On August 28, 2015, SandRidge Exploration and Production, LLC, joined a coalition of U.S. oil and gas producers in filing an amicus curiae brief to reconsider the Texas Supreme Court’s interpretation of overriding royalty language in a natural gas lease.
Plaintiffs leased their mineral rights with Four Sevens Oil Co. in 2004, which mineral rights ownership was eventually transferred to Chesapeake Exploration, LLC. The lease includes “‘a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent of gross production obtained’ from directional wells drilled on the lease but bottomed on nearby land.” Plaintiffs challenged the overriding royalty clause’s language alleging that “[Chesapeake] breached the overriding royalty clause because appellees’ ‘cost-free overriding royalty’ entitled them to an overriding royalty free of production costs and post-production costs.”
Defendant contended that the “cost-free” language of said royalty clause “merely reinforces current Texas law that an overriding royalty is free of production costs, but subject to its proportionate share of post-production costs.”
The District Court ruled in favor of plaintiffs and defendant appealed before the San Antonio Fourth Court of Appeals arguing that the District Court failed to properly interpret the overriding royalty clause. The Fourth Court of Appeals affirmed the District Court’s decision.
On June 12, 2015, the Texas Supreme Court held that “[g]enerally speaking, an overriding royalty on oil and gas production is free of production costs but must bear its share of postproduction costs unless the parties agree otherwise. The only question in this case is whether the parties’ lease expresses a different agreement. We conclude it does . . .” As a result, in this case, the royalty owners do not bear post-production costs.
In their joint amicus curiae brief, the U.S. oil and gas producers’ coalition claimed that “if unchanged, the Court’s dicta may force producers with proceeds leases and industry standard wellhead sales contracts to re-determine royalties owed to thousands, if not several hundreds of thousands, of royalty owners in Texas.”
Information on this case is available at docket no. 14-0302.
Written by Chloe Marie - Research Fellow