Supreme Court Reverses Seward County District Court Ruling

The Kansas Supreme Court today reversed a judgment by the Seward County District Court in a class action brought by royalty owners against a Kansas oil and gas operator. The lawsuit claimed the operator underpaid royalties by deducting expenses incurred by third-party purchasers to transform raw natural gas sold at the wellhead into processed gas acceptable for transmission in interstate pipelines. The district court had ruled in favor of the class.

The lawsuit was bought by the L. Ruth Fawcett Trust, which served as the class representative for owners of royalty interests in 25 leases operated by Oil Producers, Inc. of Kansas. The controversy arose because the operator sold its raw natural gas at the wellhead to third parties, who in turn processed the gas before it entered the interstate pipeline system. The price the operator was paid—and upon which royalties were calculated—was based on a formula that started with the price those third parties received for the processed gas or a published index price, then deducted costs to transform the gas into the quality required for interstate pipelines. The class argued those subtracted costs were the operator’s responsibility, so the royalties they received were less than they should have been.

The court held the oil and gas leases at issue did not obligate the operator to incur those costs, so they were properly included in the royalty calculation. The case was returned to the district court for further proceedings regarding an additional issue not covered by the appeal.