Texas Supreme Court Increases the Rights of Oil and Gas Producers

Originally published by Environmental and Energy Law Blog.

In a move that will benefit Texas oil and gas producers, the Texas Supreme Court recently held that certain costs may be deducted when calculating royalty payments based on the amount realized from a sale when royalty interest is to be delivered into certain pipelines, tanks, or other receptacles. This decision reversed an appellate court decision that held parties may allocate post-production costs in a manner they see fit.

The Case: Burlington Resources Oil & Gas Company, L.P. v. Texas Crude Energy

In Burlington Resources Oil & Gas Company, L.P. v. Texas Crude Energy, the parties disagreed over whether Burlington Resources Oil & Gas Company, L.P. (Burlington) had the right to subtract certain post-production costs from royalty payments made to Texas Crude Energy (Texas Crude). Texas Crude’s royalty interests were set forth in assignments containing a granting clause and a valuation clause.

These clauses were the primary cause of the dispute between the parties. The granting clause required overriding royalty interests to be delivered to the 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 required the royalty interest share of production to be delivered to the assignee into the pipeline, tank, or other receptacles to which any well or wells on such lands may be connected, free and clear of all royalties and other burdens, costs, and expenses (with the exception of taxes).

Holding and Impact

In its holding, the court found that although the valuation clause specified that the royalty payment would be calculated based on the amount realized from the sale, the agreements provided that the royalty interest was to be delivered into the pipelines, tanks, or other receptacles with which the wells were connected. Due to the inclusion of the delivery language, the royalty’s valuation point was fixed at the physical location where the interest was to be delivered, which was the wellhead or nearby. Therefore, the court determined that Burlington had the right to subtract post-production costs.

Our Texas Oil and Gas Attorney Is Here to Help

If you are involved in the oil or gas industry, it’s imperative that you have experienced legal representation on your side. In the areas of oil and gas, it’s vital to ensure that all contracts are properly drafted. Oil and gas contracts are sophisticated documents, and it’s important that they are drafted with the guidance of an experienced Texas oil and gas attorney.  

At the Law Office of C. William Smalling, P.C., we are highly experienced in the drafting and review of oil and gas contracts, including joint operating agreements, farm-out agreements, master service agreements, drilling contracts, licensing agreements for use of seismic or technical data, and nondisclosure agreements. If you are in need of a Texas oil and gas attorney, contact us today for a consultation.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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