Burlington Resources Oil & Gas Co. LP v. Texas Crude Energy, LLC
516 S.W.3d 638
Tex. App.2017Background
- Burlington and Texas Crude entered a 2004 Prospect Development Agreement (PDA) and Joint Operating Agreement (JOA) covering an Area of Mutual Interest; Burlington became operator and held 87.5% working interests on many leases.
- The PDA/JOA provided that Texas Crude (and its assignee Amber) would receive overriding royalty interests (ORRIs) in conveyed leases; the parties executed separate ORRI assignment instruments for each lease.
- Each ORRI assignment stated the ORRI would be delivered “into the pipelines, tanks or other receptacles… free and clear of all development, operating, production and other costs” but allowed the assignee to elect cash, in which case payment is based on the “amount realized” in an arm’s‑length sale or the market value at the well.
- Burlington, as operator, sold all production in arm’s‑length sales and paid Amber cash ORRI payments after deducting post‑production costs (transportation, processing).
- Appellees sued for breach, arguing Burlington improperly deducted post‑production costs from ORRI cash payments; the trial court granted appellees’ summary judgment on the post‑production‑costs issue.
- The court of appeals affirmed, holding the ORRI assignments unambiguously required cash ORRI payments based on the amount Burlington actually realized (thus not subject to post‑production deductions).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether ORRI assignments permit deduction of post‑production costs from cash payments | Amber/Texas Crude: ORRIs are typical and should bear post‑production costs; assignments do not allow Burlington to deduct such costs | Burlington: ORRIs normally bear post‑production costs; PDA/JOA and granting clause (delivery into pipeline) show ORRIs bear their share of post‑production costs | Held for appellees: assignments unambiguously require cash payments based on the amount realized in arm’s‑length sales, so Burlington may not deduct post‑production costs |
Key Cases Cited
- Chesapeake Exploration, LLC v. Hyder, 483 S.W.3d 870 (Tex. 2016) (price‑received/amount‑realized cash royalty basis excuses lessors from post‑production cost allocation)
- Bowden v. Phillips Petroleum Co., 247 S.W.3d 690 (Tex. 2008) ("proceeds"/"amount realized" clauses measure royalty by lessee's sales proceeds)
- Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) (market‑value‑at‑the‑well clauses generally allocate post‑production costs to royalty owner absent contrary language)
- J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003) (contract construction: interpret entire instrument to give effect to all provisions)
- MacDonald v. Follett, 180 S.W.2d 334 (Tex. 1944) (describing ORRI as carved from working interest and generally not chargeable with operating costs)