Articles Posted in Recent Cases

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Three amicus briefs have been filed in support of the Hyders, opposing Chesapeake’s motion for rehearing of the Texas Supreme Court’s decision in Chesapeake v. Hyder.

An amicus brief was filed by the City of Fort Worth and others who have filed suits against Chesapeake and Total to recover additional royalties on production in the Barnett Shale area:  City of Fort Worth Amicus Brief

An amicus brief was filed by a group of royalty owners represented by Dan McDonald, a Fort Worth attorney who has filed 430 separate suits against Chesapeake, representing more than 20,900 royalty owners in Johnson and Tarrant Counties: Barnett Shale Royalty Owners Amicus Brief

Our firm, on behalf of Texas Land & Mineral Owners’ Association and the National Association of Royalty Owners-Texas, filed an amicus brief supporting the Hyders: TLMA and NARO Texas Amicus Brief

Chesapeake lost its appeal to the Texas Supreme Court in a 5-4 decision and has asked the Texas Supreme Court to reconsider its decision. Amicus briefs supporting Chesapeake’s motion for rehearing have been filed by the Texas Independent Producers and Royalty Owners’ Association (TIPRO), the Texas Oil & Gas Association (TXOGA), Sandridge Exploration & Production, BP America, Devon Energy, EOG Resources, EXCO Resources, Shell Western E&P, Trinity River Energy, Unit Corp. and XTO Energy.

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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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The Texas Supreme Court heard arguments yesterday in the fight between the City of Lubbock and Coyote Lake Ranch over whether the accommodation doctrine applies to severed water rights. Here is a good article from the Texas Tribune summarizing the arguments. The oral arguments can be viewed on the Texas Supreme Court website, here.  My earlier discussion of the case can be found here.

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I have written before about landowners’ efforts to collect damages for personal injury and property damage caused by nearby oil and gas exploration operations on the theory that such activities cause a nuisance. Nuisance is a recognized tort claim. To recover, a person must prove that (1) the person has an interest in land (2) the defendant interfered with or invaded the person’s interest in the land by conduct that was negligent, intentional, or abnormal and out of place in its surroundings, (3) the defendant’s conduct resulted in a condition that substantially interfered with the person’s use and enjoyment of his land, and (4) the nuisance caused injury to the plaintiff.

In the case decided by the court of appeals in San Antonio, Cerny v. Marathon Oil, the Cernys bought an acre of land with a residence on it in 2002. In 2012, Marathon began drilling wells in the area. Plains Exploration and Production also constructed production facilities in the area. Eventually, there were 22 well sites within 1 1/2 mile of the Cernys’ home.  The Cernys hired experts, who measured chemicals in the air around their home and near oil and gas production sites in the area. The experts included an air quality expert, a forensic meteorologist, and a toxicologist.

The Cernys sued Marathon and Plains, alleging that the fumes, odors and dust from their facilities caused physical health symptoms and made their home uninhabitable. Marathon asked the trial court to dismiss the case, on the ground that the Cernys had no evidence that their facilities were the “proximate cause” of the Cernys’ alleged damages.

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During my vacation I read The Quartet: Orchestrating the Second American Revolution, 1783-1789, by Joseph J. Ellis. Ellis tells the story of the writing and passage of the US Constitution, orchestrated, he asserts, by George Washington, Alexander Hamilton, John Jay and James Madison (the quartet).

Before the adoption of the Constitution, the thirteen states were essentially independent countries who had won their independence but failed to found a new country. The “United States” were always referred to in the plural. The genius of the quartet, says Ellis, was the compromise they crafted in the Constitution in the debate over federal vs. state power. States were understandably reluctant to relinquish their sovereignty, but the quartet knew that the new nation, to survive, had to have federal power – to levy taxes, provide for common defense, and regulate commerce among the states. The Constitution enumerates the powers of the federal government. The Bill of Rights – the first ten amendments to the Constitution, passed simultaneously — enumerates the rights retained by the states and the people, limitations on federal power. The tenth amendment provides: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The contours of this compromise are still being debated in courts across the land. “States rights” were fighting words in the civil war, and today are the battle cry of states seeking to curb the federal government’s regulation of health care, water quality, voting rights, and abortion.

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In January, the El Paso Court of Appeals decided the appeal of Lazy R. Ranch, LP, et al. vs. ExxonMobil Corporation. The court reversed a summary judgment in favor of Exxon and remanded the case to the trial court for a trial on the merits. Exxon has asked the Texas Supreme Court to review the El Paso Court’s decision. Exxon argues that it has conclusively proven that Lazy R’s claims are barred by limitations.

The Lazy R Ranch is 20,000 acres in Ector, Crane, Ward and Winkler Counties. Exxon had operations on the ranch for many years. In 2009, the Ranch hired an environmental firm to investigate several sites on the property for oil-related contamination. The environmental firm found substantial hydrocarbon contamination at five sites, and found that at one of the sites the contamination had percolated down into the groundwater and that contamination at the other sites also posed a risk of leaching down into the groundwater. Lazy R sued Exxon for an injunction to require Exxon to take sufficient steps to prevent further spread of the contamination into the subsurface and groundwater.

The trial court ruled that the Ranch had waited too long to sue and dismissed its claims. The El Paso Court of Appeals reversed, holding that the statute of limitations does not apply because the Ranch is only suing for an injunction to require Exxon to abate a continuing nuisance, the spread of hydrocarbon contamination into the subsurface.

Both parties have now filed their briefs in the Texas Supreme Court, which has not yet decided whether to hear the case.

Groundwater contamination from older oil and gas operations, especially from tank batteries and compressor stations, is a big issue in Texas and has been for a long time. Once hydrocarbons, particularly condensate, leach into groundwater they are practically impossible to clean it up.

The agency in Texas responsible for enforcing cleanup of sites contaminated by oil and gas production operations is the Texas Railroad Commission. Companies found to have contaminated groundwater must obtain approval from the RRC of a “remediation plan” to remediate the property. For groundwater contamination, this usually involves taking steps to stop the spread of the contamination and then leave it to natural processes for the hydrocarbons in the groundwater to gradually degrade over time, called “natural attenuation.” That may take tens or even hundreds of years. In the meantime, the company responsible must obtain agreement from the landowner not to use the contaminated groundwater – a restrictive covenant that is binding on the property in perpetuity.

Landowners have a private cause of action for damages to the land resulting from contamination. The problem with such claims has been that the statute of limitations to bring the claims is either two or four years, depending on the claim. The landowner may not realize that the contamination, although evident on the surface of the property, has seeped into the groundwater until years after the contamination began. By then it’s too late to sue for damages.

The Lazy R Ranch has proposed a different remedy that, as far as I know, no Texas court has addressed — suing for an injunction to require the company to remediate the contamination, to prevent it from spreading further. This typically requires removal of the contaminated soil, which may be hugely expensive. Witness Exxon’s pleas to the Texas Supreme Court to dismiss Lazy R’s claims.

Exxon argues that, under established Texas precedent, the measure of damages for “permanent” damage to land is the diminution in the value of the property. It argues that the land contaminated on the Lazy R Ranch is only 1.2 acres, worth only $50/acre, but it would cost it millions of dollars to clean up the contamination. Exxon argues that Lazy R’s effort to use an injunction as a remedy is an “attempt at an end-run around the law,” which is really only a request for remediation damages that violate the measure of damages for permanent damage to land.

I have written before about my view of the inadequacy of established legal remedies in Texas for contamination like that allegedly caused by Exxon to the Lazy R Ranch.  In 2009, I filed an amicus brief (Senn v. Premrose Amicus) for the Texas Land and Mineral Owners’ Association in Primrose Operating Co. v. Senn, 161 S.W.3d 258 (Tex.App.-Eastland 2005, Pet. denied), asking the Texas Supreme Court to address the issue. That case applied the “permanent damage” measure of damages advocated by Exxon to contamination of the Senns’ ranch. The court of appeals held that the Senns’ property had not been damaged by the admittedly substantial contamination because the value of the property had actually increased from the time it discovered the contamination to the time of trial. Because the damages were “permanent,” and because there was no diminution in the value of the land resulting from the contamination, the Senns had not been harmed.

So this case may have important implications for landowners in areas of the state contaminated by legacy oil and gas operations.

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Chesapeake is spending a lot of money on lawyers.

Dan McDonald, a Fort Worth attorney, has filed some 250 cases against Chesapeake contending that it is underpaying its royalty owners. Companies affiliated with former House of Representatives Speaker Tom Craddick have now been added to McDonald’s client list. So many cases have been filed against it in Texas that Chesapeake asked the cases to be granted multidistrict litigation status, so that one judge could control pretrial discovery and motions and settings. Two judges have been appointed for that purpose, one for McDonald’s cases and another for cases brought by other attorneys. Chesapeake is settling cases as fast as it can.

Most of the claims against Chesapeake arise from its structure for selling gas. Chesapeake sells its gas at the wellhead to its wholly owned subsidiary Chesapeake Energy Marketing. Chesapeake Energy Marketing arranges for the gathering of the gas and delivery to central sales points, and pays Chesapeake for the gas based on a weighted average price of all sales at those central gathering points, less costs of compression, gathering, treating and transportation, and less a “marketing fee” charged by Chesapeake Energy Marketing. The costs incurred between the wellhead and the point of delivery to the purchaser were formerly incurred by another Chesapeake affiliate, Access Midstream. Chesapeake spun off its gathering systems into a separate company a few years ago, and as part of that deal it guaranteed a minimum rate of return on those gathering systems to the new spin-off company, thereby receiving a premium price in the market for the new company’s shares. Chesapeake pays royalties based on the new price it receives from Chesapeake Energy Marketing, after deduction of post-production costs and marketing fees. McDonald says that these “costs” are “sham sales” and “fraudulent transactions.”

McDonald’s first ten cases against Chesapeake are set for trial early next year. McDonald’s cases are mainly for wells in the Barnett Shale, where Chesapeake has sold a share in its wells to Total, the French energy company. Total is also named as a defendant, and it markets its share of gas in a manner similar to Chesapeake.

Chesapeake recently reported a $4 billion loss and has eliminated its dividend. It recently sued its founder and former CEO Aubrey McClendon for allegedly stealing trade secrets when he was fired by the company.

Chesapeake recently lost an important case in the Texas Supreme Court, Chesapeake v. Hyder, and the opinion in that case has other companies concerned about their ability to deduct post-production costs from royalties. Chesapeake recently filed a motion for rehearing in that case, and amicus briefs urging the court to reconsider its opinion have been filed by Texas Oil & Gas Association, BP, Devon, EOG, Exco, Shell, XTO and others. With low gas prices, the ability to force royalty owners to share in post-production costs can mean the difference between profit and loss for some companies.


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Residents of DISH, Texas were awarded a victory by the Amarillo Court of Appeals in their long-running fight with pipeline companies. Sciscoe et al. v. Enbridge Gathering (North Texas), L.P., et al., No. 07-13-00391-CV. In an opinion issued on June 1, the court held that the plaintiffs are entitled to a trial on their claims that the pipelines’ gathering and compression facilities caused damages to their properties from noise and emissions that constituted trespass and nuisance.

DISH residents have fought the pipeline companies for years. The companies constructed several compressors and a metering station just outside the town between 2005 and 2009. Residents began to complain of excessive noise and offensive odors and said they suffered adverse health effects. In 2008, the residents complained to the Texas Commission on Environmental Quality, which conducted monitoring in 2009 and 2010 and concluded that emissions from the compressors “would not be expected to cause short-term adverse health effects, adverse vegetative effects, or odors.” The Texas Department of State Health Services performed medical tests on 28 DISH residents for exposure to chemicals, and tested tap water; it found no evidence of exposure to chemicals. Those findings were contradicted by tests conducted by Plaintiffs’ expert, Wolf Eagle Environmental, which found that Plaintiffs were exposed to harmful emissions of benzene, xylene, ethyl benzene, toluene and other harmful chemicals.

Finally, 18  DISH residents sued the pipelines in 2001 for damages, alleging nuisance and trespass. The town of DISH also filed suit, seeking damages for the loss of tax revenue resulting from reduced property values caused by the compressor station.

The Plaintiffs’ suits were consolidated into one suit and the case was transferred from Denton to Fort Worth. The trial court then granted the pipelines’ motions for summary judgment and dismissed all claims. The Plaintiffs’ appeal was transferred to the Amarillo Court of Appeals.

The court of appeals held that the Plaintiffs had properly pleaded claims for nuisance and trespass and remanded the case to the trial court for trial.

The pipelines first argued that the migration of airborne chemicals from their facilities across Plaintiffs’ properties cannot constitute a nuisance, because nothing was “deposited” on Plaintiffs’ properties. The court of appeals disagreed: “the migration of airborne particulates can constitute an actionable trespass.” At trial, Plaintiffs “must establish causation, i.e., that the particulates emanated from the activities of Appellees and that Appellants sustained some compensable injury as a result thereof.”

The pipelines argued that their activities cannot constitute trespass or nuisance because they were conducted within governmental regulations, and imposing liability for lawful activities would allow judicial regulation of activities sanctioned by statute and regulation. The court disagreed. Plaintiffs are not seeking to alter or change emission standards, or to prohibit the plaintiffs’ conduct, but only damages caused by that conduct. “Just because Appellees are operating their natural gas compression facilities within the applicable regulatory guidelines does not mean that Appellants have not suffered compensable injuries as a result of those operations.” The court held, however, that Plaintiffs’ efforts to recover damages for any future diminution in the value of their properties or “damages” of $1,000 per day for trespass would be barred, because those claims “look more like a penalty than a claim for recovery of existing actual damages.

Finally, the pipelines argued that Plaintiffs’ claims were barred by limitations, because they knew or should have known of their claims more than two years prior to filing suit. Without any real analysis, the court held that the pipelines had failed to carry their burden of showing that Plaintiffs’ claims were barred by limitations.

Last year, two juries awarded damages against two operators based on nuisance claims. With more drilling and producing activities in populated areas, such claims are bound to continue.

Calvin Tillman, former mayor of DISH, has since set up his own environmental company, ShaleTest,, described on its website as “the only organization that provides free and certified environmental testing to those negatively impacted by natural gas development.” Tillman lists Josh Fox as one of the company’s “advisors.” Fox is infamous for his film Gasland, a much-criticized anti-industry documentary.

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The Texas Supreme Court has ruled 5 to 4 that Chesapeake cannot deduct post-production costs from the Hyder family’s gas royalties.

The case in the Supreme Court actually addresses only the Hyders’ overriding royalty. As part of the Hyders’ oil and gas lease, the Hyders agreed that Chesapeake could use their land to drill horizontal wells producing from their neighbors’ land — the surface location on the Hyders’ land, but all of the productive lateral of the well under the neighbor’s property. In exchange, Chesapeake agreed to pay the Hyders a 5% royalty on production from such wells. Because the Hyders have no mineral interest in the lands from which these wells produce, the parties referred to this royalty as an overriding royalty.

The Hyders’ lease contains very specific provisions prohibiting Chesapeake from deducting post-production costs from the Hyders’ royalty on production from their lands. But the lease provision granting the overriding royalty on production from wells bottomed under their neighbors’ property is not so clear. Although Chesapeake originally fought to deduct post-production costs from both the royalties and the overriding royalties, the trial court and court of appeals ruled for the Hyders on all claims, and Chesapeake elected to appeal to the Texas Supreme Court only on the issue of deductibility of post-production costs from the Hyders’ overriding royalty.

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 lease also provided that “Lessors and Lessee agree that the holding in the case of Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) shall have no application to the terms and provisions of this Lease.”

Justice Hecht wrote the majority opinion, joined by Justices Green, Johnson, Boyd and Devine. The parties’ arguments in their briefs and at oral argument focused on what was meant by “cost-free (except only its portion of production taxes).” Chesapeake argued that “cost-free” refers only to production costs. The Hyders argued that an overriding royalty is by definition free of production costs, so “cost-free” must refer to post-production costs. Justice Hecht said that “We disagree with the Hyders that ‘cost-free’ … cannot refer to production costs. … But Chesapeake must show that while the general term ‘cost-free’ does not distinguish between production and post-production costs and thus literally refers to all costs, it nevertheless cannot refer to post-production costs.”

Chesapeake made another argument, based on the requirement that the overriding royalty be based on “gross production.” It reasoned that “gross production” meant all gas, measured at the well when produced, so the value of that production must be measured at the wellhead, and any costs incurred thereafter must be shared by the royalty owner. The overriding royalty is expressed as a fraction of “gross production,” a royalty payable in-kind. Chesapeake argued that, if the Hyders elected to separately market their share of the gas, they would have to incur those post-production costs to get the gas to market, so the parties intended that the Hyders should bear those costs if Chesapeake sold the gas and paid the Hyders their 5% share of proceeds.  Hecht disagreed. “The fact that the Hyders might or might not be subject to post-production costs by taking the gas in kind does not suggest that they must be subject to those costs when the royalty is paid in cash.” Hecht concluded that “‘cost-free’ in the overriding royalty provision includes post-production costs.”

Four justices dissented. Justice Brown wrote the dissenting opinion, joined by Justices Willett, Guzman and Lehrmann. The dissenters agreed with Chesapeake that, because the overriding royalty was on “gross production,” the Hyders had to bear post-production costs. They concluded that “Though the overriding royalty may not have been expressed using the familiar market-value-at-the-well language, I read its value as being just that. Cf. Heritage, 939 S.W.2d at 131 (Owen, J., concurring).” Further discussing Heritage, Justice Brown said:

As recognized in Heritage, royalty clauses that purport to modify a royalty valued at the well are inherently problematic. 939 S.W.2d at 130 ((Owen, J., concurring)(“The concept of ‘deductions’ of marketing costs from the value of the gas is meaningless when gas is valued at the well.”). Here, no post-production costs have been incurred at the time of production, and it means nothing to say that the overriding royalty is free of those yet-to-be incurred costs.

In short, Justice Brown gave controlling effect to the “gross production” language, while Justice Hecht gave controlling effect to the “cost-free” language.

Justice Hecht’s opinion is interesting in its discussion of two other lease provisions. Although the case before the court did not encompass whether Chesapeake could deduct post-production costs from the Hyders’ royalty, Justice Hecht discussed the royalty clause. One of the provisions in the royalty clause states that the Hyders’ royalty shall be

free and clear of all production and post-production costs and expenses, including but not limited to, production, gathering, separating, storing, dehydrating, compression, transporting, processing, treating, marketing, delivering, or any other costs and expenses incurred between the wellhead and Lessee’s point of delivery or sale of such share to a third party.

Remarkably, Justice Hecht considered this language “surplusage”:

The gas royalty in the lease does not bear post-production costs because it is based on the price Chesapeake actually receives for the gas through its affiliate … after post-production costs have been paid. Often referred to as a ‘proceeds lease’, the price-received basis for payment is sufficient in itself to excuse the lessors from bearing post-production costs. And of course, like any other royalty, the gas royalty does not share in production costs. But the royalty provision expressly adds that the gas royalty is ‘free and clear of all production and post-production costs and expenses,’ and then goes further by listing them. This addition has no effect on the meaning of the provision. It might be regarded as emphasizing the cost-free nature of the gas royalty, or as surplusage.

Another provision in the Hyders’ lease disclaimed the holding in Heritage v. NationsBank:

Lessors and Lessee agree that the holding in the case of Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) shall have no application to the terms and provisions of this Lease.

The royalty clause in Heritage  provided that Lessor’s royalty is

1/5 of the market value at the well of the gas so sold or used, provided, however, that there shall be no deductions from the value of the Lessor’s royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas.

The court in Heritage held that the lessee could deduct transportation costs from the royalty, and that the “no-deductions” proviso was “mere surplusage.”

The Hyders argued that the “Heritage disclaimer” clause in their lease showed the parties’ intent that their overriding royalty should be free of post-production costs. Justice Hecht disagreed:

Heritage Resources does not suggest, much less hold, that a royalty cannot be made free of post-production costs. Heritage Resources holds only that the effect of a lease is governed by a fair reading of its text. A disclaimer of that holding, like the one in this case, cannot free a royalty of post-production costs when the text of the lease itself does not do so. Here, the lease text clearly frees the gas royalty of post-production costs, and reasonably interpreted, we conclude, does the same for the overriding royalty. The disclaimer of Heritage Resources’ holding does not influence our conclusion.

The dissent also discussed Heritage.  Justice Brown notes that, unlike the gas royalty clause, the oil royalty clause in the Hyder lease provides for payment based on the “market value at the well” of the oil, just as in Heritage.  Justice Brown questions Justice Hecht’s conclusion that the “Heritage disclaimer” in the Hyders’ lease should have no effect even as applied to the oil royalty clause: “The disclaimer could be interpreted as a belt-and-suspenders attempt to ensure the ‘free and clear’ language is given effect despite its conflict with the oil royalty’s market-value-at-the-well definition.” In other words, the Heritage disclaimer might not be “surplusage.” But the four dissenting justices would nevertheless in effect follow Heritage. They would give effect to the “gross production” language in the overriding royalty clause, and would hold that this term is equivalent to the “at the well” clause in the Heritage royalty provision; and they would then hold that, because the overriding royalty is to be valued “at the well,” the language making the overriding royalty “cost-free” is, under Heritage, surplusage.

So, what should royalty owners and their counsel take from these opinions?

This firm filed an amicus brief in Hyder on behalf of the Texas Land and Mineral Owners’ Association and the National Association of Royalty Owners-Texas, in which we urged the court to clarify how royalty clauses should be construed in relation to post-production costs, and how much, if at all, the court’s prior decision in Heritage v. NationsBank should be relied on as precedent. Unfortunately, this case does not provide much guidance. Justice Hecht does note in a footnote that, on rehearing in Heritage, the court re-aligned itself, and one justice recused himself. The result, not mentioned in the footnote, is that the court was evenly divided on whether the Court’s original opinion was correct. And Justice Hecht’s opinion does say that “Heritage Resources holds only that the effect of a lease is governed by a fair reading of its text.” Perhaps this is Justice Hecht’s way of saying that Heritage has little precedential value where the text of the royalty clause differs from that in Heritage. But the continued power of Heritage is reflected in the fact that four justices dissented and would hold that Heritage requires a reading of the Hyder overriding royalty clause that would allow Chesapeake to deduct post-production costs, despite its “cost-free” language.

One lesson royalty owners and their lawyers should take away from Hyder: a “Heritage disclaimer” clause in a lease, without more, will not insulate the royalty owner from post-production costs.

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