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Amici Weigh In on Motion for Rehearing in Chesapeake v. Hyder

The Texas Supreme Court asked the Hyders to respond to Chesapeake’s motion for rehearing in Chesapeake v. Hyder, after the court’s recent 5-4 decision in favor of the Hyders. Several amicus briefs (“friend of the court” briefs by entities not parties to the case) were filed in support of Chesapeake’s motion for rehearing. Exploration companies are clearly unhappy with language in Chief Justice Hecht’s majority opinion and asking the court to modify its language. The amicus briefs made the San Antonio Business Journal’s “Eagle Ford Shale Insight” feature.

I’ve written about this case before, and our firm filed an amicus brief in the case before the court issued its opinions, on behalf of Texas Land & Mineral Owners’ Association and the National Association of Royalty Owners-Texas.

So far, on rehearing, the following parties have joined in amicus briefs criticizing the court’s majority opinion:

  • Texas Oil & Gas Association
  • Texas Independent Producers and Royalty Owners Association
  • BP America Production Co.
  • Devon Energy Production Co. LP
  • EOG Resources Inc
  • EXCO Resources Inc
  • Shell Western E&P Inc
  • Trinity River Energy LLC
  • Unit Corp.
  • XTO Energy Inc
  • SandRidge Exploration and Production LLC

The Texas General Land Office, joined by Longfellow Ranch LP and Wesley Ranch Minerals, LP have filed an amicus brief supporting the court’s opinion. The GLO and SandRidge are engaged in a separate suit that concerns a lease provision in the Texas Relinquishment Act lease form and Sandridge is concerned that the court’s opinion could impact its case, prompting its interest in Hyder.

The issue in Hyder is the meaning of a clause that grants the Hyders an overriding royalty on horizontal wells drilled on adjacent leases from locations located on the Hyder property. The lease provision granting the overriding royalty calls for “a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5%) of gross production obtained” from wells bottomed under neighbors’ land.” The parties dispute whether, in paying the Hyders this overriding royalty, Chesapeake can deduct post-production costs. The court held that it cannot. “Cost-free” includes post-production costs, according to the majority opinion.

One might think it curious that Texas Independent Producers and Royalty Owners Association (TIPRO) would file an amicus brief supporting Chesapeake’s reading of the lease. How can an organization purporting to represent royalty owners advocate a position detrimental to their interests? The San Antonio Business Journal quotes TIPRO’s President Ed Longanecker’s press release on its support of Chesapeake:

TIPRO believes the Court’s erroneous interpretation of the overriding royalty interest (“ORRI”) at issue will affect thousands of ORRIs in the state of Texas, many of which have been in existence for decades. If allowed to stand, the ruling that the ORRI prohibits the deduction of post-production costs will result in substantial unintended windfalls for ORRI owners. It may also call into question the commercial viability of marginal wells, leading to the possible plugging of wells across the state and thus less production and royalty revenue.

One might think that, if an oil company agreed to pay a “cost-free” overriding royalty, that payment – free of post-production costs – would not constitute an “unintended windfall” to the royalty owner. Perhaps TIPRO should reconsider its name.

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