Appellant sought review of an order from Superior Court of San Joaquin County (California) requiring appellant to pay royalties on gas that appellant had injected into a storage facility but which had migrated to the adjacent well.
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Overview
Appellant acquired storage rights to an exhausted gas reservoir. Appellant also entered into an oil and gas agreement with the owners of the island to operate a nearby well on a parcel adjacent to the reservoir and to pay royalties for gas extracted from the well. Appellant then purchased gas from suppliers in Texas and Canada and injected it into the reservoir for use in periods of high demand. Appellant’s injected gas migrated to the adjacent parcel and appellant found itself paying royalties on its own gas. Appellant filed suit and the trial court entered a judgment requiring appellant to pay royalties on its own gas. Appellant argued that the trial court erred in finding that appellant lost its ownership of recovered gas when it injects that gas into a natural reservoir and the gas migrates. The court agreed finding that once gas has been reduced to personal possession, the owner is not thereafter divested of ownership simply because it stores the gas underground and that gas migrates. The court also considered the valuation of storage and mineral rights and the application of the parol evidence rule to an oil and gas agreement.
Outcome
The court reversed the judgment of the trial court ordering appellant to pay royalties and remanded the case to the trial court for further proceedings because appellant still retained ownership of the migrated gas.