.6 More importantly, the chief engineer has clear statutory authority to shut down unpermitted uses of water, including making reductions in permissible water use that would otherwise be allowed when a permit is eventually obtained. The opportunity cost of such an unscrupulous violation could greatly exceed the fines allowable as civil penalties. There are four exceptions to this permitting rule, which vary in their applicability to oil and gas producers. The first exception is that of domestic use.7 This exception is of no use for oil and gas producers in Kansas, because oil and gas production is not a domestic use.8 Thus, an oil and gas producer who obtains a domestic right must first obtain DWR approval to change that right from domestic to industrial use, which, as set forth above, requires a permit.9 The second exception applies to annual diversions and beneficial use of less than 15 acre-feet of surface water annually, impounded in any reservoir smaller than 15 acre-feet.10 Because this exception is not limited to domestic use, and oil and gas production is a recognized beneficial use of water, it may be an attractive option for smaller producers, provided they can obtain the water from a willing seller. However, there are potential legal uncertainties surrounding the use of water from ponds that are part of a watershed district, not to mention dependability issues with surface water supplies in times of drought. The third legal exception concerns salt water. The use of water whose composition exceeds 5,000 mg/l in chlorides does not require a permit.11 Kansas has plentiful saline groundwater supplies, especially in the Dakota Aquifer, and Kansas law has a clear statutory and regulatory preference for the use of salt water in oil and gas operations. As the fracking industry increases its ability to employ salt water in fracking operations, this exception has become a more popular option, especially in the Niobrara Formation of northwest Kansas. The final exception is for water withdrawn and used under a contract pursuant to the Kansas State Water Plan Storage Act.12 Water supplies under this exception generally relate to federal reservoirs. Because the use of water for oil and gas production is a recognized beneficial use (industrial use), and because most reservoirs in Kansas are limited to municipal and industrial uses, oil and gas operators could employ this exception.13 (This is in contrast to states such as North Dakota, where federal reservoirs are generally limited to flood-control, recreation, and navigation purposes.) Contract water obtained under this exception offers
the advantages of water-supply dependability and transactional efficiency: one contract could serve multiple well sites and leases. However, contract water is generally more expensive than obtaining water under the permits described in section C below.
Water rights in Kansas are real property rights, appurtenant to the land where the water is used.14 Where unappropriated water is available (an increasingly rare situation in Kansas), supplies can be obtained by application to DWR.15 More frequently, they are obtained by purchase, lease, or other conveyance. Because most Kansas water rights are irrigation rights, the oil and gas operator who obtains a water right will need to obtain DWR approval to change the right from irrigation to industrial use.16 Water rights can also be divided in Kansas, subject to the approval of the chief engineer.17 For example, an irrigator who owns a water right of 400 acre-feet can lease or sell 100 acre-feet of that right to an oil and gas operator; the operator, in addition to obtaining the water, would also obtain the same priority of the pre-divided water right.18 Before putting the divided water right to beneficial use for oil and gas operations, however, the operator will still need to obtain the requisite approval for the change from irrigation to industrial use, which engages consumptive use limitations.19 Water rights have important advantages. They are permanent and do not expire, as water permits do. Given the size of a typical irrigation water right in Kansas from which an oil and gas water right would be derived, such a right would provide plentiful water supplies. And senior rights enjoy the protections of priority during times of drought and groundwater depletion. However, water rights have not proven to be a good fit with most oil and gas operations in Kansas. Obtaining a water right can be cumbersome. New water rights applications and applications to change existing rights can take months and even years to complete, raising obvious timing issues for an operator (especially an assignee or farmee) who is facing the end of the primary term of an oil and gas lease. Alternatives to water rights—temporary water permits—have generally served to meet the needs of most oil and gas producers in Kansas. Yet this may be changing, due to the longer-term and higher-volume needs for sustained fracking operations.
Water permits that are not water rights
Largely (but not exclusively) in response to the needs of the oil and gas industry in Kansas, the legislature and DWR have provided permitting alternatives to water rights in the form of water permits. Kansas recognizes four different types of water permits. The first type is a temporary permit.20 It entitles the permit holder to use 4 million gallons (12.28 acre-feet) of water, and lasts for a term not to exceed six months.21 Due to the relatively small amount of water permitted—at least compared to an irrigation right—term permits are not subject to safe yield requirements, but a term permit cannot impair existing water rights. Temporary permits are limited to one application per project, one place of use, and one point of diversion, and they are non-transferable.22 Although they do not qualify as water rights, they do receive a priority date and its attendant protections.23
Temporary permits enjoy the advantage of a fast processing time, usually within a month or so, because they are usually processed through DWR’s field offices. However, their disadvantages have become apparent with the advent of fracking: they are limited to one use, short in duration (six months), and non-transferable, which means an assignee or farmee will not be able to use the temporary permit of the assignor/farmor. The second type of water permit is the term permit, which is essentially a temporary permit enlarged in quantity and extended in duration.24 Term permits can grant more than four million gallons of water as long as the quantity is deemed to be reasonable, and term permits are not subject to safe yield requirements (although they cannot impair existing users).25 A term permit can last as long as five years (rather than the six-month limit for temporary permits).26 There are two exceptions to this temporal limitation. First, if the applicant can show that water usage under the term permit does not exceed safe yield, that it will not impair existing rights, and that the applicant has good cause, the holder of a term permit can obtain an extension beyond five years.27 Second, if the water to be used under a term permit contains more than 5,000 mg/l of chlorides, then the initial term can extend to as long as ten years, and may be extended further to twenty years.28 Term permits allow more water usage and for a longer duration than temporary permits. But due to their larger size and commensurate potential to impair existing water rights, applications for term permits are processed at DWR’s central office, and generally require up to six to eight months to process—a much longer period than that for temporary permits. The third type of water permit is a basin term permit, a sub-type of the term permit. Basin term permits are limited to surface water supplies within a specific drainage basin. They allow the use of much larger quantities of water—as much as 100 acre-feet annually—and are generally intended for oil and gas drilling, as well as for construction projects.29 Due to the scarcity of surface water supplies in western and south-central Kansas, these permits have proven to be of limited utility for most oil and gas producers. The final type of water permit is the limited transfer permit, a new type enacted in 2012 and modeled on similar permits in Wyoming.30 It contains the same quantitative limits as a temporary permit (four million gallons), but unlike a temporary permit, which stands alone, a limited transfer permit is carved out of the water supply of an existing water right, called the “base water right.”31 The duration of a limited transfer permit is limited to a single calendar year—longer than the six months’ maximum for a temporary permit, but shorter than that for a term permit.32 The chief advantage of a limited transfer permit is water availability: because the water for the permit derives from the base water right, it should present few obstacles concerning safe yield or the impairment of existing rights—provided that there is no increase in the consumptive use enabled by the permit.33 Thus, an oil and gas operator seeking to obtain a limited transfer permit from the holder of a base irrigation right should factor in the increase in consumptive use from irrigation use to the industrial use of oil and gas production.
Oil, Gas, & Mineral Law
1. This article is excerpted from Burke W. Griggs, Water: Practical Challenges and Legal Rights to Acquire and Recycle Water for Hydraulic Fracturing, 56 ROCKY MTN. MIN. L. FDN. J. 69-109 (2019). 2. For an older survey of the subject, see Eva N. Neufeld, John C. Peck & Adam C. Dees, “Water Allocation Law and the Oil and Gas Industry in Kansas: An Update to the 1981 Neufeld Article,” Journal of the Kansas Bar Ass’n (Sept. 2012). 3. Kan. Stat. Ann. § 82a-728. 4. Id. § 82a-728(b)(1). 5. Id. § 82a-727(b)(2). 6. Id. § 82a-737. 7. Id. §§ 82a-705, -728. 8. Id. § 82a-701(c). 9. Id. § 82a-708b. 10. Id. § 82a-728. An acre foot is equivalent to 325,851 gallons. 11. Id. 12. Id. § 82a-1313. 13. Kan. Admin. Regs. § 5-5-1(qq). 14. Kan. Stat. Ann. § 82a-701(g). 15. Id. § 82a-711. 16. Id. § 82a-708b. 17. Id. § 82a-742. 18. Id. 19. Kan. Stat. Ann. § 82a-708b; Kan. Admin. Regs. §§ 5-5-1 et seq.
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20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.
Id. § 82a-727. Kan. Admin. Regs. §§ 5-9-3, -7; Kan. Stat. Ann. § 82a-728. Kan. Admin. Regs. §§ 5-9-4, -5, -8. Id. § 5-9-2. Kan. Stat. Ann. § 82a-708c. Kan. Admin. Regs. § 5-9-3. Id. § 5-9-1b(a). Id. § 5-9-1(c)–(d). Id. § 5-9-1b(b)(4). Id. § 5-1-1(M)(1). Kan. Stat. Ann. § 82a-743. Id. § 82a-743(a)–(b). Id. § 82a-743(a). Id. § 82a-743(c).
About the Author Burke W. Griggs is an associate professor of law at the Washburn University School of Law, where he teaches property, natural resources law, and legal history.
The Kansas Court of Appeals interprets and applies the Kansas Supreme Court Decision in Fawcett V. Oil Producers, Inc of Kansas, 302 Kan. 350, 352, P.3d 1032 (2015) by David E. Bengtson & Matthew J. Salzman • Stinson LLP, Wichita
n 2020, the Court of Appeals issued two opinions interpreting and applying the Supreme Court’s decision in Fawcett v. Oil Producers, Inc. of Kansas, 302 Kan. 350, 352 P.3d 1032 (2015)(“Fawcett I”). To set the stage, in Fawcett I the Supreme Court held that where a lease provides for payment of royalties based on a share of proceeds from the sale of gas at the well and the lessee sells gas at the well, the lessee has satisfied its implied duty to market the gas and its royalty obligations do not require the lessee to bear any post-sale costs. In other words, the implied duty to market the gas is satisfied “when the operator delivers the gas to the purchaser in a condition acceptable to the purchaser in a good faith transaction.” Id. 302 Kan. at 365. The lessor relied on the marketable-condition rule, which generally requires a lessee to bear all costs to produce marketable hydrocarbons, and argued that the implied duty to market required the lessee to bear all of the costs incurred to get the gas to the interstate pipeline. The Court, however, rejected that argument and refused to stretch the marketable condition rule that far. The Court of Appeals applied this holding in Cooper Clark Foundation v. OXY USA Inc., No. 120,371, 2020 WL 3481429 (Kan. Ct. App. June 26, 2020), pet. review denied Nov. 24, 2020 (“Cooper Clark”). Here, the Court of Appeals said that it rejected lessor’s and lessee’s reading of Fawcett I, but then the Court implicitly adopted lessor’s reading of that case. Specifically, the Court said it was creating “a workable definition of marketability” for which neither party advocated. The Court’s definition equates the “marketable condition” of the gas with how the lessee or operator unilaterally chooses to market it, thereby adopting a so-called “market-driven definition.” Under this approach, which does not depend on (or even consider) the language of the royalty clause in the lease, the lessee’s contractual obligations apparently require it to bear all expenses incurred before the gas is actually sold or marketed because they all occur upstream of the “intended market” for those molecules of the gas stream—meaning that the gas is not marketable until it is actually marketed—the very proposition the Court earlier in its opinion rejected as being contrary to Kansas Supreme Court precedent, including but not limited to Fawcett I. Cooper Clark was a royalty owner class action in which the class claimed that OXY had underpaid royalties by improperly deducting post-production expenses. The class represented 190 gas wells and 245 oil and gas leases. The leases contained three types of royalty clauses, namely, proceeds, market value and Waechter clauses, all of which called for a valuation “at the well.” Small amounts of the gas produced from the wells was delivered to and used to heat homes (“House Gas”), sold to run irrigation
pumps (“Irrigation Gas”), and used as fuel for compressors and pumps (“Field Gas”). The class gas was delivered to and processed at Amoco’s Jayhawk Plant. The component products, natural gas liquids, helium and residue gas, were sold by OXY in the interstate market. Amoco charged a processing fee for the residue gas and retained 25% of the liquids and 50% of the helium as in-kind processing fees. OXY received the residue gas and its share of the liquids and helium at the tailgate of the plant. OXY sold the residue gas to an affiliate, and paid royalties based on the downstream index price minus the processing fee. Royalties on the liquids and helium were paid based on the proceeds from the sale of the net liquids delivered to OXY. The class claimed that it was entitled to royalties on the value of the liquids and helium retained by Amoco as a processing fee, on the fee that OXY paid to Amoco to process the gas, and on the difference between the index price and the price paid by OXY’s affiliate. The class definition expressly excluded any claims for royalties on House Gas, Irrigation Gas and Field Gas. The so-called “Class Gas” was only that portion of the gas from each well that was sold at the tailgate of the Jayhawk Plant. The district court granted plaintiff’s motion to certify the case as a class action and OXY appealed. On appeal, one of OXY’s claims was that the district court’s certification decision was based on a misreading of Fawcett I. Specifically, OXY argued that Class Gas was in a marketable condition if it was usable at the well for any purpose, such as for House Gas, Irrigation Gas or Field Gas. Plaintiff, on the other hand, argued that the gas was marketable only when it was actually marketed or sold in a good faith transaction. The Court of Appeals rejected both parties reading of Fawcett I and created its own. The Court found that Fawcett I “establishes a simple principle: when parties define a market for gas through their conduct, that gas is marketable when it is in a condition acceptable for that intended market.” 469 P.3d at 1276. The Court reasoned that “[t]he concept of marketability is tied to the [actual] market for the gas” and “[w]hen the parties have agreed that the gas will be sold in the interstate market, the gas company cannot deduct expenses required to make the gas marketable for that interstate market.” Id. The Court of Appeals created what it referred to as a “market-driven definition of marketability.” Id. at 1277. In applying this definition of marketability to the facts of that case, the Court of Appeals stated: Oxy didn’t sell any Class Gas at the well; it sold all Class Gas downstream in the interstate market.
Oil, Gas, & Mineral Law
Until Class Gas was processed, it fell below FERC’s minimum-quality standards for transporting gas in interstate pipelines.1 So Class Gas wasn’t in a condition suitable for its intended market until [the processing plant] delivered the processed components (now up to FERC’s standards) back to Oxy at the Plant. All royalty deductions from [sic] costs incurred before that point violated the marketable-condition rule; deductions after that point did not. Id. Applying this “point of sale” focused analysis to the facts of the case, the Court of Appeals found that under Fawcett I, OXY could not deduct any of the monetary or in-kind fees charged for processing that gas prior to the sale of the residue gas, natural gas liquids and helium in the “chosen” interstate market. While the Court of Appeals’ analysis and application of Fawcett I was made in the context of ruling on a motion for class certification, by addressing the underlying liability issues in a manner that equates and eliminates the difference between gas that is “marketable” and gas that has been “marketed,” the Court of Appeals departs from the rules announced in Fawcett I as well as prior Kansas Supreme Court opinions. The Court of Appeals also ignored the other molecules in the gas that was produced, i.e., the House Gas, Irrigation Gas and Field Gas by accepting without question Plaintiff’s class definition. In other words, under the standard in Cooper Clark some portions of the gas stream are marketable at the well (the House Gas, Irrigation Gas and Field Gas), while other physically indistinguishable portions of that exact same gas stream are not. Further, despite the origin of this analysis being a lease contract and the parties’ contractual intent embodied in the chosen royalty clause language, under the standard in Cooper Clark those contractual obligations can change with time depending solely on how the lessee or operator may choose in any given month to market the gas. Presumably, if OXY chose to change the way it marketed the gas and adopted a marketing model akin to how the operator in Fawcett I marketed the gas in that case, then under the standard in Cooper Clark, all of the unmarketable gas at the wellhead would suddenly become marketable gas at the wellhead, despite (i) there being no change in the terms of the lease; (ii) there being no actual change to the physical condition of the gas; and (iii) the lessor having no involvement in the marketing of the gas (much less being part of or even needing to consent to any gas marketing agreement). In Fawcett I, the Supreme Court held that where the lease provides that royalty will be valued at the well, and the gas is sold at the well in a good faith transaction, the royalty owner will share in post-sale expenses. 352 P.3d at 1042. The Supreme Court rejected the notion that gas can only be in a marketable condition when it reaches the interstate pipeline market. 352 P.3d at 1039. In other words, the royalty “valuation point” is determined, in the first instance, by the language of the oil and gas lease. And, gas can be marketable before it is marketed which had been established in Sternberger v. Marathon Oil Co., 257
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Kan. 315, 894 P.2d 788 (1995). The Cooper Clark opinion does not address those fundamental principles. Instead, the Court of Appeals failed to address the language of the royalty clauses in the leases which is the only agreement defining the lessee’s royalty obligation, and unexplainably relied upon a fictional agreement between OXY and the lessor to sell the gas in the interstate market. The Supreme Court denied OXY’s petition for review in Cooper Clark and unless and until the cases comes back up to the appellate courts, the Court of Appeals decision remains and will likely create confusion regarding the interpretation and application of Fawcett I as well as the earlier Supreme Court royalty cases. However, technically, it does not change the precedent of Fawcett I and Sternberger. The other recent decision by the Court of Appeals was Fawcett v. Oil Producers, Inc. of Kansas, No. 120,611, 2020 WL 5849377 (Kan. Ct. App. October 2, 2020) (“Fawcett II”). This is the second round of the dispute in Fawcett I, after that case was remanded to the district court and returned to the Court of Appeals. In the first round of this legal fight, the Supreme Court held that where the lessee sells gas at the wellhead under a proceeds-type royalty clause providing for payment of royalties based on sales at the well, the lessee satisfied its implied duty to market the gas and that its royalty obligations do not require the lessee-operator to bear any post-sale costs. Fawcett v. Oil Producers, Inc. of Kansas, 302 Kan. 350, 365, 352 P.3d 1032 (2015)(“when a lease provides for royalties based on a share of proceeds from the sale of gas at the well, and the gas is sold at the well, the operator’s duty to bear the expense of making the gas marketable does not, as a matter of law, extend beyond that geographical point to post-sale expenses.”). The Supreme Court reversed the District Court’s grant of summary judgment to the class on that issue and remanded the case to the District Court for further proceedings consistent with that ruling. On remand, in response to the Supreme Court’s decision, plaintiffs sought to amend their claim to allege that OPIK had violated its duty of good faith and fair dealing by “manufacturing” the sale of gas at the wellhead in order to shift the post-production expenses to the royalty owners. The royalty owners argued that the Supreme Court did not decide that the gas was marketable at the well, that the duty to market requires an arm’s length sale in an open market with many willing buyers and many willing sellers, and that the gas was not marketable until it reached the interstate pipeline. The District Court denied plaintiffs’ motion to amend, finding that their new claim conflicted with the Supreme Court’s conclusion that the wellhead sale was proper. The Court of Appeals’ opinion in Fawcett II focuses on the application of the “mandate rule” to the denial of plaintiffs’ motion to amend. The mandate rule provides that “[w]hen an appellate court has decided a particular issue by explicit language or by necessary implication, the district court [on remand] is
foreclosed from considering the issue.” Id. at *5. On remand, the district court “must implement both the letter and spirit of the mandate.” State v. Collier, 263 Kan. 629, Syl. ¶ 4, 952 P.2d 1326 (1998). To determine whether an issue has been decided by “necessary implication,” the Court considers three factors: (A) whether the issue necessarily had to have been considered in the prior appeal to reach a decision; (B) whether consideration of the issue on remand would abrogate the appellate court’s decision; or (C) whether the issue is so closely related to an issue expressly resolved by the appellate court that no additional consideration is necessary. Id. (citing Edwards v. State, 31 Kan.App.2d 778, Syl. ¶ 4, 73 P.3d 772 (2003). In Fawcett II, the Court of Appeals found that “[t]he Class’ contention -- that a good faith sale of gas cannot occur at the wellhead -- is foreclosed by the Supreme Court’s mandate by necessary implication.” Id. at *7. That Court went on to state: The Class contends that good faith means the operator cannot ever sell the gas at the wellhead. Fawcett shows us that, in Kansas, a good-faith sale to a wellhead buyer of gas that then provides midstream services to make the gas ready for our interstate pipelines must be possible, or Fawcett would not have been decided that way it was. To rule for the Class on this question would abrogate the Supreme Court’s decision. Id. In Fawcett I, the Supreme Court observed that plaintiff had not challenged OPIK’s good faith or the prudence of its decision to sell that gas at the well. For that reason, the Court of Appeals found that the mandate rule precluded plaintiff from challenging OPIK’s good faith or the prudence of its decision to sell the gas at the well on remand and, in essence, avoiding the Supreme Court’s ruling – i.e., when it held that “OPIK satisfied its duty to market the gas when the gas was sold at the wellhead.” 302 Kan. at 365. The Court of Appeals found that the question of whether a good-faith sale can ever occur at the wellhead “necessarily had to have been considered and relied upon by the Supreme Court because of the stipulation made by the Class” and “consideration of the issue of good faith on remand by simply calling it an issue of fact would abrogate the Supreme Court’s decision.” Fawcett II also addressed two other issues relating to the plaintiffs’ claim for royalties on “conservations fees” that had been deducted by OPIK prior to paying royalties. OPIK had admitted liability on that claim based on the decision in Hockett v. The Trees Oil Company, 292 Kan. 213, Syl. ¶ 4, 251 P.3d 65 (2011). However, the parties disagreed on the rate of interest on the underpaid royalties and whether OPIK was equitably estopped from raising the statute of limitations as a defense to that claim. On the interest rate issue, the class argued that the rate of interest was governed by the general prejudgment interest statute, K.S.A. § 16-201 (10% simple interest), and OPIK argued that the interest rate was governed by the rate for interest on unpaid royalties, K.S.A. § 55-1614, et seq. (1.5% more than the fed rate
of interest). The Court of Appeals held that the more specific interest on unpaid royalties statute, K.S.A. § 55-1615, applied to the underpayment of royalties. This conclusion is consistent with two federal courts that had previously applied Kansas law to this issue. See Hitch Enterprises, Inc. v. Oxy USA Inc., 2019 WL 3202257 (D. Kan. 2019)(unpublished opinion); Frankhauser v. XTO Energy, Inc., 2012 WL 4815538 (W.D. Okla. 2012) (unpublished opinion). On the statute of limitations issue, the Court of Appeals affirmed the district court’s decision that OPIK was equitably estopped from relying on the statute of limitations defense. On its check stubs, OPIK had lumped the conservation fee and severance taxes under the designation of “State Production Tax,” and while severance taxes are deductible from royalties, the conservation fee was not. The Court of Appeals agreed with the district court that OPIK had misrepresented the conservation fee on the check stubs as a tax and, as a result, was estopped from relying on the statute of limitations defense as to those claims. Cross petitions for review have been filed in Fawcett II and, as of this date, the Supreme Court has not issued its decision on those motions.
About the Authors
David Bengston has extensive experience representing oil and gas companies in nearly all aspects of their business, including litigation, transactional matters, title opinions, and regulatory issues. His litigation experience ranges from the defense of statewide royalty owner class action lawsuits to routine lawsuits over operational and contractual matters. His regulatory experience ranges from complex multi-party field rules hearings to routine regulatory filings and applications. He also routinely counsels oil and gas clients on the application of state regulatory law and case law to their operations and activities. He also has extensive experience in preparing drilling, division order, and acquisition title opinions. Matt Salzman is a partner at Stinson LLP in the Kansas City office. He represents E&P, midstream, pipeline, and refining companies in a wide variety of litigated matters, including successfully defending against numerous royalty class action claims. Matt has advised clients on royalty matters in Kansas, Texas, Oklahoma, Colorado, Arkansas, New Mexico, Wyoming, North Dakota, and Montana in both state and federal courts, including victoriously taking a royalty class action to the United States Supreme Court. He also frequently writes and presents on royalty issues. 1. Presumably this refers to the gas quality standards in the FERC approved tariff for the interstate pipeline into which the gas was delivered, although that is not clear.
Oil, Gas, & Mineral Law
Recent Kansas Cases Highlight the Importance of Meticulous Drafting Regarding Minerals By Jessica Freeman, Erik Hageman & Caroline Kordes • Students at Washburn University School of Law, Topeka
nclear drafting can create expensive litigation regarding mineral interests even outside conveyance and lease documents. In Stone v. Stone, 448 P.3d 500 (Kan. Ct. App. 2019), ambiguity in a divorce settlement left the parties at the mercy of the Kansas Court of Appeals’ interpretation of their intentions. There, Billy and Phyllis Stone were bequeathed several mineral interests when Billy’s father, F.A. Stone, died. One year later, Billy filed for divorce. Billy and Phyllis, working through their attorneys, negotiated and finalized a property settlement agreement. The problem arose from a contradiction between two paragraphs in the settlement agreement describing the mineral interests Billy and Phyllis were to receive as part of the divorce. The paragraph detailing Phyllis’ interest read: 1. i. The Respondent [Phyllis] will retain all of her interest in the Estate of F.A. Stone, District Court Finney County, Case No. 91-P-48. This was followed by a paragraph specifying what Billy would retain: 2. a. All of the remaining personal and real property of the parties including, but not limited to, . . . all of the Petitioner’s [Billy’s] interest in the Estate of F.A. Stone, District Court Finney County, Case No. 91-P-48; all minerals including, but not limited to, oil and gas and production thereof; and all other realty and personality of every type and character whatsoever and not specifically set over to the Respondent [Phyllis] in the above paragraph. [Emphasis added] No mention of the minerals appeared anywhere else in the settlement agreement. Billy asserted that the specific language describing his “mineral interest” controlled over the preceding broad provision describing Phyllis’ interest. The district court disagreed, holding that when the document was read in full, the extent of either party’s interest in Billy’s father’s estate was unclear. Therefore, the court turned to parole and extrinsic evidence to resolve the ambiguity. The court examined Billy’s father’s estate documents, multiple drafts of the settlement agreement, and the attorney communications related to them. Additionally, Phyllis’ divorce attorney provided an affidavit stating that the clear intent of Phyllis and Billy was to allow Phyllis to retain her undivided one-half interest in all of the Finney County property she inherited from Billy’s father,
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including the mineral interests. The Court of Appeals affirmed the district court’s grant of summary judgment in favor of Phyllis. To help avoid ambiguities such as these, options are available to add clarification. For example, had the Stones used specific language to describe and designate ownership of the mineral interests, the settlement agreement would have helped resolve whether Phyllis kept her fractional mineral interest. Furthermore, specific language in the settlement agreement controls the general provisions and, therefore, would have helped amend or modify any interests that Phyllis may have inherited. Smith v. Russ, 184 Kan. 773,779, 339 P.2d 286 (Kan. 1959); Exchange State Bank v. Kansas Bankers Surety Co., 39 Kan. App. 2d 232, 240-41, 177 P.3d 1289 (Kan. Ct. App. 2008); Colburn v. Parker & Parsley Dev. Co., 17 Kan. App. 2d 638, 649, 842 P.2d 321 (Kan. Ct. App. 1992). When drafting the settlement agreement, Billy and Phyllis could have used a separate provision which described and divided any mineral interest held by the parties. With this addition, the settlement agreement could have been determined as a complete writing since, upon reading all the provisions together, the settlement agreement would manifest the parties’ intention. Thus, by employing specific language in another provision, the settlement agreement would have resolved the issue of whether Phyllis retained all, or any, of her interest. Another recent Kansas Court of Appeal’s decision demonstrates the importance of careful conveyance drafting. In Cross Bar Land Company, LLC, v. Bow, 441 P.3d 1085 (Kan. Ct. App. 2019) (unpublished) the Court held that deed language excepting “easements and restrictions of record” did not reserve mineral interests. The problem arose in 1995 when two separate warranty deeds conveyed two tracts of land in Greenwood County. The deeds contained the following common language: “EXCEPT AND SUBJECT TO: Easements and Restrictions of Record.” Grantors took the position that the language reserved the minerals to them and for the next 21 years, they received oil royalties. Then, in 2015, after a series of conveyances ending with Cross Bar, Cross Bar filed a petition to quiet title to the minerals in one of the tracts conveyed with the deeds above. After reviewing the 1995 deeds, the district court granted summary judgment quieting title to the minerals in Cross Bar because the 1995 deeds were unambiguous and contained no “express exclusion or retention of mineral interests.” No appeal was raised.
Subsequently, in 2017, Cross Bar was again granted summary judgment, this time to quiet title in all of the surface and mineral rights under both tracts that were conveyed in the 1995 deeds. The district court relied on the same reasoning as in 2015. This time the grantors appealed. The Kansas Court of Appeals held that collateral estoppel prevented them from hearing the 2017 case as no appeal was raised from the district court’s ruling in 2015 and the grantors had the opportunity to fully and fairly litigate the issue then. The Court went on to affirm the order of summary judgment on the grounds of issue preclusion. An express reservation of the mineral interests in the grant could have helped the parties retain their interests and might have prevented this litigation. K.S.A. 58-2202 provides that a real estate conveyance transfers all of the grantor’s interest unless the intent to give something less is expressly stated or can be “necessarily implied in the terms of the grant.” In other words, if a contrary intention is not clearly stated in the grant, a deed which describes the land conveyed in accordance with the government survey will convey the underlying minerals owned by the grantor, even though a separate estate in such minerals has previously been created. See Fast v. Fast, 209 Kan. 24, Syl. ¶ 2, 496 P.2d 171 (Kan. 1972); McGinty v. Hoosier, 291 Kan. 224, 243, 239 P.3d 843 (Kan. 2010). These recent unpublished Kansas cases illustrate that the importance of deliberate and meticulous drafting cannot be overstated.
About the Authors
Jessica Freeman Jessica Freeman is a 3L at Washburn. She is originally from Louisville, Colorado and is still deciding what area of law she would like to practice but is very interested in natural resources, real estate, medical malpractice and veteran law.
Erik Hageman is a 2L at Washburn. From Abilene, Kansas he graduated from Kansas State University. He is interested in practicing in the areas of natural resources law, criminal law and probate.
Caroline Kordes is a 3L at Washburn. Originally from Centennial, Colorado, she graduated from Ripon College in Ripon, Wisconsin with a double major in Chemistry and History. She is interested in practicing natural resource law and corporation law.
Oil, Gas, & Mineral Law
February 2021 Oil, Gas, and Mineral Law Newsletter