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January 19, 1990.

EDWARD D. ROBBINS, JR., individually and as Trustee of the Edward D. Robbins Trust, EDWARD GALLUP, FRED GALLUP, and MARGARET GALLUP GARDNER, Appellees,
CHEVRON U.S.A., INC., Appellant, v. KANSAS GAS SUPPLY CORPORATION, Third-Party Defendant/Intervenor.

The opinion of the court was delivered by

In this action plaintiff lessors contend defendant lessee breached an implied covenant to market gas. The district court entered summary judgment in favor of the plaintiffs cancelling the oil and gas leases involved and ordering an accounting. Twelve wells are involved. Defendant appeals therefrom.

Plaintiffs own the mineral interests in approximately 5,900 acres of land situated in Kiowa and Comanche counties. In 1956 and 1957, Gulf Oil Corporation, defendant's predecessor in interest, obtained oil and gas leases from plaintiffs. Subsequently, substantial quantities of gas were found. The leases represent the greater part of what is known as the Glick Field.

  In June 1960, Gulf entered into a 20-year gas purchase contract with Kansas Gas Supply Corporation (KGS). Under this contract, KGS agreed to "take or pay" for an amount of gas that would: (1) exhaust the reserves over the life of the contract; or (2) be at least 80% of each well's ability to deliver gas. KGS owns a Kansas intrastate natural gas pipeline that originates in the Glick Field and terminates in the Wichita area. The primary utilization

[246 Kan. 127]

      of gas so transported was to provide boiler fuel for Wichita power plants owned by Kansas Gas & Electric Company (KGE).

  In 1978 Gulf and KGS entered into an amended contract which extended the term from June 1980 to December 31, 1990. In return for the extension, KGS agreed to increase the price of the gas purchased under the contract to either 45¢ or 55¢ per Mcf, depending upon whether or not compression was applied, until December 3, 1980; to $1.50 per Mcf from December 4, 1980, to December 3, 1981; to $1.55 per Mcf from December 4, 1981, to December 3, 1982; and for the remainder of the contract the price would be redetermined annually based on the average of the highest price paid by any three pipeline buyers within an eight-county area. There were no changes to the contractual taking requirements. At the time of this amendment, the price for gas under the existing contract was 20.5¢ per Mcf.

  On April 17, 1978, the date of the contract amendment, Gulf imposed the following express condition on the amended contract:
"Gulf's execution of this amendment is expressly conditioned upon receiving the stated price increases as set forth. If the Kansas Corporation Commission refuses to approve any of the price increases and/or redetermined prices as of the dates provided by this amendment, then the gas purchase contract dated June 24, 1960, as amended, will terminate the date of said refusal and the term extension provided by this amendment will not be applicable."
  Gulf received the price of gas in accordance with the terms of the amendment and paid royalties based on these prices in the years 1978 through 1982.

  Beginning on December 4, 1982, the determined price for the gas was to be $3.27 per mmbtu. However, the price under the contract was set at $2.289 per mmbtu by the Kansas Natural Gas Price Protection Act (Act), K.S.A. 55-1401 et seq. Gulf and KGS agreed that the contract price was capped by the Act. Gulf sold gas at the $2.289 per mmbtu price through December 1984, when the Act expired.

  In 1984, a dispute arose between Gulf and KGS. Demand for the gas had been sharply reduced, prices were down, and KGS was under pressure from the Kansas Corporation Commission to reduce its costs by renegotiating contracts containing "favored nations" clauses such as the one herein. KGS successfully renegotiated

[246 Kan. 128]

      contracts with some Glick Field producers. It did not reach agreement with Gulf.

  From January 1, 1985, until September 13, 1985, Gulf continued to sell gas to KGS. According to Gulf, the contract price, upon redetermination, was approximately $3.56 per mmbtu. KGS paid, however, $2.28 per mmbtu for the gas.

  On September 13, 1985, by which time Gulf had merged with Chevron USA, Inc., (Chevron) the wells were shut in. The wells remained shut in until approximately October 1, 1987. During the shut-in period, Chevron timely tendered shut-in royalty payments. Other producers in the Glick Field continued to produce and sell gas from this common source of supply.

  In February 1987, Chevron filed suit against KGS in the United States District Court for the District of Kansas, Chevron U.S.A., Inc. v. Kansas Gas Supply Corp., et al. v. Kansas Gas and Electric Co., No. 87-1115-C, for alleged breach of contract. That lawsuit is being vigorously pursued by all parties.

  In October 1987, Chevron began selling gas from the wells herein at approximately $1.21 per Mcf to Oxy Marketing, Inc., a KGS affiliate.

  On July 28, 1988, plaintiffs filed this lawsuit to cancel the gas leases, alleging that in 1978 Chevron breached its implied obligation to market their gas by extending the gas purchase contract through 1990 and by the lack of sales between September 1985 and September 1987. On September 1, 1988, Chevron filed its answer and third-party complaint against KGS, seeking indemnity for any losses it might incur as a result of this action. Concurrent with its answer, Chevron filed a motion to dismiss, contending in part that Chevron, as a matter of law, did not breach its implied marketing obligation and that cancellation was not a remedy available to the plaintiffs. The motion was denied.

  On October 14, 1988, plaintiffs filed a motion for partial summary judgment seeking a determination that Chevron's leases should be cancelled for breach of the implied covenant to market. On November 2, 1988, Chevron responded to plaintiffs' motion for partial summary judgment and filed a cross-motion for partial summary judgment, again contending that no implied duty to market the gas had been violated.

[246 Kan. 129]


  Following a hearing on the motions, the district court, on December 16, 1988, granted plaintiffs' motion for partial summary judgment, ruling that Chevron had breached its implied duty to market the gas and that cancellation of the leases effective as of the date the wells were shut in (September 13, 1985) was the appropriate remedy. The district court further ordered an accounting for all production after ...

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