pjc-oil-and-gas-2022-lib

PJC 303.4

L ESSOR -L ESSEE I SSUES

Royalty on gas has historically been valued on the basis of either (1) the “amount realized” or (2) the “market value.” Often both of these royalty-valuation standards are found in the same lease form, and they will apply depending on where the gas is sold. A frequently litigated gas royalty clause provides as follows: “The royalties to be paid by Lessee are: . . . on gas . . . produced and sold or used off the premises . . . the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale.” See, e.g., Yzaguirre , 53 S.W.3d 368; Exxon Corp. , 613 S.W.2d 240. The definitions of “market value,” “proceeds received,” and “amounts realized” have been established by Texas case law. Therefore, when submitting a question regarding breach of express provisions to pay royalty, absent an express definition in the lease, an instruction on any established legal definition of the applicable term should be included. Postproduction costs. Another issue that may arise is whether improper deduc tions have been taken from the royalty amount before calculation of the royalty. Gen erally, the lessor’s royalty interest bears no costs of drilling and production or bringing the product to the surface but will bear its proportionate share of production and sever ance taxes, transportation, marketing, compression, processing, and gathering costs, unless the lease provides otherwise. Reasonable postproduction costs may be deducted from the proceeds of a sale that occurs “down-stream” or beyond the well in order to “net back” to the well the amounts realized from the sale or to determine market value at the well. See Burlington Resources v. Texas Crude , 573 S.W.3d 198 (Tex. 2019) (holding as first impression that phrase “into the pipeline” required owner of overrid ing royalty to bear share of postproduction costs); Chesapeake Exploration, L.L.C. v. Hyder , 483 S.W.3d 870 (Tex. 2016); French v. Occidental Permian Ltd. , 440 S.W.3d 1 (Tex. 2014); Judice v. Mewbourne Oil Co. , 939 S.W.2d 133, 135 (Tex. 1996); Heri tage Resources, Inc. v. NationsBank , 939 S.W.2d 118, 122–23 (Tex. 1996); see also Holbein v. Austral Oil Co. , 609 F.2d 206, 209 (5th Cir. 1980); Martin v. Glass , 571 F. Supp. 1406, 1410 (N.D. Tex. 1983), aff’d , 736 F.2d 1524 (5th Cir. 1984); Cartwright v. Cologne Production Co. , 182 S.W.3d 438, 444–46 (Tex. App.—Corpus Christi– Edinburg 2006, pet. denied). Broad-form submission. PJC 303.4 is a broad-form submission and should be submitted with the appropriate instructions and conditional questions on damages for the specific issues in dispute. For further discussion, see PJC 314.2 regarding broad form issues and the Casteel doctrine.

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