John F. Shepherd & Tina R. Van Bockern February 12, 2015

 Marketable condition “means lease products which are sufficiently free from impurities and otherwise in a condition that they will be accepted by a purchaser under a sales contract typical for the field or area.” [30 C.F.R ]

 Burlington Resources Oil & Gas Co., 183 IBLA 333 (April 23, 2013), aff’d, Burlington Resources Oil & Gas Co. v. U.S. Dep't of the Interior, No. 13-CV-0678-CVE-TLW, 2014 WL (N.D. Okla. July 24, 2014)  Encana Oil & Gas (USA), Inc., 185 IBLA 133 (Sept. 30, 2014)

 Burlington sold unprocessed gas at the wellhead to two unaffiliated companies under “POP” contracts.  Burlington valued the residue gas, NGLs and sulfur sold at the tailgate of the plants based on the proceeds it received from the buyers.  The buyers calculated proceeds due to Burlington by deducting the costs for compression, dehydration, and sweetening.

 Board’s Order:  “It is only after the unprocessed gas at issue is compressed, dehydrated, and sweetened, in order to render it suitable for processing, and then processed by BPE, that it is, in fact, acceptable to the ultimate third-party purchaser.”  The two contracts – for purchase at the wellhead – did not establish a market for unprocessed gas.

 Although POP contracts are legitimate sales contracts, they are not “evidence that the gas being sold is marketable.”  “Whether gas is marketable depends on the requirements of the dominant end- users, and not those of the intermediate processors.”

 Burden of Proving Marketability:  “The administrative record is silent as to the requirements of sales contracts typical for the field or area.”  The POP contracts have “no bearing on marketability.”  The court placed the burden on Burlington to prove where gas is marketable.

 Encana processed gas in a plant connected to two mainline pipelines; a third mainline was 15 miles away; yet another was 30 miles away  Encana marketed gas on all of these pipelines; it used the pipeline 30 miles away to sell gas in New Mexico for higher prices  The distant pipeline had higher pressure and stricter CO2 specs

 Relied on Burlington’s “dominant end- use” rationale  “A ‘sales contract typical for the field or area’ refers to the contracts that are typical in the field or area into which the gas is actually sold, which may or may not be the field or area where the gas was produced.”

 What is the “dominant end-use” test and is it consistent with the definition of “marketable condition”?  Why doesn’t a wellhead sales contract based on “percentage of proceeds” show marketability of gas at the well?

 Why is the burden on the producer and not ONRR, when ONRR (not the producer) has the contracts for the field or area?  How can a producer, without access to other companies’ contracts, prove the terms of contracts “typical for the field or area”?

 The Texas Co., 64 I.D. 76 (1957)  “until the gas from the wells is in such a condition that it can be sold in the market, it cannot be said that the lessee has fulfilled his obligations under the lease.”  California Co. v. Udall, 296 F.2d 384 (D.C. Cir. 1961)  where sales contract required gas to be suitable for pipeline transmission, compression and dehydration costs could not be deducted  Exxon Corp., 118 IBLA 221 (1991)  where dehydration was necessary to transport gas from field to processing facility, dehydration was deductible as part of transportation

 XENO, 134 IBLA 172 (1995)  where there was a proven market for gas at the wellhead without gathering or compression, gathering and compression costs were deductible as transportation costs  Devon Energy Corp. v. Kempthorne, 551 F.3d 1030 (D.C. Cir. 2008)  lessee is required to bear all costs of compression and dehydration to meet pipeline specifications  Amoco v. Watson, 410 F.3d 722 (D.C. Cir. 2005)  gas containing higher CO2 content than pipeline specifications was held not in marketable condition despite some wellhead sales of untreated gas