Waste Not, Want Not: The Marketable Product Rule Violates Public Policy Against Waste of Natural Gas Resources

The courts of several natural gas-producing states have, over the years, adopted what is often referred to as the “marketable product rule” or “first marketable product doctrine” (hereinafter referred to, in all its various forms, as the “Marketable Product Rule” or the “Rule”). The Marketable Product Rule is a judicially crafted doctrine applied to natural gas royalty provisions. The Rule requires the lessee under an oil and gas lease to bear all production and post-production expenses incurred until the gas is considered “marketable.” Often, the result is a massive shifting of post-production costs from lessors to lessees, as compared to the application of the same lease language in nonMarketable Product Rule jurisdictions. A careful examination of the jurisprudence reveals that courts applying the Marketable Product Rule have failed to consider some of the far-reaching implications of their doctrine. Specifically, every Marketable Product Rule state has at least one statute declaring the public policy of that jurisdiction to prohibit waste of oil and gas resources. Ironically, as a direct consequence of the Marketable Product Rule’s shifting of post-production costs to lessees, natural gas leases