Burlington Resources Oil & Gas Company Lp v. Texas Crude Energy, LLC and Amber Harvest, Llc
573 S.W.3d 198
Tex.2019Background
- Burlington Resources (operator) and Texas Crude/Amber Harvest (royalty owners) entered PDA and JOA covering an AMI; Texas Crude/Amber Harvest hold overriding royalty interests (0–6.25%).
- Assignments contain a Granting Clause (royalty to be "delivered ... into the pipelines, tanks or other receptacles" "free and clear" except for certain taxes) and a Valuation Clause (payable by cash "the applicable percentage of the value," with "value" defined: (i) amount realized on on-lease arm’s-length sale, (ii) amount realized on off-lease arm’s-length sale, (iii) market value at the wells otherwise).
- For years Burlington paid royalties net of the royalty owners’ share of post-production costs; Texas Crude later sued, claiming the contracts prohibit deduction of post-production costs for arms-length cash sales.
- Trial court granted summary judgment for Texas Crude on deductibility; court of appeals affirmed. Parties agreed contracts are unambiguous and sales here were arms-length with cash payments.
- Supreme Court of Texas construed the contracts together (including the JOA) and held the assignment language fixes valuation at the well ("into the pipeline" = wellhead valuation), so Burlington may deduct proportionate post-production costs when calculating cash royalties.
Issues
| Issue | Plaintiff's Argument (Texas Crude) | Defendant's Argument (Burlington) | Held |
|---|---|---|---|
| Whether royalty holder bears share of post-production costs for arms-length cash sales | "Value" is the "amount realized" from sale; that phrase entitles royalty owner to a share of downstream sale proceeds without deduction | Granting and Valuation Clauses require delivery "into the pipeline/tanks" — a wellhead valuation point — so downstream sale proceeds must be reduced by post-production costs to value the interest at the well | Burlington may deduct its proportionate share of post-production costs when calculating royalties for the sales at issue |
Key Cases Cited
- Chesapeake Exploration, L.L.C. v. Hyder, 483 S.W.3d 870 (Tex. 2016) (interpreting "amount realized/price received" language and discussing when royalties bear post-production costs)
- Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) (framework for valuing royalties and discussing "at the well" valuation)
- French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014) (post-production processing increases downstream value and affects royalty calculations)
- Judice v. Mewbourne Oil Co., 939 S.W.2d 133 (Tex. 1996) (net-proceeds royalty provisions authorize deduction of post-production costs)
- Warren v. Chesapeake Exploration, L.L.C., 759 F.3d 413 (5th Cir. 2014) (construed "amount realized" with an explicit mouth-of-the-well computation point to allow deduction of post-production costs)
- Bowden v. Phillips Petroleum Co., 247 S.W.3d 690 (Tex. 2008) ("proceeds/amount realized" clauses measure royalty by sales contract receipts)