In Oklahoma, Kansas, Colorado, West Virginia and all federal leases, “production” has not completely occurred until the lessee has captured and held the substances recovered, and has made those substances marketable.  This is the “Marketable-Product Rule." The minority view which contrasts to the majority view discussed in March in the “Capture and Hold Rule”.

            Under the Marketable-Product Rule, the lessee has the implied duty not only to actively look to find a market for the substances, but to also make those substances marketable.  The lessee is bound by the implied covenant to market, which includes in the minority jurisdictions embracing it, the duty to make the production marketable.  Costs of compressing, transporting and processing necessary to make the production marketable may not be deducted as an expense and charged back to royalty and overriding royalty owners.  They are considered part of the cost of producing, just like overhead charges under the COPAS each month.

John S. Lowe, Oil and Gas Law In A Nutshell, (West Group Publishing Company 2003), pg. 294-296.

Maxwell, Martin & Kramer, The Law of Oil and Gas, Eighth Edition (Foundation Press 2007), pg. 321-346.