Nature of the Case
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Facts
P represents the class based on its royalty interests. Natural gas coming from the ground in its raw condition is not suitable for transportation in interstate pipelines. It must meet certain quality specifications before it can enter an interstate gas pipeline and it must be processed to achieve those specifications. Some of this may occur at the wellhead, such as when an operator performs separating or dehydrating, as needed. Most processing required to transform raw natural gas into pipeline-quality gas occurs away from the wellhead, such as at processing plants, where other valuable components of the raw gas can be isolated and sold separately. D does not own gathering or processing facilities. It sells the gas at the wellhead to midstream gatherers and processors (the third-party purchasers), who prepare the raw natural gas for eventual delivery into the interstate pipeline system. Those third-party purchasers transport the gas to processing plants; process it, separate the natural gas and the natural gas liquids contained in the raw gas; and eventually sell the natural gas and natural gas liquids to someone else. The price D gets for the raw gas is dependent in the first instance on what the third-party purchasers are paid for the processed gas or a contractually set index price. D sold the gas at the well to various purchasers. Under Kansas law, the leases imposed on D an implied duty to market the minerals produced. To satisfy this duty, D had to market its production at reasonable terms within a reasonable time following production. P contends raw natural gas coming from the well is not marketable until it enters an interstate pipeline, so its royalties cannot be reduced by the deductions in these purchase agreements relating to transforming the gas into a condition suitable for that transmission system. P claims that its royalty payments are being reduced for expenses P claims are D's sole responsibility. None of the leases define what the term 'proceeds' means and are silent as to deductions. The dispute between the parties is centered here and with the third-party purchase agreements. D argued its royalty payments were proper because they were computed on 100 percent of its actual proceeds from its sale of the gas at the wellhead. P countered that D was required to pay royalties on the 'gross' price of the gas as it entered the interstate market, rather than the 'net' contract prices set out in the third-party purchase agreements. The district court granted P partial summary judgment for 'those expenses claimed by D such as the 'gathering charges, compression charges, dehydration, treatment, processing, fuel charges, fuel lost or unaccounted for, and/or third party expenses incurred to make the gas marketable.'' It reasoned D owed P a duty to make the gas marketable free of cost and that d could not avoid responsibility for those costs by contracting with a third party to incur them. D appealed. The court of appeals found that the gas was sold at the well and that the leases require royalty payment based on the proceeds from wellhead sales with no provisions for deductions or adjustments from gas sale contracts. It concluded the term 'proceeds' as used in the leases means the money D would have received under the third-party purchase agreements without the deductions specified in those agreements. It held that D was obligated to produce a marketable product, which the panel held did not occur until the gas reached mainline transmission pipeline quality. It held that D could not contract with third-party purchasers to provide the services the operator was required to provide. D appealed.
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