The Corpus Christi Court of Appeals, in Devon Energy Production Co. v. Robert Leon Oliver, No. 13-25-00131-CV, has reversed a $9 million judgment against Devon in a suit for failure to pay royalties in accordance with Oliver’s leases. The court followed the reasoning of the Texas Supreme Court’s opinions in Heritage Resources v. NationsBank, 989 S.W.2d 118 (Tex. 1996), holding that Oliver’s lease provision prohibiting post-production-cost deductions from Oliver’s royalty was “surplusage,” and that Oliver’s royalty should be based on the “market value at the well.”
Oliver’s leases were on a printed form with an addendum that provided the addendum’s provisions would prevail over any conflicting language in the leases. The royalty clause in the lease form provided that the royalty on oil would be
1/5th of all oil produced and saved by lessee from said land, or from time to time, at the option of lessee, to pay lessor the average posted market price of such 1/5th part of such oil at the wells as of the day it is run to the pipeline or storage tanks, lessor’s interest, in either case, to bear 1/5th of the cost of treating oil to render it marketable pipeline oil. …
Oliver’s lease addendum provided that
Lessor’s royalty on hydrocarbons shall never bear, either directly or indirectly, any portion of (A) the costs or expenses to save, store, gather, dehydrate, compress, pipe, truck, transport, treat, separate, process, refine, manufacture or market hydrocarbons on or from the leased premises, (B) the costs or expenses (including depreciation) to construct, repair, renovate or operate any plant or other facilities or equipment used in connection with the treating, separation, extraction, processing, refining, manufacture or marketing of hydrocarbons produced from the leased premises or lands pooled therewith, (C) any other costs or expenses whatsoever, except, Lessor’s royalty shall bear its proportionate part of all
ad valorem, excise, state severance taxes, windfall profits taxes, or like and similar tax imposed on such hydrocarbons or on the value thereof that is attributable to Lessor’s royalty, if any, paid by Lessee, which proportionate part may be deducted from Lessor’s royalty interest before payment to Lessor.
The trial court instructed the jury that “the Leases require Lessees to purchase or market Lessors’ oil at a cash price equal to the market value on the day of sale,” and that Lessor’s royalty would not bear any post-production costs. The court of appeals held that this instruction was erroneous. Following Heritage’s logic, it concluded that the addendum did not modify the “at the wells” provision of the lease, so the no-deduction clause in the addendum was “surplusage.”
I’ve written many times about Heritage and (in my opinion) its flawed logic. But Oliver was unable to escape that logic, however flawed.