## Facts

- A predecessor of the plaintiffs acquired an overriding royalty interest (ORI) in 1967 through a grant/assignment carved from the lessee’s working interest.
- The ORI was an “in-kind” interest “deliverable at the wellhead,” entitling the ORI owners to a physical share of gas at the well rather than proceeds from downstream sales.
- The instrument creating the ORI contained no express provision requiring the operator/lessee to market the gas on the ORI owners’ behalf.
- SMR, as operator/lessee, gathered, compressed, processed, and delivered gas to purchasers and deducted from ORI payments a proportionate share of those post-production costs.
- The ORI owners claimed the gas was unmarketable at the well and argued the implied covenant to market required SMR to bear costs necessary to obtain a marketable product, making the deductions improper.

## Issues

1. Whether the implied covenant to market arising under an oil and gas lease extends to owners of an overriding royalty interest created by a separate conveyance.
2. Whether an in-kind ORI deliverable at the wellhead, absent an express marketing obligation in the creating instrument, permits the ORI owners to shift gathering, compression, and processing costs to the operator under an implied duty to market.

## Decision

- Certiorari was granted to decide whether the lease’s implied covenant to market extends to these ORI owners.
- The Oklahoma Supreme Court vacated the Court of Civil Appeals’ opinion.
- The Court reversed the district court’s summary judgment for the ORI owners.
- The Court held there was no implied covenant to market applicable because the ORI instrument undertook no marketing obligation and the ORI was in-kind and deliverable at the wellhead.

## Legal Principles

- Implied covenants to market are contract-based duties implied in the oil and gas lease to protect the lessor; they do not automatically attach to separate instruments creating overriding royalty interests.
- When an ORI is created by a separate conveyance that lacks an express marketing obligation, courts will not imply a duty on the operator/lessee to market the ORI owners’ share.
- For an in-kind ORI deliverable at the wellhead, the operator’s obligation is to deliver at the specified point; absent an express agreement, the ORI owners cannot use a lease-based implied marketing duty to require the operator to bear post-production expenses.
- The lease “marketable product” line of cases governing lessor royalties does not control allocation of post-production costs for wellhead-deliverable, in-kind ORIs created outside the lease relationship.

## Conclusion

The Oklahoma Supreme Court limited the reach of the implied covenant to market by holding it did not apply to in-kind overriding royalty owners whose interest was deliverable at the wellhead and created by a separate instrument containing no express marketing duty, thereby allowing allocation of proportionate post-production costs to those ORI owners.


XAE Corp. v. SMR Prop. Mgmt. Co., 968 P.2d 1201 (Okla. 1998)