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Texas Supreme Court Denies Chesapeake Request to Rehear Barnett Shale Royalties Lawsuit

The Texas Supreme Court has denied a request for a rehearing by Chesapeake Energy Corp. regarding a closely watched case that awarded a Fort Worth, TX family at least $1 million in royalties, interest and attorneys’ fees for natural gas wells drilled in the Barnett Shale. The denial effectively brings the case to an end.

The case may hold huge implications for other exploration and production companies that take over leases they did not negotiate. In this case, the family of Martha Rowan Hyder had signed a lease agreement in 2004 with Four Sevens Oil Co., which included a 25% royalty for production and a 5% override for output 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 sold the produced gas to affiliates and paid 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).

A Tarrant County court awarded the family close to $1 million, and on appeal, the ruling was upheld in 2012. The Fourth Court of Appeals in San Antonio also held in 2014 that the lease agreement had been breached (see Shale DailyMarch 11, 2014). The Texas Supreme Court then weighed in last year, upholding the 2014 ruling (see Shale Daily, June 15, 2015).

Last September a group of eight producers, including ExxonMobil Corp.'s XTO Energy Inc., Devon Energy Corp., EOG Resources Inc. and U.S. units of BP plc and Royal Dutch Shell plc, filed a joint amicus brief with the Texas Oil & Gas Association in support of Chesapeake and requesting a rehearing (see Shale DailySept. 4, 2015). The group argued that the appeals court decision would have negative consequences for the energy industry. Chesapeake attorneys also argued that the courts had disregarded precedent and "inexplicably ignored the law." In its appeal to the high court, Chesapeake argued the lower court ruling was "wrong and its rushed decision should be corrected."

The City of Fort Worth, Tarrant County College and other stakeholders, including landowners, voiced support to deny the appeal.

Texas Supreme Court Chief Justice Nathan Hecht, who wrote for the majority in striking down Chesapeake's appeal last year, said in June that in general, "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."

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