post-production deductions

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Co-author Rusty Tucker

The 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

Co-author Rusty Tucker

Devon Energy Prod. Co., et al. v. Sheppard, et al is your kind of case if you are in search of:

  • A roadmap for slicing and dicing royalty calculations in myriad ways,
  • Pretty good summaries of the Supreme Court’s notable decisions in Heritage Resources v. NationsBank, Judice v. Mewborne Oil, Chesapeake Exploration v. Hyder and Burlington Resources v. Texas Crude. (pp 12-19)
  • A description of the gas fractionation process.
  • For you scriveners: Reference to the Supreme Court’s lament for “the considerable time, money and heartache” expended due to the use of “industry jargon, outdated legalese, or tenuous assumptions about how judges will interpret industry jargon or outdated legalese”.

Continue Reading When is a “Gross Proceeds” Royalty not Paid on Gross Proceeds?

Co-author Ethan Wood

In Johnson et al vs. Chesapeake et al, unit operator Chesapeake deducted post-production costs (gathering, compression, treatment, processing, transportation and dehydration) from non-operating, unleased mineral  owners’ share of production proceeds. The UMO’s (so-called by the court) sued. The federal district court concluded that La. R.S. 30:10(A)(3) governs the dispute, and post-production costs could not be recovered from the UMO’s share of production proceeds.
Continue Reading Louisiana Operator Can’t Deduct Post-Production Costs from Unleased Mineral Owners

Co-author Chance Decker

 Burlington Resources Oil & Gas Company, LP. v. Texas Crude Energy, LLC et al is another chapter in the back-and-forth over deduction of post-production costs from royalty payments. In “clarifying” (royalty owners might say “retreating from”) Chesapeake Exploration & Production, LLC v. Hyder, the Texas Supreme Court held that a royalty delivered into the pipeline or tanks is akin to a royalty delivered “at the wellhead.” The lessee was entitled to deduct post-production costs from its royalty calculation, notwithstanding that the calculation was based on the “amount realized” from downstream sales.

Don’t read too much into it?
Continue Reading Texas Supreme Court Clarifies Hyder

hide the ballThe result was like others we’ve seen. Lessors Win. These wells are in Johnson and Tarrant County, Texas. Lessee Chesapeake Exploration sells to affiliate Chesapeake Marketing through affiliate-operator Chesapeake Operating. Plaintiffs sued Exploration and Operating for underpayments of royalty and overrides.

The Takeways

  • This decision demonstrates the reason for special royalty clauses addressing sales

…

Co-author Travis Booher

Chesapeake Exploration, L.L.C. v. Hyder is another hair-splitting Texas decision about “cost-free royalties”. 

The Facts

The Hyder family executed a lease covering 1,037 acres. Chesapeake drilled 22 wells on the leased premises. The Hyders believed their lease provided for a “cost free” royalty; that is, no post-production deductions. Chesapeake deducted post-production…