Montgomery Trustee v. ES3 Minerals and Echo Minerals is another Texas fixed or floating royalty case. Before diving into the details, perhaps it’s best to describe the pattern the courts seem to fall into to resolve these disputes. These are general rules of construction one sees time after time in these cases:

  • To the extent possible apparent inconsistencies or contradictions must be harmonized by construing the document as a whole. In other words, the court will consider the entire document, not just each party’s favorite parts.
  • To discern the parties’ intent, words and phrases of the instrument must be construed together and in context, not in isolation.
  • Words and phrases generally bear their ordinary meaning unless the context supports a technical meaning or different understanding.
  • The text of an instrument retains the same meaning today that it had when it was drafted.
  • When faced with a double fraction involving 1/8 in a mineral reservation or conveyance the court is not to give the fraction its arithmetical meaning; rather, evaluation of conveyances and reservations executed in the “early to mid-20th century” (Whenever that was, this one is a 1955 deed) begins with the presumption that 1/8 reflects the entire mineral estate, not just 1/8 of it.
  • The estate misconception theory refers to the prevalent mistaken belief during that time that a lessor reserving a 1/8 royalty only retained a 1/8 interest in the minerals rather than the entire mineral estate in fee simple determinable with the possibility of reverter.
  • Because of the presumption, treating 1/8 as a placeholder for future royalties generally results in a floating royalty interest.
  • The presumption is “readily and generally” rebuttable but the court must examine the entire instrument to determine whether the text rebuts the presumption.
  • Although not present in this case, courts often consider the presumed grant doctrine.

The conveyance at issue

“The grantors… exclude from this conveyance, a [NPRI] of one fourth (1/4) of the landowners’ usual one eighth (1/8) royalty.“

Because the conveyance used a double fraction involving 1/8 the court began with the rebuttable presumption that the 1/8 was a placeholder for the standard royalty and not a set arithmetical value. The court concluded that the deed reserved a floating ¼ NPRI in existing and future leases.

Appellees relied on six clauses in the deed that they argued rebutted the floating presumption because they established that the grantors were under no misconception about the extent of their ownership of the mineral estate. The court was not convinced. These exceptions were too far afield from the granting language for the conclusions based on the granting language to be rebutted.

It’s sometimes not that easy.

These “rules” remain the same even where the interests to be conveyed or reserved are described in two – or even more – seemingly different or even contradictory ways, often scattered throughout the instrument. The court then has to engage in the additional task of harmonizing the different clauses, which is not easy to accomplish in many cases. 

John Mayall RIP. You have choices today.

with Eric Clapton …

Mick Taylor ,,,

Peter Green

Litigation practice tip before we dive into Right-Way Sand Co. v. South Texas Pipelines LLC (STX). Waiting 27 months after being sued and after the offending activity has occurred before asking for an injunction to “protect the status quo” is probably a loser.

STX sued landowners Right-Way and others to exercise the power of eminent domain for construction of a new pipeline to carry polymer grade propylene (PGP). Landowners objected to the court’s jurisdiction, arguing that STX did not satisfy the statutory requirements for exercising the power of eminent domain, and asked the court to enjoin STX from, among other activities, coming on the property, ceasing operation of an already-constructed pipeline, and requiring removal of the pipeline. The trial court granted STX’s motion for partial summary judgment and denied the landowners’ plea to the jurisdiction and request an injunction. The court of appeals agreed.

What is required to be a common carrier in Texas?

A person is a common carrier under the Natural Resources Code if he ” … owns, operates or manages a pipeline … for the transportation of crude petroleum to or for the public for hire, or engages in the business of transporting crude petroleum by pipeline”. “Oil” includes crude petroleum oil. A petroleum product includes ” … any other liquid petroleum product or byproduct derived from crude petroleum oil or gas.”

Under the Business Organizations Code entities can use eminent domain if they engage as a common carrier in the pipeline business “for the purpose of transporting oil, oil products, gas, carbon dioxide, salt, brine, fuller’s earth, sand, clay, liquefied minerals or other mineral solutions.”

It’s not a slam dunk. Constitutional protections require courts to give “special scrutiny” to questions about a private entity’s exercise of eminent domain. An entity relying on the statutory power must strictly comply with all statutory requirements and when there is a doubt as to the scope of the power, the use of such power is construed in favor of the landowner. But that was not a big hill for STX to climb here.

PGP is an oil product whether it is derived from catalytic fracturing and distillation of oil or from dehydrogenation of propane that might have come from a gas well. It is a liquid derived from gas and is a petroleum product.

Evidence establishing a reasonable probability that the pipeline will at some point serve even one customer unaffiliated with the pipeline owner is substantial enough to satisfy the public use requirement.

The court concluded that STX is a common carrier and has the right to exercise the power of eminent domain over the landowners’ property.

No injunctive relief

A party is not entitled to the extraordinary remedy of a temporary injunction unless it pleads and proves (1) a cause of action, (2) a probable right to the relief sought, and (3) a probable, imminent and irreparable injury in the interim.

The landowners failed to comply with basic requirements for a temporary injunction:

  • The application was not verified,
  • There was no evidentiary hearing,  
  • The purpose of a temporary injunction is to preserve the status quo. The landowners waited 27 months after STX filed its original petition to seek an injunction. During that time the pipeline was installed and was operating. The court had a hard time understanding what “status quo” the landowners were trying to preserve.

Your musical interlude.

Maverick Natural Resources, LLC at al v. Glenn D. Cooper Oil & Gas, Inc. is for control freaks wherever you are … and for those of you who advise the aforesaid control freaks.

Cooper sent Maverick a letter offering to purchase oil and gas wells and leases in Crane County for $950,000, to which Maverick agreed. The letter contemplated typical due diligence rights for Cooper (examination of title, LOS’s, etc.). Cooper would have the exclusive right to purchase the properties until a certain date. The letter gave Cooper the sole discretion to decide whether to actually close.

The closing date passed and Maverick decided not to sell. Cooper sued for breach of contract, declaratory judgment and statutory fraud. Maverick’s response was that the “I can bail out whenever I want for no reason” language rendered the letter unenforceable for want of consideration. The trial court disagreed with Maverick and issued a series of summary judgments which, among others, awarded Cooper specific performance.

The court of appeal reverses

At the heart of the dispute was this language in the letter:

“… Should [Cooper] in its sole discretion, desire to move forward to a closing, no financing contingencies shall be had, and closing will occur promptly. Should [Cooper] discover anything during its diligence period it determines unacceptable, no closing or exchange of funds shall occur.”  (emphasis added)

Why the Court Did What It Did

For a contract to be enforceable it must be supported by valid consideration i.e. mutuality of obligation. Consideration refers to something that is a benefit to the promisor or a loss or detriment to promise. Although a promise to perform constitutes consideration, if the promisor retains the option to terminate the transaction in the performing it, the promise is illusory and does not actually bind the promisor. Consequently, if one party retains the option to walk away, that party must give separate consideration for the option. When the letter was signed the commitments in the letter were the sole form of consideration exchanged; no money was paid.

Cooper insisted that its sole discretion was contingent upon its discovery of unacceptable information during its diligence review and carried an implied duty to act in good faith. The court relied on the plain language of the contract and disagreed. Nothing in the text of the letter conditioned Cooper’s sole discretion on information discovered during the diligence, or anything else for that matter. Cooper insisted that a duty to act in good faith implied in the letter prevented the promise to perform from being illusory. The court declined to apply a good-faith requirement.

What can you do about it?

The Court gave the answer: The agreement could provide for a payment or other benefit in consideration of the promise to close.

There is another answer: Maybe it wasn’t a “control freak”. Maybe the culprit was incomplete, inaccurate, or imprecise language in the problematic sentence. Was the parties’ “real” intention something other than what the plain language said it was? In the world of contract construction, it doesn’t matter.

Your musical interlude.

In Louisiana et al v. Biden et al a federal district court granted relief to 16 states by enjoining the DOE’s pause in considering LNG export permits. The relief is not permanent. It means that the plaintiff-states have a likelihood of success on the merits.   

The “Export Ban”

As you know, in January President Biden announced a “temporary”, and perhaps indefinite, pause on pending decisions on whether to grant LNG export permits. The same day the DOE announced it was pausing determinations of applications to export LNG to non-Free Trade Agreement countries (Among others, all of Europe). The stated purpose was to update the assessments used to inform whether additional LNG export authorization requests are in the public interest.

The litigation

The complaint cited a number of violations of statute and the DOE’s own history and policies; for example, it contradicted a July 2023 DOE decision which concluded that halting approval of LNG exports has no factual or legal basis.

Defendants moved to dismiss on several procedural grounds, all of which were denied and none of which are relevant for this discussion (apologies to administrative law buffs). 

Bases for the decision

Here are (simplified) bullets explaining allegations cited by the court for the injunction Some are recited as facts and others as allegations that the court believed justify injunctive relief. They still must be proved:

  • Exports are governed by the Natural Gas Act, the purpose of which is to encourage the orderly development of plentiful supplies of electricity and natural gas at reasonable prices.
  • The DOE’s regulatory authority extends to the act of transporting gas to and from the United States. It does not extend upstream to production or downstream to consumption.
  • The NGA expressly instructs the DOE to ensure expeditious completion of all proceedings in which companies desiring to export gas to a foreign country apply for an export permit.
  • The DOE has no discretion to delay ordering a hearing on an application.
  • In denying a permit the DOE is required to make an affirmative showing that a permit would be inconsistent with the public interest.
  • The NGA does not define the public interest but the term has been interpreted for years to mean to promote the orderly production of plentiful supplies of natural gas at just and reasonable rates.
  • The National Environmental Policy Act requires a federal agency to prepare an environmental statement as part of major federal actions significantly affecting the quality of the human environment.
  • In 2020 the DOE concluded that such an analysis is limited to considering only the potential environmental impact starting at the point of delivery to the export terminal and extending to the territorial waters of the receiving country.
  • Environmental impacts of upstream and downstream activities are not within the scope of the DOE’s environmental review.
  • Page 7 of the opinion references damages claimed by the states and the industry.
  • The Export Ban is contrary to law and exceeds the DOE’s statutory authority.
  • The Export Ban directly contradicts without explanation or logic the EPA’s 2023 reaffirmation of its LNG export approval process based on its long-standing policy in statutory interpretation.
  • There are massive economic benefits for US communities by providing global access to reliable US natural gas supply needed to further the global energy transition from higher GHG-emitting fuels to lower GHG-emitting natural gas.
  • Exports of natural gas pay five times more than the sale of natural gas domestically. Thus, exporting natural gas is economically beneficial to the United States.
  • The EPA’s process is “ … completely without reason or logic, perhaps the epiphany (sic) of idiocy and ideography.” (A Chamber of Commerce-ready quip if there ever was one.)

What’s next?

For one thing, the election. Will this seditious, economy-busting pandering to the Greens end after November? Will the Administration simply ignore the injunction, as has been suggested? The damage to the affected states, the natural gas industry, and the country’s economic health and national security are real.

Enjoining a refusal to act is an order that requires the defendant to act. What if the DOE and the president just pick up their administrative marbles and go home, ignoring the order by doing nothing while pretending to be doing something? They could delay the process interminably while our gas-producing foreign competitors develop their own market-share-stealing export capabilities.

Your musical interlude.

The U. S. Supreme Court struck down the “Chevron doctrine” that has plagued the citizenry of our great country since 1984. In Loper Bright Enterprises et al v. Raimondo, the Court ruled that the Administrative Procedure Act requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority. The courts may not defer to an agency’s interpretation of the law simply because a statute is ambiguous. This case was a challenge by New England herring fishermen to a requirement of the National Marine Fisheries Service that fishing vessel owners pay for government-mandated inspectors to monitor their fish harvests.

The reasoning

Citing sources such as the Federalist Papers (No. 78 p. 525; No. 37, p. 276 if you’re interested) and decisions as early as Marbury v. Madison, Chief Justice Roberts concluded that the final interpretation of laws is the province of the courts. Chevron defied the command of the APA that a reviewing court, not the agency whose action is being reviewed, is to decide questions of law. Chevron required a court to ignore the reading it would have reached had it exercised independent judgment as required by the APA. Chevron’s presumption is misguided because agencies have no special competence in resolving statutory ambiguities. The Court observed that under Chevron’s broad rule of deference, ambiguities of all stripes triggered deference even in cases having little to do with an agency’s subject matter expertise.

What is Chevron deference?

In Chevron USA v. Natural Resources Defense Council, a quorum of six justices established a two-step approach to review of federal agency action. First, discern whether Congress had directly spoken to the question at issue.  If the intent of Congress is clear that’s the end of the matter. If the statute is silent or ambiguous with respect to the issue, a reviewing court could not impose its own construction of the statute as would be necessary in the absence of an administrative interpretation. Instead, the second step would be for a court to defer to the agency if the agency had offered a permissible construction of the statute even if the court would have reached a different result in a judicial proceeding.

A brief history

Since the beginning, the Supreme Court believed it should give “the most respectful consideration” to the executive branch’s interpretation of laws. The views of the executive branch could inform, but not supersede, the judgment of the judiciary. Beginning with the rise of the administrative state during the New Deal era the Court began to treat agency determinations of fact as binding on the courts, provided there was evidence to support the findings. The court did not extend similar deference to agency resolutions of questions of law. The interpretation of the meaning of statutes remained exclusively a judicial function.

In 1946 Congress enacted the APA “as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating the offices”.

Then, along came Chevron, which triggered what Justice Roberts referred to as a “marked departure from the traditional judicial approach of independently examining each statute to determine its meaning.” Over time the Court has whittled away the full effect of Chevron, but the lower courts have continued to apply it because it had not been reversed.

It remains that an agency’s interpretation of a statute may be especially informative to the extent it rests on factual premises within the agency’s area of expertise.

Stare Decisis

This doctrine governs judicial adherence to precedent but does not require the court to persist in Chevron if the quality of the precedent’s reasoning, the workability of the rule it established, and the reliance on the decision do not support stare decisis. Those three factors weighed against start decisis in Loper.

Concurring opinions

Justice Thomas noted that Chevron not only curbed the courts’ judicial powers but simultaneously expanded agencies’ executive power beyond constitutional limits.

Justice Gorsuch relied on Article III of the Constitution, which delegates the power to resolve cases and controversies to tenured judges. As for stare decisis, he noted that during the years under Chief Justices Warren and Burger the Court overruled an average of three cases per Term, including roughly 50 statutory precedents. And one could consider how the FDR era Court expanded the Commerce Clause.

The dissent

Justice Kagan saw the decision as yet another example of the Court’s rollback of agency authority, despite Congressional direction to the contrary, and referring to Chevron as “long-standing”. She saw a rule of “judicial humility” give way to “judicial hubris”, citing several cases in which the Court was well-advised to leave technical terms to the agency. She sees agencies as “politically accountable” and Congress as often intentionally leaving gaps and ambiguities in statutes. She took issue with the majority’s reliance on the APA.

What does Loper Bright mean?

The New York Times doesn’t like it which, to regular readers of this blog, means it must be a good result. Decide for yourself. One obvious effect: It diminishes the power of the unelected, often overly zealous federal bureaucracy to, without oversight from any court, micromanage the everyday lives of ordinary citizens and businesses of all sizes. It is a victory for the “forgotten man” the New Deal was envisioned to help and a defeat for the overweening regulatory apparatus that the New Deal spawned.

Lagniappe: Want to meet the real “Forgotten Man”? Read the book of the same name by economist Amity Schlaes. Among other issues, see how rent-seeking big business buddied up to the New Deal regulators to squeeze the little guy.

Willie Mays , RIP

Orlando Cepeda, RIP

It would be a heavy burden to catalogue all of the wrongs one might attribute to our Texas Attorney General. Now, we have another one. Opinion KP-0467, responding to a request from the Texas Real Estate Commission, concluded that a person who negotiates a lease of property for the development of a wind power project on behalf of another, for compensation, is required to hold a license issued by the TREC.

 The Opinion cites Sections 1101 and 954 of the Occupations Code. In particular, Section 954 was amended by Sente Bill 604 in the 88th Legislature to excuse landmen from TREC licensing requirements.  I think it is fair to say that the industry and the Legislature thought they had wind leasing covered in SB 604. The AG disagrees. Because the Opinion is not enforceable and no one’s livelihood depends on the nuances, I will not get into the details of the reasoning.  

After the Opinion was issued, AAPL President Brooks Yates responded in this letter. The AAPL believes the Opinion reached the wrong result and will be detrimental to the interests of landmen and wind power developers.

FYI here is Senate Bill 604.

Your musical interlude.

In United States v. Osage Wind LLC a federal court in Oklahoma awarded permanent injunctive relief against a developer in the form of ejectment of a wind turbine farm after finding a continuing trespass.

The history

Beginning in 2010 Osage Wind leased 8400 acres of surface land in Osage County, Oklahoma. The Osage Nation sued to block construction on the basis that the project unlawfully deprived the Nation of access to the right to develop the mineral estate. That suit was dismissed on the merits. Defendants began construction soon after that. The wind farm began operating in 2015 and consists of 84 turbines and associated infrastructure.

The construction consisted of excavating holes to accommodate cement foundations measuring 10 by 60 feet. The developer sorted rocks, crushed them into smaller rocks, and used the smaller rocks as backfill for structural support for each turbine tower.  

In the first suit the federal 10th Circuit concluded that the defendants’ extraction, storing and crushing of rocks that were then used as backfill for support of wind towers constituted mineral development under federal regulations. 

After the first suit, the United States sued for judgment declaring that the excavation and construction activities constituted unauthorized mining of the mineral estate without first obtaining a lease and. Osage Wind continued its construction. The Osage Nation intervened.

The allegation in the second suit was that the developers’ continued presence on the land constituted a continuing trespass. The court evaluated whether the trespass was continuing or temporary.

The distinction between a temporary and continuing trespass is the ongoing nature of the access. The court determined that operation of the entire wind farm constituted a continuing trespass.

The 10th Circuit’s ruling seems at first to be an overly broad interpretation of “mineral development”, but the trial court here relied on a canon of interpretation that requires the court to liberally construe ambiguity in laws intended to benefit Indians in favor of Indians.

The US’s allegations involved activities encompassing the entire windfarm project, not only the foundations for the wind towers. The size of the mining setback created by the presence of each wind tower would be a relatively small percentage of the leased surface estate. That factor did not constitute a continuing trespass.

Irreparable harm

The court relied on the Tribe’s traditional and undisputed power to exclude persons from tribal land gives it the power to set conditions on entry to the land. The defendants were advised by the BIA and the Osage Mineral Counsel on multiple occasions that the project required a lease related to the mineral estate but the developers never attempted to obtain a mineral or mining lease (Why not? the uninformed onlooker might ask). The 10th Circuit held in 2017 that the defendants were actively avoiding the leasing requirement. The trial court in this case concluded that the defendants’ continued refusal to obtain a lease constitutes an offense to the sovereignty of the Osage Nation and was sufficient to constitute irreparable injury.

A trial will be held to assess damages.

RIP Mark Evans. “Who”, you ask? One of a legion of writers of great and popular songs who go unnoticed beyond the close confines of the music industry. He wrote this one, and this one, and others.

Briggs v. Southwestern Energy Production Company, LLC is good news for Pennsylvania mineral owners bringing claims for subsurface trespass by fracking.

In 2018 in “Briggs 1”, the Briggs family sued SWN for subsurface trespass by fracking into the Marsellus formation from wells on SWN’s leases that extracted gas from Briggs’ property. The Pennsylvania Supreme Court found that because Briggs did not allege any specific physical invasion of their land, summary judgment dismissing Briggs’ claims was proper. 

In 2022 Briggs filed a new complaint for trespass, conversion, and damages alleging the same claims (“Briggs 2”).  The difference in the two suits was Briggs’ assertion in Briggs 2 that SWN’s drilling and hydraulic fracturing processes employed by wells running along Briggs’ land actively injected fluids and proppants into Briggs’ land, thereby constituting a physical intrusion that caused gas to flow from Briggs’ land into SWN’s wellbore.

In response to SWN’s motion to dismiss, Briggs amended their complaint to assert claims alleged to have arisen after the date of the Briggs 1 decision.

The question for the Pennsylvania Supreme Court this time around was whether Briggs alleged a continuing trespass and whether their claims were barred by the statute of limitations.

Pennsylvania trespass law

A person is subject to liability for trespass is one intentionally enters land in possession of another or causes a thing or a third person to do so, remains on the land, or fails to remove a thing which one is under a duty to remove.

The failure to remove from land of another a structure, chattel or other thing which he has tortuously erected or placed on the land constitutes a continuing trespass for the entire time during which the thing is wrongfully on the land … .

… which is not the same as a trespass which permanently changes the physical condition of the land.

Whether a trespass constitutes a permanent or continuing cause of action depends on three factors, all of which the Court concluded were sufficiently alleged, resulting in success for Briggs, at least at this stage of the proceeding.

•First factor: Character of the structure or thing which produces injury. SWN is continuing to actively extract gas from Briggs’ property due to proppants from boreholes in SWN’s well. 

•Second factor: Will consequences of the trespass continue indefinitely? Duration of the gas extraction is unknown and is thus indefinite. 

•Third factor: Whether the past and future damages may be predictably ascertained. It is impossible to determine how much will be extracted in order to ascertain the amount of damages but it is known that damages will be sustained in the future.

The Court responded to SWN’s statute of limitations defense by ruling that Briggs could not recover damages for time periods before the date of the opinion in Briggs 1.

Your musical interlude, having nothing to do with fracking, Pennsylvania, or anything else even tangentially discussed in this post.

In Occidental Permian, Ltd. et al v. Citation 2002 Investment LLC  the Supreme Court construed a 1987 assignment from Shell Western E& P Inc. to Citation of a large number of properties. The instrument contained these numerous provisions:

  • 1st granting clause: … all right, title and interest in the … leasehold estates described in Exhibit A.
  • 2d granting clause: … all right, title and interest in contracts … including, but not limited to, … rights above or below certain footage depths or geological formations, affecting the property described in EXHIBIT A.
  • 3d granting clause: It is the intent of this assignment to … convey … all rights and interests now owned by Shell Western … regardless of whether same may be incorrectly described or omitted from Exhibit A … .
  • Exhibit A with six columns, including “Column IV”: describing Permits from the surface to the base of certain formations.
  • Seven “subject to” clauses.

The dispute

Instruments with this many moving parts are good candidates for controversy which is, of course, what happened here. The Supreme Court, in affirming the court of appeals (See this post for the facts and that opinion) described “overlapping property interests, overarching leasehold mineral estates, tracts within those leases with depth applications, smaller property interests encompassing larger property interests with no express reservation of the property beyond the smaller interests.”

There is no need to decipher this sui generis instrument. You are welcome to do that on your own. The takeaways:

(1) Interpretation of an unambiguous contract is a question of law. The court’s job was to consider the entire agreement and, to the extent possible, resolve conflicts by harmonizing the provisions so as to give effect to all provisions so that none will be rendered meaningless.

(2) The Court considered the entire conveyance together with Exhibit A to conclude that the assignor Shell (predecessor to Occidental) conveyed its entire ownership in the leasehold without reserving an interest in portions outside identified tracts within the leases. It was the leases that were the significant interest described in Exhibit A and Shell intended to convey all rights inherent in the leases to Citation.

(3) The Court declined to disregard the third granting clause as an overly broad Mother Hubbard clause It was a general grant or conveyance. It could not be read as covering only overlooked interests. Mother Hubbard clauses are not intended to convey significant property interest not adequately described in the deed.  

(4) The subject-to clauses did not limit the grant. Those clauses are widely used for other purposes than their ordinary meaning of subordinate to, subservient to, or limited by. An agreement may be subject to a term that does not limit the scope of the conveyance but instead notifies the granting of a right or obligation attendant to the property conveyed.

(5) one might be inclined to treat this case as a lesson in sloppy drafting. But in such a complicated transaction, a better way to see the case is as a potential hazard that comes with such a complex transaction. If there’s enough at stake, somebody will look for a reading of such an agreement to that party’s advantage.

What’s your mood today?

A melancholy musical interlude …

Or comforting with punch?

In Carl v. Hillcorp Energy the Supreme Court of Texas addressed the relationship between the lessee’s use of gas off-premises under a free-use clause and the lessor’s burden to share post-production costs (PPCs) under the at-the-well gas royalty clause of an oil and gas lease. Spoiler alert: Lessee wins.   

The basics

Minerals that have been processed or transported are generally more valuable than the same minerals at the wellhead. The Supreme Court has long held that the holder of an at-the-well royalty must share proportionately in PPC’s expended on production from the well prior to sale.

Producer Hillcorp used gas produced from the well to power post-production activities conducted off the premises. Generally, the value of gas used for post-production activities is a PPC of the kind normally charged to the royalty owner. Hillcorp accounted for this value by subtracting the volume of gas used in post-production activities from the total volume of gas on which royalties were calculated.

The royalty clause

Hillcorp was to pay royalty “on gas … produced from said land and sold or used off the premises.”

Royalty owner Carl argued that Hillwood could not subtract volumes of gas used in post-production activities because the lease required payment of royalty on all gas produced from the well; gas sold or used off-premises must be calculated based on the market value of that gas at the well; and when volumes of gas are removed from the royalty calculation she is not being paid for all the gas sold or used off the premises.

Hillcorp countered that because this is an at-the-well royalty lease it may subtract the value of gas used in post-production activities before paying royalty.

The free-use clause

The royalty clause allowed Hillcorp to have “free use of … gas … from said land for “all operations hereunder, and the royalty on … gas … shall be computed after deducting any so used.” Carl argued that Hillcorp did not have free use of gas for off-lease post-production operations, which she argued were not “operations hereunder”. Thus, Hillcorp must pay royalty on that gas.

What the Court said

The Court concluded that Carl invoked a provision – the free-use clause – that has no impact on her obligation as a royalty holder of an at-the-well royalty to bear her proportionate share of PPCs.

To the Court, the question was not whether the lease entitled Hillcorp to free use of the gas used in post-production activities. The fact remained that Carl as a holder of an at-the-well royalty must share in PPC’s whether or not those costs include using some of the gas produced from the well. Carl was not claiming that gas used for post-production activities was not a genuine PPC of the kind that normally is shared by an at-the-well royalty holder.

The free use clause had no bearing on the outcome of the dispute over how to account for PPCs. The point was that Carl’s market-value-at-the-well royalty bears the usual cost of PPC’s including the cost of gas produced from the well and used off-premises to power postproduction activities.

Caveat from the Court

Attaching labels to general categories of lease clauses – eg. “off-lease-use-of-gas” and “free-on-lease-use” clauses gives the misimpression that all clauses to which those labels apply operate in the same way. To the contrary, all leases are to be interpreted based upon what they say and not based on labels.

Remember Memorial Day