Austin Oil and Gas Attorney Gregory D. Jordan Comments on $10 Million Carbon-Injection Royalty Case
Austin, TX (Law Firm Newswire) February 24, 2014 – The Texas Supreme Court will decide a $10 million dispute between property owners and Occidental Permian Ltd. over the valuation of natural gas production.
The case questions whether a company can take deductions for the cost of carbon injection from the mineral royalties it pays to property owners.
“Deductions for production costs and post-production costs are a common area of dispute between royalty owners and oil and gas producers,” says Gregory D. Jordan, an Austin oil and gas attorney not involved with the case. “It is extremely important for mineral and royalty owners to have the assistance of an experienced oil and gas attorney in negotiating the terms of their leases and production agreements so that these disputes can be avoided. The initial agreements should clearly establish the rights and obligations of the parties.”
The lawsuit was filed by a group of Cogdell Canyon Reef Unit royalty owners. The plaintiffs claim that Occidental reduced their royalty payments by deducting the cost of production services provided by a subsidiary of Kinder Morgan Inc. Carbon dioxide injection was used to produce natural gas and natural gas liquids as part of an enhanced recovery project.
The plaintiffs were awarded damages of $10 million and attorneys’ fees of $500,000 by a trial court, but that decision was reversed in October 2012 by the Eleventh Court of Appeals. The appeals court found that the expense of removing carbon dioxide from the gas stream was properly shared between landowners and producers, because it was part of the cost of treating the gas so it could be sold.
The lawsuit raises the question of whether gas is properly valued before extraction, in its “native” state, or when it is commingled with carbon dioxide at the wellhead. Additional issues in the lawsuit include whether removing, compressing and transporting carbon dioxide should be classified as production operations, and whether the off-site action of removing carbon dioxide for reuse is properly classified as a production operation or a post-production operation.
The royalty owners claim that the decision by the appeals court is in conflict with a 1974 ruling by the Texas Supreme Court, which found that royalty obligations only apply to natural gas produced in its “native” state, and not to minerals produced with carbon dioxide injection methods. Occidental takes the position that the gas should be valued based on its condition when it left the well, and that gas containing up to 85 percent carbon dioxide requires additional processing.