Another Royalty Deduction

General Mineral Rights Discussion
1

The trial court awarded French $10,074,262.33 in underpaid royalties. The court of appeals reversed.

In French vs. Occidental Permian, Ltd. the Texas Supreme Court held that costs associated with injection of carbon dioxide into a reservoir in a tertiary recovery operation were properly deducted from royalties.

I thought that CO2 well injection costs are part of production cost therefore not deductible from royalty. I never thought it through to the CO2 ending up being in the production stream: Occidental processed the gas to remove the CO2 and extract the NGLs. This was the cost at issue.

The article is here:

CO2 is Good By Charles Sartain Co-author Mark Bohon on August 14th, 2014

http://www.energyandthelaw.com/2014/08/14/co2-is-good/

I do not know if there is a post production cost free royalty clause in French's lease.

Does there need to be lease language specifically addressing the processing of injected CO2 as a cost free post production cost?

2

Dear Wilson Inc

Injected CO2 is typically used for a tertiary recovery operation or technique after primary production has ceased (can't remove anymore by pump) and secondary operations have ceased (waterflood).

The Fieldwide Unitization Agreement, if drawn properly, addresses the production of and re-injection of CO2. There are some court cases that say that injected materials are personal property and when produced are still personal property and not real property where a royalty in entitled. It makes sense to me. The FUA supersedes the lease on conflicts like this.

Best

Buddy Cotten

3

Dear Mr. Cotten,

Thank you for pointing out the difference between a lease and a FUA for tertiary recovery operations.