TOPEKA, Kan. (RFD NEWS) — The Kansas Supreme Court has provided guidance on when natural gas is considered “marketable” and who may be responsible for the costs of getting it to that point.
Roger McEowen with the Washburn School of Law joined us on Monday’s Market Day Report to explain how the court’s rejection of a one-size-fits-all approach to determining when gas becomes marketable and who pays post-production costs has broader implications for farmers, ranchers and royalty owners.
It Starts with the Lease Language
In his interview with RFD News, McEowen said the first step is to read the oil-and-gas lease.
If the lease specifically addresses how royalties are calculated or who is responsible for particular post-production costs, that language controls. If the lease is silent or ambiguous, the marketable-condition rule can come into play.
The court said determining when gas becomes marketable is a fact-specific question that can vary from case to case.
Factors can include where the gas was sold, its condition when delivered, whether a market existed at the wellhead, and whether processing was necessary to make the gas marketable.
McEowen said that distinction is important for agricultural landowners receiving royalty payments.
“Don’t assume that a deduction appearing on your royalty statement is either automatically permissible or automatically improper,” McEowen said.
What Landowners Should Look For in Oil-and-Gas Leases
McEowen said landowners should review the specific language in their leases, including terms such as “proceeds,” “market value,” “gross proceeds,” and “net proceeds.”
He also recommended looking for provisions addressing gathering, compression, dehydration, processing, and transportation.
Landowners should then compare the lease language with what actually happened to the gas and which costs were deducted from their royalty payments.
“Don’t start with the royalty check. Start with the lease,” McEowen said.
A Legal Lesson Beyond Kansas
Although the case involved Kansas law, McEowen said the decision reinforces the importance of clearly written royalty provisions in oil-and-gas leases more broadly.
He said landowners negotiating new leases should pay close attention to how royalties are calculated and how the lease addresses costs incurred before and after gas becomes marketable.
For landowners who already have leases, McEowen recommended having an oil-and-gas attorney review the agreement to determine whether royalty payments are calculated appropriately.
READ MORE: Kansas Court Clarifies Marketable Condition Rule for Natural Gas Royalties
Read more of Roger McEowen’s thoughts on agricultural law and policy issues that matter to farmers and ranchers on his RFD Business Blog, Firm to Farm.
