Texas Supreme Court Rules on Costs Applied to Oil and Gas Royalties

Austin Oil and Gas Attorney, Gregory D. Jordan

Austin Oil and Gas Attorney, Gregory D. Jordan

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.”

Law Offices of Gregory D. Jordan
5608 Parkcrest Drive, Suite 310
Austin, Texas 78731
Call: 512-419-0684

View Larger Map

  • Are Texas Arbitration Agreements Between Employers and Their Employees Always Enforceable?
    Over the past decade, it has become common to see arbitration agreements in a variety of business agreements. Indeed, arbitration is the preferred method for many businesses to resolve all kinds of Texas business disputes, whether a dispute is between a company and its customers, employees, suppliers or another business. Recently, forced arbitration clauses have […]
  • The Duties of the Holder of the Executive Right to Minerals
    In the case of Texas Outfitters, LLC vs. Nicholson, the Texas Supreme Court examined the holder of the executive right’s duty of utmost good faith and fair dealing to non-participating mineral interest owners. In Texas Outfitters, the holder of the executive right to lease minerals refused to sign a lease which the owner of a […]
  • Texas fines a cryptocurrency investment firm
    An investment firm that marketed cryptocurrency in Texas has been fined and ordered to provide restitution to its investors. Texas security regulators reported that Mintage Mining LLC has agreed to pay the penalties and restitution. This agreement came on the heels of an 18 month long investigation by Texas security regulators of what they characterized […]

Dream2Career, LLC, a women-owned startup, offers Quality-of-Life Employee Benefits to small and medium-sized businesses. The company's suite of dynamic products is built on an intelligent platform, using the Horizontal Industry Framework (HIF) which creates a sense of community, increases innovation, and integrates diversity of thought into the company culture so that businesses can recruit and retain the workforce of tomorrow.

Get involved!

Engage in HIFies Community
Explore | Define | Grow


No comments yet