Texas Supreme Court Rules on Costs Applied to Oil and Gas Royalties
Austin, TX (Law Firm Newswire) May 21, 2019 – In the case of Burlington Resources Oil & Gas Company, L.P. v. Texas Crude Energy, LLC (No. 17-0266), the Texas Supreme Court held that certain post-production costs were rightfully deducted when calculating overriding royalty payments based on the “amount realized” from the sale when the royalty interest is to be delivered “into the pipelines, tanks, or other receptacles with which the wells may be connected.” This opinion reversed the decision by the lower appeals court.
Texas Crude Energy, LLC sued Burlington alleging Burlington could not charge post production costs to the royalty holder. The leases at issue have both a Granting Clause and a Valuation Clause. The Granting Clause provides that “[s]aid overriding royalty interests shall be delivered to ASSIGNEE into the pipelines, tanks or other receptacles with which the wells may be connected, free and clear of all development, operating, production and other costs.” The Valuation Clause provides that “[t]he overriding royalty interest share of production shall be delivered to ASSIGNEE or to its credit into the pipeline, tank or other receptacle to which any well or wells on such lands may be connected, free and clear of all royalties and all other burdens and all costs and expenses except the taxes thereon or attributable thereto.”
The Court first noted the usual rule that royalty interests are free from post-production expenses, but that this general rule can be modified by agreement between the parties. The Court identified that the crux of the parties’ dispute is whether Texas Crude Energy, LLC holds royalties on products at the well (Burlington’s position) or on treated and transported products at their downstream point of sale (Texas Crude’s position). The Court held that the agreements between the parties provided that the royalty interest shall be delivered “into the pipelines, tanks, or other receptacles with which the wells may be connected.” This latter phrase fixed the royalty’s valuation point at the physical location where the interest is to be delivered — at the wellhead or nearby.
In a comment on the decision, Gregory D. Jordan, an oil and gas attorney with the Law Offices of Gregory D. Jordan in Austin, Texas, stated that, “This ruling highlights the importance of carefully drafting oil and gas leases. Seemingly innocuous provisions can come back to bite the royalty owner. If you are considering leasing, it is a good idea to have knowledgeable counsel.” Jordan further noted, “It will be very interesting to see whether this case signals that the Court will be more willing to assess costs against royalties than it has historically found.”