In Fawcett v. Oil Producers, Inc. of Kansas, 306 P.3d 318 (Ks. Ct. App., July 19, 2013), the lessee, Oil Producers, Inc. of Kansas (OPIK) sold the gas on the lease to an unrelated third party and paid royalties based on 100 percent of the proceeds received from that sale. The sale price in the gas sales contract was calculated based upon a pricing formula using the downstream index price less certain expenses associated with moving the gas from the wellhead to the downstream sales point. The royalty clause in the oil and gas lease stated that where the gas was sold at the well, the royalty would be one- eighth (1/8th) of the proceeds from that sale.
The Court of Appeals held that the lease obligated OPIK to compute royalties based on the gross proceeds of gas sales at the well. Then, the Court of Appeals found that the "gross proceeds" from the sale of the gas was the downstream index price that was used as the starting point in the gas contract sales price formula. In reaching this result, the Court of Appeals disregarded the actual price that the gas purchasers paid OPIK for the gas, and ordered that the landowner's royalty should be based on a price that was higher than the price that OPIK actually received for the gas. The Court of Appeals' decision ignored the language of both the oil and gas lease and the gas purchase contract, and fundamentally altered the manner in which many lessees routinely calculate royalties on gas in Kansas and other producing states.
OPIK filed a Petition for Review with the Kansas Supreme Court. On December 27, 2013, the Supreme Court granted review. Because review has been granted, the Court of Appeals decision "has no force or effect." Sup.Ct.R. 8.03(i). When the Supreme Court takes up the issues in this case, it will have the opportunity to revisit the issues surrounding the calculation of royalties on gas, the deduction of "post-production costs," and the "first marketable product rule" adopted in Sternberger v. Marathon Oil Co., 894 P.2d 788 (Kan. 1995).