Haynes and Boone in Law360: Royalty Ruling Boosts Energy Cos. In Permian Basin Fights

07/03/2014


A Texas Supreme Court opinion allowing Occidental Permian Ltd. and other oil and gas producers to charge royalty owners for their share of removing carbon dioxide from natural gas is a significant win for the energy industry as enhanced recovery methods become more common, lawyers say.

The opinion, released Friday, affirms a lower court ruling that stripped a group of royalty owners led by Marcia French of a more than $10 million judgment following a bench trial that found they’d been underpaid for oil and gas produced from her land by Occidental Permian, also known as Oxy. The opinion found Oxy had appropriately charged the group for the post-production costs of making gas and other liquids marketable by removing carbon dioxide that had been injected into the reservoir to boost production...

Don Jackson of Haynes and Boone, LLP says the decision will help other operators of carbon dioxide-enhanced recovery projects argue they should be able to deduct from royalty payments the inevitable cost of removing the carbon dioxide and recycling it by calling it a post-production expense, particularly with lease language similar to that in this case...

The quality of gas varies as it comes out of the ground, the court said, so for gas that can be sold only after it goes through additional processing, royalty owners share in those costs. It said the market price of the processed gas can reflect the value of the unprocessed gas at the well only if reasonable post-production processing costs are deducted.

“It’s hard to see a bright-line rule between production and post-production, but the general principle you can draw from this opinion is expenses incurred to make the gas marketable or enhance the market value of the gas would be deemed post-production expenses that the royalty interest owner would be required to share in,” says Mark Trachtenberg of Haynes and Boone.

Excerpted from Law360, July 3, 2014. To view full article, click here (subscription required).

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