Occidental Permian Ltd. v. Marcia Fuller French
391 S.W.3d 215
Tex. App.2012Background
- Royalty owners sue Occidental for underpaid royalties under two oil and gas leases in Scurry/Kent Counties.
- CO2 tertiary recovery unit diverts casinghead gas with high CO2 content; Gas processing and in-kind fees are paid to Kinder Morgan.
- Kinder Morgan/Torch contract allocates 100% of NGLs and residue gas to Kinder Morgan with processing fee; 70% of NGLs go to royalty owners.
- Trial court found appellant underpaid royalties by deducting in-kind fees; court rejected market-value at the well via net-back.
- Two leases govern royalties: Fuller Lease (market value at well) and Cogdell Lease (net proceeds after manufacturing costs).
- Appellant asserts production costs are not chargeable to royalty owners; trial court awarded damages, fees, and declaratory relief.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether under Fuller Lease royalties were properly determined by market value at the well | Kuss provides market value via comparable sales/POP method. | Kinder Morgan/Torch contract establishes value; net-back suffices. | No, market value not proven; evidence insufficient under both methods. |
| Whether removal of hydrogen sulfide at Cynara is postproduction cost chargeable to royalty owners under Cogdell Lease | Costs are production expenses; royalty owners share should bear some. | Costs are postproduction/manufacturing; owner bears no share. | Yes, it is a postproduction/manufacturing cost requiring deduction; royalty underpayment not proven. |
| Whether appellant breached an implied duty to market gas under Fuller Lease | Implied duty to market exists to prevent self-dealing/undue benefit. | No implied duty to market in a market-value lease. | Implied duty to market is not recognized under Fuller Lease; issue sustained for appellant. |
| Whether appellant breached implied duty to market under Cogdell Lease | 40/60 or 85/15 POP arrangements imply duty to market. | No consistent implied duty under proceeds-based lease. | Evidence insufficient to prove breach of implied duty under Cogdell Lease. |
| Whether attorney's fees and declaratory relief were proper | Remedies flow from contract breaches. | Contractual breaches not proven; fees/declaratory relief inappropriate. | Sustained; awards improper. |
Key Cases Cited
- Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) (royalty defined; postproduction costs deductible)
- Bowden v. Phillips Petroleum Co., 247 S.W.3d 690 (Tex. 2008) (no implied duty to market in market-value leases)
- Carter v. Exxon Corp., 842 S.W.2d 393 (Tex. App.—Eastland 1992) (‘at the well’ designates market-value point)
- Cartwright v. Cologne Production Co., 182 S.W.3d 438 (Tex. App.—Corpus Christi 2006) (postproduction costs; retention of treatment/compression costs)
- Occidental Permian Ltd. v. Helen Jones Found., 333 S.W.3d 392 (Tex. App.—Amarillo 2011) (comparable sales method; CO2 content contracts as comparables)