'Amount Realized' May Not Discount Post-Production Expenses

March 08, 2019

Generally, royalty owners do not share in the costs of producing natural gas from the ground, but they do share in “post-production” costs, unless their oil and gas lease states otherwise. Post-production costs include the costs to move the gas from the wellhead to the market, plus any costs associated with treating or processing.

In Burlington Resources Oil & Gas Company LP vs. Texas Crude Energy, LLC., the court of appeals determined the language in the parties’ oil and gas lease required Burlington to pay an overriding royalty interest without deducting post-production costs. 516 S.W.3d 638 (Tex. App.—Corpus Christi 2017, pet. granted). The Burlington lease stated that an overriding royalty interest was to be paid “free and clear of all . . . costs and expenses . . .” and granted an option for the lessor to take the royalty in kind or in the form of a cash payment. If the lessor chose cash payment, it was to be based on the “amount realized” from an arm’s length sale. The court of appeals determined the lease’s “free of costs” and “amount realized” language prohibited deducting post-production costs. The Texas Supreme Court granted Burlington’s petition for review and heard oral argument on October 8, 2018. A decision is still pending.

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