Recently, a San Antonio court of appeals affirmed the decision of a Tarrant County judgement against Chesapeake Exploration, LLC, awarding royalty owners approximately $700,000 for deducting unauthorized post-production/post well-head costs.
The plaintiff (Hyder) claimed Chesapeake deducted improper fees and interests from the royalty, based on specific language in the lease agreement. The Hyder's royalty clause was not a standard lessee-form lease. It said the following:
The royalty reserved herein by Lessors shall be free and clear of all production and post-production costs and expenses, including but not limited to, production, gathering, separating, storing, dehydrating, compressing, transporting, processing, treating, marketing, delivering, or any other costs and expenses incurred between the wellhead and Lessee's point of delivery or sale of such share to a third party. ... In no event shall the volume of gas used to calculate Lessors' royalty be reduced for gas used by Lessee as fuel for lease operations or for compression or dehydration of gas.
Chesapeake is currently seeking review of the decision by the Texas Supreme Court.
Below are links to further reading material on the case:
Kirk,
Thanks for posting. Now if the Supremes will just be fair and leave the decision as it is.
I wonder how much it will cost Chesy for the Supremes to turn the decision to their favor? Hmmmm...........
Clint Liles
I wonder where this leaves the "standard lessee-form lease" landowners? At the wellhead for oil (or at the tanks) and at "first marketable gas quality" for gas?
John Gustavson
Certified Minerals Appraiser
Because this lease was not written to be "valued at the mouth of the well" and all of the provisions explicitly prohibiting post-production costs, and especially including the provision about Heritage v NationsBank, I think this victory was to be expected. For those of us who are not so lucky, the only grounds I can see using this case as precedence is that all deductions should be actual and reasonable. Clearly they are not actual, or reasonable (even when prohibited!). There is a law firm in Fort Worth who has hundreds of clients and is suing CHK over that point specifically. I really hope the RICO lawsuit in Pennsylvania sticks, because that has the opportunity to really turn the tide for royalty owners.
Right. I was an expert witness years ago in the Bridenstein case in Oklahoma, and I recall that we worked our butts off to get the courts to agree in standard leases that 1) the operator might have a right to receive compensation for making the gas "pipeline quality", but 2) the costs had to be reasonable, in particular if/when the operator also owned the gas processing unit.
John