Written by attorneys · grounded in primary & secondary sources — see 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.
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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.
Courts 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.
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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.
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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.
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…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…