454 S.W.3d 603
Tex. App.2014Background
- Oil-and-gas litigation over twelve leases with State Leases and private leases (Citation Lease, Green/Purple Leases, South Piñón Fee Lease, 2005 Longfellow Lease, Longfellow Green/ Purple Leases).
- Dispute centers on post-production cost deductions and carbon-dioxide royalties.
- State Leases include a 4(B) non-processed gas royalty and 7(no deductions); 4(C) processed gas and 4(D) other products.
- Century Plant (carbon dioxide handling) changed practice to give CO2 to a third party, withholding CO2 royalties.
- Trial court granted cross-motions in SandRidge’s favor; appellate court must determine proper interpretation under contract language.
- Court must harmonize multiple similar, but not identical, lease provisions against the backdrop of applicable Texas law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether 4(B) provides a separate carbon dioxide royalty | West/Longfellow: CO2 royalties payable under 4(B) | SandRidge: 4(B) is market value at the well for raw gas | 4(B) does not provide a separate CO2 royalty |
| How 4(B) should be interpreted (at the well vs gross proceeds) | 4(B) is gross proceeds or at-the-well value depending on interpretation | 4(B) supports at-the-well market value with no deductions | 4(B) is the functional equivalent of market value at the well; raw gas measured at wellhead; deductions are not allowed under 4(B) |
| Whether 4(C) and 4(D) apply to carbon dioxide | CO2 royalties may arise under 4(C) or 4(D) | CO2 royalties under 4(C)/(4)(D) are limited or excluded by other provisions | CO2 royalties are not payable under 4(B); 4(C)/(4)(D) govern CO2 where applicable |
| Does Citation Lease 3(A)(2) provide a separate CO2 royalty | West: 3(A)(2) controls CO2 royalties | SandRidge: 3(A)(4)/(5) govern CO2 royalties | 3(A)(2) does not provide a separate CO2 royalty; 3(A)(4)/(5) applicable to CO2 |
| Are firm transportation charges deductible under Green/Purple Leases | Charges may be deductible to royalties | Deduction must be tied to actual sales from Green/Purple Leases | Firm transportation charges deductible only to the extent they are actually incurred in relation to Green/Purple Leases; trial court erred by broad application |
| Whether South Piñón Fee Lease provides CO2 royalties free of post-production costs | CO2 royalties free of post-production costs under III(l)(e) | No-deduct clause does not apply to CO2 value at royalty points as needed | South Piñón Fee Lease CO2 royalties are free of post-production costs; no future-hypothetical deductions; sustained |
| Whether 2005 Longfellow Lease provides CO2 royalties and post-production cost deductions | Longfellow 3(b)/(3(c)) govern CO2; no post-production deductions allowed | 3(b) is broad gas royalty; 3(c) handles condensates/other products; post-production costs may apply | 3(b) does not provide CO2 royalty; post-production costs not deductible under 3(e) |
Key Cases Cited
- Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) (market value at the well defeats post-production deductions; value at the well net of marketing costs)
- Mewbourne Oil Co. v. Heritage Resources, Inc., 939 S.W.2d 133 (Tex. 1996) (conflicting at-the-well and gross-proceeds language can create ambiguity; ambiguity depends on entire contract)
- Bowden v. Phillips Petroleum Co., 247 S.W.3d 690 (Tex. App.—Tex. 2008) (wellhead measurement governs royalty on gas; production defined as extraction at wellhead)
- In re Coker, 650 S.W.2d 391 (Tex. 1983) (contract interpretation; when reasonable interpretations exist, court may reverse or remand for further proceedings)
- Chrysler Insurance Co. v. Greenspoint Dodge of Houston, Inc., 297 S.W.3d 248 (Tex. 2009) (contract interpretation; de novo review of contracts)
- Cross Timbers Oil Co. v. Exxon Corp., 22 S.W.3d 24 (Tex. App.—Amarillo 2000) (parties control contract terms; cannot rewrite contract to suit one side)