Bice v. Petro-Hunt, L.L.C.

Summary

The North Dakota Supreme Court affirmed summary judgment for Petro-Hunt in a class action concerning royalty calculations for sour gas produced from the Little Knife Field. The court held that the leases' "market value at the well" language permitted use of the work-back method and deduction of reasonable post-production costs. The court also upheld Petro-Hunt's use of residue gas under the free-use clauses and its deductions for risk capital and depreciation.

Holdings

1. When a lease bases gas royalties on market value at the well, the lessee may calculate that value using the work-back method and deduct reasonable post-production costs from plant-tailgate proceeds before calculating royalties.
2. North Dakota adopts the majority at-the-well rule and rejects the first marketable product doctrine for leases providing for royalties based on market value at the well.
3. A free-use clause permitting use of gas produced from the leased land for operations under the lease permits the lessee to use residue gas off the leased premises when the gas is used in furtherance of overall lease operations.
4. The six-percent risk-capital charge on the undepreciated investment in the gas plant was commercially reasonable and deductible under the 1983 settlement agreement.
5. The 1983 settlement agreement did not prohibit Petro-Hunt from continuing depreciation deductions after July 22, 1990, and the undisputed evidence did not show that Petro-Hunt depreciated the plant below its salvage value or otherwise established a material fact dispute.

Questions Presented

1. Whether royalties under leases providing for payment based on the market value of gas at the well may be calculated using the work-back method, with reasonable post-production costs deducted from plant-tailgate proceeds.
2. Whether North Dakota should adopt the first marketable product doctrine instead of the at-the-well rule.
3. Whether the leases' free-use clauses permitted Petro-Hunt to use residue gas off the leased premises without paying royalties when the gas was used in furtherance of lease operations.
4. Whether Petro-Hunt's six-percent risk-capital charge was commercially reasonable and deductible under the 1983 settlement agreement.
5. Whether the 1983 settlement agreement prohibited depreciation deductions after July 22, 1990 or required Petro-Hunt to stop depreciating the plant below its salvage value or book value.

Disposition

affirmed