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Producers Ask Texas Supreme Court to Reconsider Chesapeake Royalties Decision

A group of U.S. oil and gas producers has asked the Texas Supreme Court to reconsider a 5-4 decision against Chesapeake Energy Corp. in a natural gas royalties lawsuit concerning leases in the Barnett Shale.

The state's high court in June upheld a lower court ruling that the Oklahoma City-based producer owed a Fort Worth, TX, family more than $574,000 in royalties for leases on their land (see Shale DailyJune 15). The Fourth Court of Appeals in San Antonio in 2014 held that a 13-year-old lease agreement with the family of Martha Rowan Hyder had been breached (see Shale Daily, March 11, 2014). The appeals court had agreed with a Tarrant County, TX court ruling in 2012, which awarded the family close to $1 million, including $700,000 in unpaid royalties, interest and attorney fees.

Chesapeake in early August asked the justices to reconsider, arguing that the majority had "misread the contract's single overriding royalty provision" [No. 14-0302].

The Texas Oil & Gas Association filed a joint amicus brief in support of Chesapeake with eight producers -- ExxonMobil Corp.'s XTO Energy Inc. U.S. units of BP plc and Royal Dutch Shell plc, along with Devon Energy Corp., EOG Resources Inc., Exco Resources Inc. and Trinity River Energy. SandRidge Energy Inc. also filed an amicus brief.

The coalition argues that the high court's decision is going to have negative consequences for the oil and gas industry.

In 2004, the Hyder family signed a lease agreement with Four Sevens Oil Co., which included a 25% royalty for gas production, as well as a 5% override for production from other leases if the wells were drilled on the family's property. The agreement did not allow for post-production expense deductions. Four Sevens assigned the lease in 2006 to Chesapeake, which began using the same process it had been using across its leasehold in the Barnett, selling the natural gas to affiliates and paying the Hyders a weighted average sales price, less production costs. The Hyders sued Chesapeake in 2010 [Chesapeake Exploration LLC et al, v Martha Rowan Hyder et al,  No. 04-12-00769-CV].

In his initial decision, Texas Supreme Court Chief Justice Nathan Hecht, writing for the majority, had said, "Generally speaking, an overriding royalty on oil and gas production is free of production costs but must bear its share of post-production costs unless the parties agree otherwise...The only question in this case is whether the parties' lease expresses a different agreement. We conclude that it does." Affirming the verdict were justices Paul Green, Phil Johnson, Jeff Boyd and John Devine. Those dissenting were justices Jeff Brown, Don Willett, Eva Guzman and Deborah Lehrmann.

"The court's misinterpretation of this 'cost free' language will throw into dispute thousands of royalty provisions in oil and gas leases and overriding royalty instruments throughout Texas that simply describe a royalty as being a cost free share of production," the amicus motion said.

Brown, who wrote the dissenting opinion, said Chesapeake's deductions were proper and the post-production activities added value to the overriding royalties received by the Hyders. "That Chesapeake undertook to market the gas should not saddle Chesapeake with post-production costs or entitle the Hyders to more than the royalty for which they bargained."

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