A Colorado judge earlier this week ruled that BP wrongfully deducted the costs of gathering, treating and compression from payments to royalty owners with interests in mostly coalbed methane wells in the San Juan Basin — a decision that could potentially cost the producer as much as $100 million in damages once interest is calculated and which may have implications for other producers.

Judge David L. Dickinson of the Sixth District Court in La Plata County, CO, concluded that the gas in the Colorado portion of the San Juan Basin was marketable only after it had been gathered, treated, compressed (GTC) and delivered to the “inlet” to the interstate pipeline, which placed the burden for the majority of the costs on BP and not the royalty owners.

Under Colorado law, a lessee (producer) has the responsibility to place gas in a marketable condition and assume the costs for getting the gas in a marketable condition, said Robert Miller, an attorney in Durango, CO, who represented the royalty owners in the class-action lawsuit. He noted that Dickinson just applied the facts of the case to the existing law.

BP argued the gas was marketable at the wellhead, and that royalty owners were responsible for a proportionate share of the GTC costs. The defendant in the case originally was Amoco Production Co., which was acquired by BP.

Dating back to June 1991, the producer has deducted the post-production GTC costs from royalty payments to lessors who have interests in some 600 wells in the Colorado portion of the basin, according to the court decision. In the next phase of the case, Miller is expected to ask for an accounting of the deductions so that the court can determine the amount of damages owed. It could be “several tens of millions of dollars,” according to one estimate.

A status conference is planned for Oct. 16 to begin the process of assessing damages, Miller said.

While the ruling is limited to BP, other producers in the San Juan Basin reportedly deduct the same costs from royalty payments even though state laws prohibit it. “Other producers in the basin are not before the court in this case, thus this decision is not binding upon them,” wrote Dickinson in his lengthy decision. “However, were such producers before this court on the identical evidence, the finding as to marketability would be the same.”

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.