The Texas Supreme Court issued its opinion in the most
closely watched case involving royalty agreements since Chesapeake Exploration, L.L.C. v. Hyder. In Burlington
Resources Oil & Gas Company LP v. Texas Crude Energy, LLC and Amber
Harvest, LLC, Number 17-0266 (Tex. 2019), the Texas Supreme Court held that
overriding royalties paid by Burlington Resources Oil & Gas Company LP
(“Burlington”) to Texas Crude Energy, LLC and Amber Harvest, LLC (together, “Texas
Crude”) are burdened by post-production costs under the parties’ overriding
royalty interest assignments. At the trial court, both parties filed motions
for partial summary judgment on this contract-interpretation question. The
trial court found in Texas Crude’s favor and the court of appeals agreed. The
Texas Supreme Court reversed and remanded the court of appeal’s judgment.
The question in Burlington
Resources resembled the question in Hyder.
In Hyder, the Texas Supreme Court determined
that the overriding royalties should be free from post-production costs,
construing the overriding royalty provision as an agreement to pay royalties on
gross proceeds because the parties agreed that the only cost that would burden
the royalty would be taxes.
But the Court in Burlington
Resources determined that the language at issue differed from the language
at issue in Hyder. While the Court noted that a provision to pay
royalties on the “amount realized” at sale might typically prevent the
deduction of post-production costs, the parties’ agreement modified that
rule. Because the granting clause and
valuation clause in the parties’ agreement provided for delivery “into the
pipelines, tanks or other receptacles,” the Court reasoned that the overriding royalty
was cost-free only to that point. And based
on the facts at issue and industry practices, the Court further determined that
language calls for a valuation of the royalty at delivery “into the pipeline”
is similar to a valuation of the royalty “at the well.”
Notably, the Court did not find Texas Crude’s interpretation—that
the overriding royalties were free of post-production costs—to be
unreasonable. But when applied to other
provisions within the assignments and other agreements between the parties, the
Court held that Texas Crude’s interpretation lacked harmony with those other
provisions and agreements, whereas Burlington’s interpretation did not. Because the overriding royalty agreement was
unambiguous, however, the Court determined it did not need to consider the
parties’ course of performance leading up to the dispute.
The take away for practitioners is that the decisive factor
in each case is the language chosen by the parties to express their agreement. A few words can make the difference on whether
a royalty is free from post-production costs. Notice: Wick
Phillips represented the royalty owners in Hyder.
By: Schyler Parker
