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Northern Natural Gas Co. v. Oneok Field Services Company, LLC

Supreme Court of Kansas

September 6, 2019

Northern Natural Gas Company, Appellant,
v.
ONEOK Field Services Company, LLC; ONEOK Midstream Gas Supply, LLC; Lumen Energy Corporation; and Lumen Midstream Partnership, LLC, Appellees,
v.
Nash Oil & Gas, Inc. and L.D. Drilling, Inc., Appellees, and Val Energy, Inc., Intervenor/Appellee.

         SYLLABUS BY THE COURT

         1. Once the Kansas Corporation Commission or Federal Energy Regulatory Commission approves its certification, a natural gas public utility's identifiable non-native storage gas lying underneath a natural gas storage facility's certificated boundaries is no longer subject to the common-law rule of capture-even if the utility has not yet acquired storage rights through eminent domain or contract.

         2. A court of last resort will follow the rule of law established in its earlier cases unless clearly convinced the rule was originally erroneous or is no longer sound because of changing conditions and more good than harm will come by departing from precedent.

          Appeal from Pratt District Court; Francis E. Meisenheimer, judge.

          Richard A. Olmstead, of Kutack Rock LLP, of Wichita, argued the cause and was on the briefs for appellant Northern Natural Gas Company.

          James M. Armstrong, of Foulston Siefkin LLP, of Wichita, argued the cause on behalf of all appellees, and Jim H. Goering and Daniel J. Buller, of the same firm, and Larry E. Keenan and Timothy R. Keenan, of Keenan Law Firm, P.A., of Great Bend, were with him on the brief for appellee L.D. Drilling, Inc.

          Robert R. Eisenhauer, of Johnston & Eisenhauer, of Pratt, and Brad Welsh, pro hac vice, of Gable & Gotwals, of Tulsa, Oklahoma, were on the brief for appellees ONEOK Field Services Company, LLC and ONEOK Midstream Gas Supply, LLC.

          Robert Christensen, of Law Office of Robert W. Christensen, of Medicine Lodge, and Mark Banner, pro hac vice, of Hall Estill, of Tulsa, Oklahoma, were on the brief for appellees Lumen Energy Corporation and Lumen Midstream Partnership, LLC.

          Brian J. Madden, of Wagstaff & Cartmell, LLP, of Kansas City, Missouri, was on the brief for appellee Nash Oil & Gas, Inc.

          Jeffery L. Carmichael and Will B. Wohlford, of Morris, Laing, Evans, Brock & Kennedy, Chtd., of Wichita, were on the brief for appellee Val Energy, Inc.

          David G. Seely, of Fleeson, Gooing, Coulson & Kitch, L.L.C., of Wichita, was on the brief for amicus curiae Eastern Kansas Royalty Owners Association, and Gregory J. Stucky, of the same firm, was on the brief for amicus curiae Southwest Kansas Royalty Owners Association.

          OPINION

          BILES, J.

         Northern Natural Gas Company injects into underground storage reservoirs large quantities of previously produced natural gas acquired from distant locations so it can remove, transport, and resell that gas later during peak market conditions. Some of its storage gas migrated beneath the earth to nearby wells in areas Northern did not control through eminent domain or contract. The wells' operators extracted that gas and sold it. A legal struggle has waged for more than a decade over the disputed right to produce Northern's migrated storage gas. This is yet another round in that high-dollar subsurface prize fight.

         In a previous appeal, we applied the common-law "rule of capture" to conclude the operators lawfully produced and sold Northern's storage gas taken before June 2, 2010. Northern Natural Gas Co. v. ONEOK Field Services Co., 296 Kan. 906, 296 P.3d 1106 (2013) (ONEOK I). That was the date when Northern received a certificate from the Federal Energy Regulatory Commission permitting it to expand the authorized boundaries of its then-existing underground storage field to encompass the offending wells. We now consider whether that certification changes the right-to-produce analysis for gas taken after June 2, 2010. We hold it does.

         Once those new boundaries were certified, Northern's identifiable storage gas within that designated area was no longer subject to the rule of capture-even though Northern had not yet acquired storage rights through eminent domain or contract. See Union Gas System, Inc. v. Carnahan, 245 Kan. 80, 88, 774 P.2d 962 (1989) ("[A]s soon as Union's storage operation became authorized and its gas identifiable, the gas was no longer ferae naturae and subject to the rule of capture. The title to Union's captured gas remained in Union."). The district court erred when it granted judgment against Northern by holding otherwise. We reverse and remand to the district court for further proceedings.

         Factual and Procedural Background

         As mentioned, state and federal courts have wrestled with this controversy before. The facts and interrelated procedural twists are detailed in other court decisions. See, e.g., ONEOK I, 296 Kan. at 911-16; Northern Natural Gas Co. v. L.D. Drilling, 862 F.3d 1221 (10th Cir. 2017), cert. denied 138 S.Ct. 747 (2018); Northern Natural Gas Co. v. Appx. 9, 117 Acres in Pratt, No. 10-1232-MLB-DWB, 2015 WL 471244 (D. Kan. 2015). For our purposes, the relevant facts can be concisely described.

         Northern has an underground natural gas storage facility known as the Cunningham Storage Field in Pratt and Kingman counties. Northern holds certifications from the Kansas Corporation Commission and FERC to inject and store previously produced natural gas that is transported to the Field to await favorable market conditions and resale. Nash Oil & Gas, Inc. and L.D. Drilling, Inc. operated oil and gas wells about two to six miles from the Field's northern certificated boundary as it existed before June 2, 2010. ONEOK and Lumen were third-party purchasers of gas produced by Nash and L.D.

         In 2008, Northern sued Nash, L.D., and another producer, Val Energy, Inc., in the United States District Court for the District of Kansas, alleging they aggravated the subsurface movement of Northern's storage gas beyond the Field's then-certificated boundaries by pumping atypical quantities of water to create artificial pressure sinks. This, the allegation continued, drew Northern's storage gas from the Field toward the producers' wells, where it was extracted and sold.

         While that federal litigation progressed, Northern filed this state lawsuit in Pratt County District Court against ONEOK and Lumen alleging they participated in converting Northern's storage gas by buying it from Nash and L.D. Its conversion claims state:

"43. Producers have produced and sold, and will continue to produce and sell Northern's previously injected storage gas which migrated on or after July 1, 1993.
"44. Northern holds title to, and is the lawful owner of, all such previously injected, but migrated storage gas.
"45. Based upon belief and recently acquired information and data, [ONEOK and Lumen] have purchased from the Producers, or caused others to purchase from the Producers, such migrated storage gas and, upon information and belief, transported and re-sold such migrated storage gas.
"46. [ONEOK's and Lumen's] acts and/or omissions, including, but not limited to, purchasing, transporting, and reselling Northern's migrated storage gas constitute the unauthorized exercise of ownership rights by [ONEOK and Lumen] over Northern's migrated storage gas, to the exclusion of Northern's rights.
"48. [ONEOK's and Lumen's] unauthorized exercise of ownership and control over Northern's storage gas . . . is an unlawful conversion." (Emphases added.)

         In response, ONEOK and Lumen admitted purchasing gas from Nash and L.D., denied Northern's conversion allegations, and asserted third-party indemnification claims against Nash and L.D. as a precaution against the conversion claims. ONEOK and Lumen insisted they were innocent good-faith purchasers for value; and "[a]s a matter of public policy, innocent purchasers of previously injected storage gas can have no liability for conversion because purchasers must be entitled to rely upon the assurances of title made by sellers."

         Nash and L.D. moved for summary judgment, asserting a legal right to produce the migrated gas from their wells. They noted the Underground Storage of Natural Gas Act, K.S.A. 55-1201 et seq., sets out circumstances when natural gas public utilities can acquire property rights through condemnation for underground natural gas storage and addresses ownership of storage gas migrating outside a designated area. But, they argued, the Storage Act did not apply to the migrated gas they took and this statutory gap left in place common-law principles permitting their operations.

         The district court granted the motion, ultimately resolving not only ONEOK and Lumen's third-party claims against Nash and L.D., but also Northern's conversion claims against ONEOK and Lumen. The court agreed with Nash and L.D. that the Storage Act did not apply because it expressly dealt only with gas that "migrated to adjoining property or to a stratum, or portion thereof, which has not been condemned as allowed by law or otherwise purchased." (Emphasis added.) K.S.A. 55-1210(c). And because the producers' wells were not on land adjoining the Field, the court held the common-law rule of capture applied and allowed Nash and L.D. to produce and sell migrated storage gas taken from their wells.

         Shortly thereafter, FERC issued the June 2, 2010 certificate authorizing Northern to expand the Field's boundaries. The FERC order gave Northern authority to acquire rights to property within the newly certificated boundaries. This effectively extended Northern's buffer zone to better protect its migrating gas from capture by others.

         The FERC certification caused the district court to modify its judgment to limit its application to the time before June 2, 2010. The court also ordered ONEOK and Lumen to suspend payments to Nash and L.D. for gas produced from their wells until further court direction.

         On appeal, the ONEOK I court affirmed the district court's ruling. It then remanded the case to resolve "any remaining claims that may exist regarding matters after June 2, 2010, and for resolution of the district court's standing order requiring ONEOK and Lumen to suspend payments to Nash and L.D." ONEOK I, 296 Kan. at 942.

         Meanwhile, with the ONEOK I appeal pending, Northern began condemnation in the United States District Court for the District of Kansas for storage rights in the expansion area authorized by the June 2, 2010 certification. Northern Natural Gas v. 9117.53 Acres in Pratt, 781 F.Supp.2d 1155, 1158-59 (D. Kan. 2011). The date of taking was set as March 30, 2012. The federal court ordered Northern to pay $8.5 million for the condemned property rights. Much of that award resulted from the federal district court's vigorously disputed decision to value Northern's migrated storage gas lying "in place" underneath the condemned land. Northern Nat. Gas v. 9117 Acres in Pratt, Kingman, 2 F.Supp.3d 1174, 1187 (D. Kan. 2014).

         Back in the state district court after our ONEOK I remand to consider the storage gas taken by the producers after June 2, 2010, Northern narrowed its claims to only the gas taken from within the expansion area and filed what it styled as a motion for partial reconsideration, essentially arguing for a different result for the post-certification gas. The district court denied the motion, finding Northern did not own the storage gas produced from the expansion area before the March 30, 2012 taking date set in the federal condemnation lawsuit. It reasoned Northern did not control the area where the wells were located until the date of taking.

         It is important to note that two weeks before the state district court denied Northern's reconsideration, the United States Court of Appeals for the Tenth Circuit reversed a substantial part of the federal condemnation award. The circuit court held the lower federal court erred by including the value of Northern's "in place" migrated storage gas under the landowners' property on the date of taking. L.D. Drilling, 862 F.3d at 1231-32 (holding Northern owned all storage gas within certified field boundaries after the certification date). Nevertheless, the state district court did not revise its judgment, or even mention the Tenth Circuit ruling, despite the federal appeals court's obvious contradictions with the state district court's right-to-produce rationale for the post-June 2, 2010 storage gas issue, as well as a related question about whether landowners would suffer an unconstitutional taking. See 862 F.3d at 1227-28 ("We disagree with the inclusion of the value of storage gas in and under the Extension Area on the date of taking because we find that the Landowners and Producers had no right to produce such gas after the date of certification." [Emphasis added.]).

         The district court certified its decision as a final order under K.S.A. 2010 Supp. 60-254(b). Northern timely appealed. We granted a motion to transfer the controversy to our court. Jurisdiction is proper. See K.S.A. 60-2101(b) (providing Supreme Court jurisdiction over appeals transferred under K.S.A. 20-3017).

         No Right to Capture Storage Gas After June 2, 2010

         Our question is whether the producers could take Northern's migrated non-native storage gas from wells located within the newly certified boundaries for the storage field after June 2, 2010. On summary judgment, the district court concluded the producers had that right under the common-law rule of capture. We disagree.

         Standard of review

"'"'Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case. On appeal, we apply the same rules and where we find reasonable minds could differ as to the conclusions drawn from the evidence, summary judgment must be denied.'"' [Citation omitted.]" Trear v. Chamberlain, 308 Kan. 932, 935-36, 425 P.3d 297 (2018).

         There are no material facts in dispute as to the issue on appeal, so we are presented with a straightforward legal question. Our review is de novo as to the legal effect of the undisputed facts. ONEOK I, 296 Kan. at 918.

         Discussion

         It is necessary for clarity to revisit some long-standing Kansas legal principles affecting natural gas and its underground storage. This has been covered to some extent in recent caselaw. See, e.g., ONEOK I, 296 Kan. at 919-24; Northern Natural Gas Co. v. Martin, Pringle, et al., 289 Kan. 777, 788-91, 217 P.3d 966 (2009). A few applicable principles date back more than 100 years.

         In Anderson v. Beech Aircraft Corp., 237 Kan. 336, 699 P.2d 1023 (1985), the court described the economic desirability and legal entanglements inherent in the commercial practice of injecting non-native natural gas back into the ground for storage-after it has already been produced, purchased, and transported from another location-in this way:

"[T]he concept of underground storage of natural gas has become well accepted in the natural gas industry. Today, natural gas is being stored in underground reservoirs in most of the gas producing states. This tremendous increase in gas storage was the result of the increased demand for, and popularity of, natural gas as a consumer fuel. The demand for natural gas far exceeded the supply, and pipelines proved incapable of supplying peak consumer demands which were mainly caused by cold weather. During periods of lesser demand, the pipelines could transport more than enough gas. Above ground storage of gas was impossible. It simply was not economically feasible to fabricate containers large enough to serve all consumers. Experience proved that the problem of meeting peak consumer demands for natural gas could be solved only by the use of underground storage of gas. It became obvious that depleted oil and gas fields could be effectively converted into vast storage containers. However, suitable formations for underground storage of natural gas do not exist in all states. A formation must possess a high degree of porosity in order to accommodate large quantities of gas and must also possess a high degree of permeability to allow the gas to be injected and withdrawn rapidly. In addition to these basic requirements, the formation must be sufficiently sealed geologically to prevent migration of the injected gas.
"With the underground storage of natural gas, there developed many legal problems involving the interrelationship between a gas company or a storage operator and the owners of land or mineral interests included within the storage reservoirs. These include competing claims asserting ownership of injected gas and ownership of the storage formation. One problem was the matter of the title to the non-native gas injected in an underground reservoir for storage. Other problems were concerned with the acquisition of the necessary stratum and surface land for the storage reservoir and the relative rights of the owner of the fee and the owner of a mineral interest which had previously been severed from the surface interest. Problems have also arisen in regard to the method of acquisition. One method involves voluntary acquisition by contract between the gas company and the landowners. The other alternative is the exercise of the power of eminent domain. There have been complications arising because of state regulation and also federal regulation and the conflicts arising therefrom. Finally, there has been the problem of income tax considerations as between the parties granting storage rights and the party acquiring storage rights. Some of these problems have come before the courts and some have not. They are mentioned to show the complexity of the problems arising from the injection of non-native gas into the earth for underground storage. [Citation omitted.]" 237 Kan. at 340-42.

         Before 1951, a natural gas public utility lacked the power to condemn subsurface property to create an underground storage facility. See Strain v. Cities Services Gas Co., 148 Kan. 393, 397, 83 P.2d 124 (1938) ("The use of the earth as a storage place for gas is an idea so novel we cannot believe the legislature had such matter in contemplation when the power of eminent domain was given to pipe-line companies."). The Storage Act came into being to facilitate and promote this commercial activity. See K.S.A. 55-1202 (underground natural gas storage is in the public interest).

         The Storage Act, enacted in 1951, established procedures for a natural gas public utility to use eminent domain to acquire subsurface property rights for underground storage facilities. K.S.A. 55-1201; K.S.A. 55-1205. Notably, K.S.A. 55-1205 provided, "The appraisers in awarding damages hereunder shall also take into consideration the amounts of recoverable oil and native gas remaining in the property sought to be appropriated . . . ." (Emphasis added.) "Native gas" is defined as gas not previously withdrawn from the earth. K.S.A. 55-1201(c). In other words, the statute did not require valuing non-native storage gas lying beneath the landowner's condemned property.

         Northern is a natural gas public utility engaging in transporting and distributing natural gas within or through Kansas for public use. It is undisputed Northern is eligible to invoke the Storage Act's provisions and protections. Storage gas is statutorily described as natural gas previously reduced to possession and then later injected into underground storage fields. K.S.A. 55-1210(a).

         When first enacted, the Storage Act was silent about how it related to the previously mentioned common-law rule of capture. Court decisions filled in some gaps case-by-case based on historical common-law principles for oil and gas. We review those historical principles first, then return to their application to underground storage of previously produced natural gas.

         Generally, the peculiar migratory characteristics of oil and gas resulted in developing the rule of capture in the common law. 1 Kuntz, Law of Oil & Gas, § 2.4. (1987) ("Because the rights in oil and gas were subject to being lost by drainage from operations on other land, it was difficult to describe in conventional property terms, the nature of the rights to the oil and gas before capture."). In states such as Kansas, the rule of capture operates as a corollary to the ownership-in-place theory that recognizes ownership in oil and gas in the ground as part of the land. 1 Kuntz, Law of Oil & Gas, § 2.4. (1987) ("According to the ownership-in-place theory, the landowner owns all substances, including oil and gas, which underlie his land. Such ownership is qualified, however, in the case of oil and gas, by the operation of the law of capture. If the oil and gas depart from beneath the owned land, ownership in such substances is lost."); see Zinc Co. v. Freeman, 68 Kan. 691, 696, 75 P. 995 (1904) ("Petroleum and gas, so long as they remain in the ground, are a part of the realty. They belong to the owner of the land, and are a part of it as long as they are on it, or in it, or subject to his control. When they escape and go into other lands, or come under another's control, the title of the former owner is gone.").

         Under the rule of capture, if oil or gas migrated from the owner's property, title would pass to anyone who produced or "captured" that migrated gas, so long as that person was acting within the person's right to do so, such as a nearby landowner with a well properly bottomed on the landowner's property. The rule of capture made migrated native gas the personal property of the first person who produced it. ONEOK I, 296 Kan. at 919; see also 1 Kuntz, Law of Oil & Gas, § 4.1 (1987) (the nearby landowner "owns the substance absolutely once it has been reduced to dominion and control"); 1 Summers, Oil and Gas § 3:2 (3d ed. 2015) ("The rule of capture states that a mineral interest owner in a common source of oil and gas supply is legally privileged to take oil and gas from under the land, even though in so doing they may take some of the oil or gas from under adjoining lands.").

         In Kansas, the rule of capture dealt initially with native oil and gas that migrated from another's property. In other words, it applied to the original capture of native gas. Mobil Exploration & Producing U.S. Inc. v. Kansas Corporation Comm'n, 258 Kan. 796, 800, 908 P.2d 1276 (1995) ("[T]he common-law rule of capture applies to a common pool. At common law, the owner of a tract of land acquired title to the oil and gas which the owner produced from wells drilled thereon even though it could have been proved that part of such oil or gas migrated from adjoining lands."); Carlock v. Krug, 151 Kan. 407, 411, 99 P.2d 858 (1940) ("It is well settled in Kansas that the owner of the land and those holding under him own all the oil produced from wells located on the land and that owners of adjoining tracts must protect themselves by development of their own land."); Prewett v. Van Pelt, 118 Kan. 571, 576, 235 P. 1059 (1925) ("The rule seems to be that when one drills a gas or oil well on his premises he becomes the owner of all the oil and gas produced therefrom.").

         The rule of capture and the ownership-in-place theory coexist, but obviously are not the same. And in the context of injected non-native storage gas, there is tension because the ownership-in-place theory considers gas to be personal property once severed from the land. As we will see, our caselaw joined a line of cases rejecting an approach in which injected gas always remained the injector's personal property in favor of the rule of capture, which perhaps in the case of storage gas is better termed a rule of "recapture." See Treadway, Oil & Gas Law-The Rule of Capture Applied to the Underground Storage of Natural Gas-Anderson v. Beech Aircraft Corp., 34 U. Kan. L. Rev. 801, 815 (1986).

         In 1985, the Anderson court considered for the first time whether the rule of capture applied to a corporation's injected non-native gas originally produced elsewhere and returned to the earth for storage for its own business use. Anderson, 237 Kan. at 342. There, Beech Aircraft, which was not a natural gas public utility, used a depleted subsurface formation to store non-native gas. That formation was underneath Beech Aircraft's property and Anderson's property, but Beech Aircraft did not have Anderson's permission for the subsurface storage. The court held the Storage Act did not apply because its protections were available only to a natural gas public utility, so the court resorted to the common-law rule of capture. 237 Kan. at 347.

          In doing so, the Anderson court engaged in a detailed discussion of out-of-state cases about the rule of capture as well as an alternative that preserved an injector's title in non-native storage gas wherever it roamed. 237 Kan. at 342-45; cf. 237 Kan. at 344 (noting rule of capture criticized by some as "illogical and invalid for the reason that once man has reduced natural gas to possession, ...


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