By Russell Boniface | Nov 3, 2016

OKLAHOMA CITY (Legal Newsline) - Oklahoma landowners have filed a federal class action lawsuit against Texas-based oil and natural gas company Marathon Oil, asserting the energy giant owes more than $5 million in gas and oil royalties.

Lead plaintiffs James and Judy Grellner sued on Oct. 6 in U.S. District Court for the Western District of Oklahoma against Marathon Oil on behalf of Oklahoma landowners who have had mineral leases with Marathon for use of their land since Sept. 1, 2011. 

The plaintiffs allege Marathon Oil breached their contractual agreement by failing to pay royalties on the costs of gathering, treating, processing and marketing raw gas from landowners’ wells.

The Grellners allege that they and the landowners do not know the terms of the natural gas contracts, including how Marathon calculates royalties based on the revenue it receives from the gas. The Grellners assert that Marathon keeps much of the well revenue for itself.

The complaint states that “Marathon, like most lessees, has guarded its production and accounting processes as confidential or proprietary, thereby, depriving the royalty owners of information necessary to understand how Marathon calculates royalties."

A lessor/lessee agreement in natural gas contracts is complex, John S. Lowe, professor of energy law at Texas-based Dedman School of Law at Southern Methodist University, told Legal Newsline

“In an oil and gas lease, the words have meaning and you have to read all of the words to figure out exactly what the meaning is,” Lowe said. “That kind of analysis is typically what oil companies that are resisting class certification want to hear.”

Lowe said that historically oil and gas royalties are based on the market price. 

“If you own a piece of land and they discover gas on your land, it is worth what you can get for it once you get it to market,” Lowe said. “The natural gas liquids industry, which is a subset of the oil industry, considers the natural gas liquid a commodity, so the price varies over time. 

"Royalties would depend on the cost of setting up the processing plant and the market value. Different companies have different payment provisions in their percentage of proceeds depending upon the market.”

Lowe said that in Texas the cost of transporting and processing the gas from the lease to the marketplace is charged proportionally to landowners and is deducted from their royalties. 

Conversely, in Oklahoma, oil companies have to bear all the costs involved in making the gas marketable, which would have a significant impact on the amount of royalties landowners would receive. 

“What may be going on with Marathon in Oklahoma is another round in the ongoing struggle to try to clarify what is the limit to the oil companies’ right to make deductions against royalty calculations,” Lowe said.

Lowe said that what happens in an oil and gas class certification also largely depends on where it is filed

“Typically royalty disputes are brought into state courts, so it is state law that governs,” Lowe said. “The state statutes that authorize and limit how class actions proceed are different from state to state. 

"In Texas, we haven’t seen a lot of oil and gas class action lawsuits since the 1990s involving energy royalty calculation because the Texas courts and legislature poured them out. Texas found that leases aren’t enough alike in these cases to legitimately treat them as a class. It is different in Oklahoma. Oklahoma judges rarely see a class action they don’t like.”

Lowe said that another factor that leads to Oklahoma energy class certification claims is that Oklahoma landowners lease their land to more than one energy company. 

“Landowners receive checks from several companies that interpret regulations differently and don’t calculate royalties the same way,” Lowe said.

Marathon Oil told Legal Newsline that it does not comment on pending litigation.

The class action seeks trial by jury and damages. The plaintiffs are represented by attorneys Reagan E. Bradford and W. Mark Lanier of The Lanier Law Firm in Houston and by Rex A. Sharp of Prairie Village, Kansas. They could not be reached for comment.

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