Summary
This is a dissenting opinion in a Texas Supreme Court dispute concerning whether an overriding royalty interest under an oil-and-gas lease bears post-production costs. Justice Brown concluded that the lease language did not modify the default rule allocating post-production costs and would have reversed the court of appeals.
Topics
Practice areas
Questions Presented
- Whether the lease's "cost-free" overriding royalty clause allocated post-production costs to Chesapeake.
- Whether the phrase "gross production obtained from each such well" required valuation at the wellhead rather than at a downstream point of sale.
- Whether the manner in which the royalty owners received their royalty, in cash rather than in kind, affected the allocation of post-production costs.
Holdings
- The overriding royalty clause should be read as granting the Hyders five percent of production at the wellhead, before post-production value is added, and the clause does not shift post-production costs to Chesapeake.
- The form in which the Hyders received their royalty should not determine the value of the overriding royalty or alter the allocation of post-production costs.
Key quotations
“I read the overriding-royalty clause as granting the Hyders a percentage of production before post-production value is added and without allocating their share of post-production costs to Chesapeake.” (at 8)
“I would thus hold Chesapeake properly deducted post-production costs to arrive at the royalty’s value and would reverse the court of appeals’ judgment.” (at 8)
Factual background
The Hyders held an overriding royalty under an oil-and-gas lease granting a "cost-free (except only its portion of production taxes) overriding royalty of five percent (5.0%) of gross production obtained from each [directionally drilled] well." Chesapeake deducted post-production costs in calculating the value of that overriding royalty. The dissent interpreted the clause as granting a percentage of production at the wellhead, before post-production value was added, with the Hyders bearing their share of post-production costs.
Procedural history
The case reached the Supreme Court of Texas on Chesapeake's petition for review from the Fourth Court of Appeals. The dissent would have reversed the court of appeals and held that Chesapeake's deduction of post-production costs was proper.