Lower Courts “Misunderstand”
AUSTIN – In its latest ruling on the hotly contested issue of who pays post-production costs, the Texas Supreme Court Friday said Burlington Resources could deduct the costs from royalties it paid to Texas Crude Energy and affiliate Amber Harvest.
A unanimous court said it reached a different result than it did in 2015 on a similar question in Chesapeake Exploration v. Hyder because of differences in the contractual language.
“Hyder and other decisions interpreting royalty agreements serve as informative guides for today’s decision, but the decisive factor in each case is the language chosen by the parties to express their agreement,” said Justice Jimmy Blacklock.
Agreements between Burlington and Texas Crude specifies the royalty calculation be based on the “amount realized” from the sale, but also provides that the royalty interest shall be delivered “into the pipelines, tanks, or other receptacles with which the wells may be connected.”
“In the context of these agreements, this latter term fixes the royalty’s valuation point at the physical spot where the interest must be delivered – at the wellhead or nearby,” said Blacklock. “This gives Burlington the right to subtract post-production costs from the ‘amount realized’ in downstream sales prices in order to calculate the product’s value as it flows” into pipelines.
Macey Reasoner Stokes of Baker Botts argued the case for Burlington. Jack O’Neill of Pierce & O’Neill argued the case for Texas Crude.
The case was being closely watched by royalty owners, who were buoyed by their surprise win in Hyder. Texas courts have seen an explosion of litigation against energy companies from royalty owners ranging from small landowners to large public entities. The Hyder family of Fort Worth, royalty owners in the Barnett Shale, were among the earliest litigants.
Hyder also was notable for its 5-4 split. Blacklock was not on the court when it was decided.
Burlington said that it heard no complaint from Texas Crude and Amber Harvest about post-production deductions for development in the Eagle Ford until the day the Supreme Court issued Hyder. That is when an expert witness for Amber Harvest told the company it was entitled to a refund, according to Burlington.
The trial court and 13th Court of Appeals sided with the royalty holders. The Corpus Christi-based court of appeals said that the overriding royalty interests assigned to Texas Crude 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.
The Supreme Court said said the court of appeals “misunderstands our decision in Hyder.” The court said it had “never construed a contractual ‘amount realized’ valuation method to trump a contractual ‘at the well’ valuation point.”
“Allowing the holder of an ‘at the well’ royalty to escape his responsibility for post-production costs would improperly convert the royalty interest from a royalty on raw products at the well to a royalty on refined, downstream products,” said Blacklock.
Read the opinion in Burlington v. Texas Crude here.