AUSTIN – For nine years, Burlington Resources deducted post-production costs from royalties it paid to Amber Harvest for development in Eagle Ford’s Sugarkane Field.
Burlington says it heard no complaints from Amber Harvest about the deductions until June 12, 2015, the day the Texas Supreme Court issued its decision in a dispute over post-production costs involving Fort Worth’s Hyder family and Chesapeake Exploration. In an unusual win for royalty owners, the sharply divided court said that Chesapeake had improperly deducted post-production costs from royalty payments on gas wells in the Barnett Shale.
That same day, according to Burlington, an expert witness for Amber Harvest told the company it was entitled to a refund of post-production deductions. Having won on that issue at the trial court in 2016 and the 13th Court of Appeals in 2017, the parties stood before the Texas Supreme Court earlier this month to discuss their dispute and its relation to the court’s opinion in Chesapeake v. Hyder.
The Corpus Christi-based court of appeals said that the overriding royalty interests assigned to Texas Crude and its affiliate Amber Harvest specifically provide for the allocation of post-production costs based on whether the royalty is taken in-kind or in cash. When the royalty is taken in cash and the minerals are sold at an arm’s-length sale – as in both the Hyder and Amber Harvest leases — the royalty is based on the “amount realized” by Burlington from the sale, and free of post-production costs, the court of appeals said.
Burlington and its allies, the Texas Oil and Gas Association, argue that the court of appeals misinterpreted and expanded isolated statements in Hyder to uproot the long-standing assumption in Texas law that an overriding royalty is presumed to bear post-production costs unless the parties expressly agree otherwise.
If the court of appeals is correct, Burlington says, a lessee or operator could not deduct post-production costs whenever an agreement contains an “amount realized” royalty provision.
The Texas Land & Mineral Owners Association and National Association of Royalty Owners said the Supreme Court should uphold the court of appeals decision to the benefit of 672,000 Texas households that receive billions of dollars in oil and gas royalties each year.
During the Oct. 9 oral arguments, Burlington attorney Macey Reasoner Stokes said the leases with Texas Crude involve very different language than the ones interpreted by the court in Hyder.
“I don’t think the court of appeals’ myopic focus on ‘amount realized’ has any support in Hyder and directly conflicts with other precedent,” said Stokes, a partner at Baker Botts.
“Under this court’s well-established precedent, an ‘amount realized’ provision that has a valuation point at the well is fully consistent with the presumption that the interest bears post-production costs,” said Stokes.
Amber Harvest attorney Jack O’Neill said the court of appeals decision conflicts with neither the majority nor dissenting opinions in Hyder.
“Products don’t exist at the well. Products exist at the end of the sales stream as a result of post-production costs,” said O’Neill of Houston’s Pierce & O’Neill. “In the overriding royalty clause applicable to this case, it’s ‘amount realized’ and ‘amount realized’ is what Burlington got at the end of the sales process. It’s gross proceeds.”
Watch the arguments here in Burlington Resources v. Texas Crude and Amber Harvest.