Co-author Brittany BlakeyRecall our recent post on Carl v. Hilcorp Energy Company from the U.S. District Court for the Southern District of Texas discussing the lessee’s royalty obligations on gas used off the premises in a market-value lease. See now, Fitzgerald v. Apache Corporation: Different judge; same district; similar facts, lease provisions
Co-author Brittany BlakeyThe question is presented again but in a different format: In Texas is a lessee allowed to deduct post-production costs (PPC’s) from the lessor’s gas royalty? In Carl v. Hilcorp, the answer was “yes” based on the language in the oil and gas lease at issue. The question was for gas
Co-author Brittany BlakeyZehentbauer Family Land, LP v. TotalEnergies E&P USA, Inc. is a story we’ve heard before: Royalty owners contend they are not getting a big enough slice of the hydrocarbon pie, which presents a question courts must answer: Where is the valuation point for royalty calculation?
Under the oil and gas leases at issue, royalties are to be paid:
“based upon the gross proceeds paid to Lessee for the gas marketed and used off the leased premises, including casinghead gas or other gaseous substance… computed at the wellhead from the sale of such gas substances so sold by Lessee.”
The midstream arrangements and the “netback method”
Chesapeake and Total sell their production at the wellhead to their respective midstream affiliates, CEMLLC and TGPNA, each of which sells the transported product to unaffiliated downstream companies. The affiliates account for the gas using the “netback” method, which “takes a weighted average of prices at which the midstream affiliates sell the oil and gas at various downstream locations and adjusts for the midstream company’s [various costs (including transportation)] to move the raw oil and gas from the wellhead to downstream resale locations.” The netback method accounts for these midstream (post-production) costs. The midstream affiliates pay this reduced amount to the producers, who use this netback price as the base for calculating the plaintiffs’ royalty payments.
Continue Reading Ohio Royalty Owners Burdened with Post-Production Costs
The question with wide-ranging implications for Louisiana operators and mineral owners in Johnson et al. v. Chesapeake Louisiana LP et al is whether unleased mineral owners in a drilling unit established by the Commissioner of Conservation must bear their proportionate share of post-production costs.
The statutory scheme
Under Louisiana’s forced pooling statutes, the Commissioner may form drilling units and appoint an operator to drill and operate wells for all owners in the unit. Unleased mineral owners (the court called them UMO’s) are exempt from the statutory 200% risk charge for drilling costs applied to non-participating lessees. The operator is required by La. R.S 30:10(A)(3) to pay a UMO who has not elected to market his share of production the tract’s pro rata share of proceeds from the sale of hydrocarbons.
The claims and defenses
Continue Reading Louisiana Unit Operators May Deduct Post-Production Costs from Unleased Mineral Owners
Author Ethan WoodLouisiana’s compulsory pooling scheme seeks to balance the interests of individual landowners and oil and gas operators to promote responsible development of natural resources. Because of compulsory pooling, operators are not held hostage by individual landowners who refuse to lease, but landowners are afforded protections so as not to be taken for
It was jurisprudential Groundhog Day as the Supreme Court of Texas handed down Nettye Engler Energy v. Bluestone Natural Resources, another in a series of postproduction cost disputes, only two days after Puxsutawney Phil peeked out of his cozy burrow to pronounce six more weeks of winter.
The takeaway
The Court clarified Burlington Resources
In resolving a dispute over post-production cost deductions from oil and gas royalties (PPC’s), the court in Shirlaine West Properties Ltd et al v. Jamestown Resources, LLC and Total E&P USA, Inc. opined that the case ” … is yet another episode in the endless struggle in the oil and gas context between lessors and lessees in the allocation of [PPC’s] in the calculation of royalty payments.”
Takeaway
Was the lessor’s gas royalty burdened by PPC’s? Yes. The market value royalty clause unambiguously fixed the wellhead as the valuation point for royalty calculation.
The royalty clause
The lessor did its best to be free of PPCs:
Continue Reading Another Post-Production Cost Decision in Texas
Coauthors Sahrish K. Soleja and Lydia WebbIf you are a royalty owner and have questions about how your claim is likely to be treated when your lessee/operator goes into bankruptcy in Delaware, In re MTE Holdings LLC is a significant case.
Historically, royalty claims have been treated as funds placed in trust because they
Most bills filed in each legislative session fail. For the most part we are thankful for that. But today we summarize a few that survived while you weren’t paying attention. As usual, there are winners, losers, and rainouts.
HB 2730 beefs up the “Landowners’ Bill of Rights” in eminent domain negotiations and proceedings. It amends
Co-author Rusty TuckerThe Supreme Court of Texas has ruled that oil and gas leases under consideration in BlueStone Natural Resources II, LLC v. Walker Murray Randle, et al. did not permit deduction of postproduction costs from sales proceeds before royalties were computed, and a “free use” clause did not authorize the lessee to consume leasehold gas in off-lease operations without compensating the lessors.
The takeaway …
… at least that’s what they ruled in this cicumstance. The Court reiterated that regardless of a recitation here or an observation over yonder, it will not adjudicate the supremacy of one contract clause over another or one arbitrary rule of construction over another. Rather, it will construe each contract according to its terms.
The royalty clause
Continue Reading Texas Supreme Court Weighs in on Post-Production Costs