pjc-oil-and-gas-2022-lib

L ESSOR -L ESSEE I SSUES

PJC 303.9

PJC 303.9

Question and Instruction on Unreasonable Deduction of Postproduction Costs

QUESTION ______

Did Larry Lessee take [ an ] unreasonable deduction[ s ] from the royalty pay able under Paul Payne ’s lease? A deduction is unreasonable if it is in excess of a reasonable amount of post production costs. Postproduction costs can include taxes, treatment costs, gath ering costs, marketing costs, compression costs, and transportation costs. Answer “Yes” or “No.” Answer: _______________ COMMENT When to use. PJC 303.9 should be used when the plaintiff claims deductions from the royalty are unreasonable. Source of question and instruction. PJC 303.9 is derived from Burlington Resources v. Texas Crude , 573 S.W.3d 198 (Tex. 2019) (holding as first impression that phrase “into the pipeline” required owner of overriding royalty to bear share of postproduction costs); Heritage Resources, Inc. v. NationsBank , 939 S.W.2d 118, 122 (Tex. 1996), and Martin v. Glass , 571 F. Supp. 1406, 1410 (N.D. Tex. 1983), aff’d , 736 F.2d 1524 (5th Cir. 1984). See also Cartwright v. Cologne Production Co. , 182 S.W.3d 438 (Tex. App.—Corpus Christi–Edinburg 2006, pet. denied). Postproduction costs and the calculation of royalty. Royalty is commonly defined as the landowner’s share of production, free of the expenses of production. The lessee is entitled to deduct reasonable postproduction costs, such as taxes, treat ment costs to render the gas marketable, and compression, transportation, gathering, and marketing costs in calculating the royalty due under the lease. Martin , 571 F. Supp at 1410. Compression costs may or may not be deductible, depending on whether the compression is necessary for production purposes or for transportation purposes. Mar tin , 571 F. Supp at 1410. The instruction should be modified to reflect any lease provi sions that specify the costs that may or may not be deducted, but note that when the lease provides for the royalty to be based on market value at the well, and deductions are an integral part in reaching that valuation, contrary lease language may not be effective. See Heritage Resources, Inc. , 939 S.W.2d at 122.

99