pjc-oil-and-gas-2022-lib

L ESSOR -L ESSEE I SSUES

PJC 303.4

PJC 303.4

Question on Breach of Express Royalty Provision

QUESTION ______ Did Larry Lessee fail to pay a royalty in accordance with the terms of the lease? The lease provides [ insert express lease provision ]. Answer “Yes” or “No.” Answer: _______________ COMMENT When to use. PJC 303.4 should be used when the lessor claims the lessee has breached express royalty provisions in the lease. Source of question. PJC 303.4 is derived from Yzaguirre v. KCS Resources, Inc. , 53 S.W.3d 368 (Tex. 2001), and Exxon Corp. v. Middleton , 613 S.W.2d 240 (Tex. 1981). Royalty. Leases typically contain express provisions governing the lessee’s roy alty-payment obligation. These clauses contain language dictating how the royalty is to be paid, including language regarding what, when, where, and how to value produc tion for royalty purposes. Disputes arising under the express provisions of the lease generally involve disagreements regarding the volume or measurement of production, the value of production, and whether any improper deductions have been taken before the calculation of royalty. In all instances, however, the express language of the lease determines the lessee’s royalty obligation to the lessor. See, e.g., Sowell v. Natural Gas Pipeline Co. of America , 789 F.2d 1151, 1155 (5th Cir. 1986) (royalty calculated in a manner other than market value or amounts realized). Other clauses, such as pooling and proportionate reduction clauses, may affect the royalty payment obligation. See Samson Exploration, LLC v. T.S. Reed Properties, Inc. , 521 S.W.3d 766 (Tex. 2017) . Therefore, jury questions must be modified to reflect the express lease royalty obliga tion in dispute. Lease forms typically provide different royalty provisions for oil and gas. Oil roy alty clauses often provide that lessees may pay royalty “in kind” or, at the lessee’s option, base payments on “the market price . . . prevailing in the field.” As commenta tors have noted, oil royalty provisions have not been as extensively litigated as the gas clause for a variety of reasons, including the complicated regulatory provisions and physical differences that affect gas sales contracts. Ernest E. Smith & Jacqueline Lang Weaver, 1 Texas Law of Oil and Gas § 4.6 [E] (2d ed. 2013).

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