Written by attorneys — see sources below.
A post-production activity that removes impurities such as hydrogen sulfide and other waste products from sour gas. The process yields sweet gas that meets pipeline quality specifications and is otherwise prepared for market.
Triumph Resources produced sour gas from its wells and contracted with a midstream company to treat the stream. After hydrogen sulfide was removed, the resulting sweet gas met pipeline specs and was sold at a higher price. The court held the treating costs were post-production and deductible under the lease.
Thaddeus Tran and Talia Torres leased land to an operator whose gas contained impurities. The operator treated the gas before sale. When calculating royalty the court allowed deduction of treating costs because the lease measured value at the wellhead after the gas left the premises.
Tundra Resources operated wells yielding sour gas that required treating to become marketable. When the reservoir of treated gas was sold, the court ruled that treating costs incurred to reach pipeline quality could be deducted from royalty under the lease language.
The plaintiff occupied a mine and works under a close of land. The defendants owned a mill in the neighborhood. They proposed to construct a reservoir for storing water to be used about their mill upon another close of land. This close may be taken as adjoining the plaintiff's close, although some intervening land lay between the two. Underneath the defendants' close on which they proposed to construct the reservoir were old and disused mining passages and works. These included five vertical shafts filled up with soil and rubbish along with some horizontal shafts communicating with them. No person was aware of the existence of the vertical shafts or the horizontal works. In the course of working his mine the plaintiff gradually worked through the seams of coal underneath the close and came into contact with the old and disused works underneath the defendants' close. The defendants constructed the reservoir through the agency and inspection of an engineer and contractor. They took no personal part in the works and remained unaware of any want of security. The engineer and contractor did not exercise reasonable care and caution with respect to the vertical shafts. When the reservoir was constructed and filled or partly filled with water, the weight of the water broke through the disused and imperfectly filled-up vertical shafts. The water passed down the shafts into the horizontal workings under the defendants' close and then into the workings under the plaintiff's close, flooding his mine and causing considerable damage. The Court of Exchequer, on a special case stating these facts, held that the plaintiff had established no cause of action. The Court of Exchequer Chamber unanimously arrived at the conclusion that there was a cause of action, and that the Plaintiff was entitled to damages. The defendants appealed to the House of Lords.
View caseCourts interpreting 'at the well' royalty clauses have held that treating costs incurred after the gas leaves the wellhead may be deducted when calculating market value or amount realized. The operator is not required as a matter of law to bear those costs before royalty is due.
Supporting sources
Under the first-marketable-product rule, the lessee must make the gas marketable, which may include treating. Once the gas is in marketable condition, further treating costs are ordinarily shared or borne by the royalty owner depending on lease language.
Supporting sources
Division orders that purport to deduct treating costs contrary to lease terms are generally ineffective to modify the lessor's royalty rights. The lease controls unless the royalty owner expressly agrees to the change.
Supporting sources
…it is impossible to determine the very existence of a market." Mittelstaedt , 954 P.2d at 1214 (Opala, J., dissenting). "Treating marketability as a question of law ignores market realities." Id. We recognize that pursuant to the first-marketable product rule, as explained by Anderson, transportation costs to a…