Robbins v. Chevron U.S.A., Inc.
108 Oil & Gas Rep. 42, 246 Kan. 125, 785 P.2d 1010 (1990)
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Rule of Law:
A lessee's duty under the implied covenant to market gas is judged by the 'prudent operator' standard, which evaluates whether the lessee's actions were what an experienced operator of ordinary prudence would have done under the same or similar circumstances, having due regard for the interests of both lessor and lessee.
Facts:
- In 1956-1957, plaintiffs leased mineral rights to Gulf Oil Corporation (Chevron's predecessor), which subsequently discovered substantial quantities of natural gas.
- In 1960, Gulf entered into a 20-year gas purchase contract with Kansas Gas Supply Corporation (KGS).
- In 1978, when the contract price was 20.5¢ per Mcf, Gulf and KGS amended the contract, extending it to 1990 in exchange for a significantly increased price, eventually reaching $1.55 per Mcf.
- From late 1982 to late 1984, a state law, the Kansas Natural Gas Price Protection Act, capped the contract price at a lower rate ($2.289 per mmbtu).
- In 1984, after the price cap law expired, a dispute arose between Chevron (which had merged with Gulf) and KGS, as KGS sought to renegotiate lower prices due to reduced demand.
- Chevron refused to renegotiate and insisted on the contractually determined price, which was higher than the price KGS was willing to pay.
- On September 13, 1985, due to the price dispute and impasse with KGS, Chevron shut in the wells.
- The wells remained shut in until October 1, 1987, during which time other producers in the same field continued to produce and sell gas.
Procedural Posture:
- Plaintiffs (lessors) filed suit against defendant Chevron (lessee) in Kansas district court (a trial court) seeking cancellation of oil and gas leases for breach of an implied covenant to market.
- Plaintiffs filed a motion for partial summary judgment to cancel the leases.
- Chevron filed a cross-motion for partial summary judgment, arguing it had not breached its duty.
- The district court granted summary judgment in favor of the plaintiffs, cancelling the leases and ordering an accounting.
- The district court subsequently entered a final monetary judgment against Chevron for $4,419,064.57.
- Chevron (as appellant) appealed the district court's grant of summary judgment and the monetary award to the Supreme Court of Kansas.
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Issue:
Does a lessee breach the implied covenant to market gas, as a matter of law, by entering into a long-term contract amendment and later shutting in wells for two years during a price dispute with the sole purchaser?
Opinions:
Majority - McFarland, J.
No. A lessee's actions do not breach the implied covenant to market as a matter of law under these circumstances because whether the lessee acted as a prudent operator is a question of fact that cannot be decided on summary judgment. The 'prudent operator' standard requires evaluating the lessee's decisions based on the facts and circumstances existing at the time of the action, not with the benefit of hindsight. Here, the claim that Chevron acted imprudently by entering the 1978 contract amendment or by shutting in the wells during a price dispute is a hotly contested issue that requires expert testimony to resolve. Uncontroverted facts showed that the 1978 contract was favorable when signed and that other producers entered similar agreements. Therefore, granting summary judgment in favor of the plaintiffs was improper.
Analysis:
This case reinforces the deferential 'prudent operator' standard for evaluating a lessee's compliance with the implied covenant to market in oil and gas law. The court's decision emphasizes that such determinations are highly fact-specific and cautions against using hindsight to second-guess complex business judgments made under uncertain market conditions. By reversing summary judgment, the ruling establishes that claims of imprudent marketing will typically require a full trial with expert testimony, making it more difficult for lessors to win such cases without substantial evidence. The opinion also reaffirms the principle that forfeiture of a lease is a disfavored, extraordinary remedy reserved for cases where damages are wholly inadequate.
