Oil and Gas Lawyer Blog
Mayfield and Ingham leased several sections in Sutton County to EnerVest. EnerVest produces gas which goes to a gas plant for processing and pays royalty on the residue gas and natural gas liquids, after deducting post-production costs. The gas must be compressed and dehydrated before sale, and EnerVest does not pay royalty on the fuel used in compression and dehydration. Mayfield and Ingham sued EnerVest seeking royalties on the fuel gas.
The San Antonio Court of Appeals held that, under the lease royalty provisions, EnerVest does not owe royalties on fuel gas. EnerVest v. Mayfield, No. 04-21-00337-CV.
The lease provides for payment “on gas produced from said land and sold or used off the premises, … the market value at the mouth of the well of one-eighth of the gas so sold or used.” Another lease clause provides:
Lessee shall have free use of oil, gas and water from said land, except water from lessor’s wells and tanks, for all drilling operations hereunder, and the royalty shall be computed after deducting any so used.
Mayfield and Ingham argued that, under the royalty clause, royalty must be paid on gas “used off the premises”; the fuel gas used for compression and dehydration was used off the premises, and so royalty is owed on that gas. The free-use clause by implication requires that royalty be paid on the fuel gas because that gas is not used for “drilling operations.”
The court disagreed. It first cited Heritage v. NationsBank, holding that a royalty based on market value “at the well” requires the lessor to bear its share of post-production costs. The court concluded that Mayfield and Ingham’s reading of the free-use clause “amounts to an isolated reading of the free-use clause and ignores the plain language in the gas royalty provision, which requires the determination of gas royalty by market value at the mouth of the well. … Accordingly, we conclude the free-use clause in this case does not alter the gas royalty provision’s requirement for Mayfield and Ingham to bear their share of post-production costs.”
In effect, it appears the court concluded that any language contradicting the “at the well” language–requiring the lessor to bear post-production costs–should be ignored as “surplusage” just as the no-deductions clause in Heritage v. NationsBank was held to be surplusage and unenforceable. The royalty clause requires royalty to be paid on gas “used off the premises”; fuel gas is “used off the premises”; but Heritage says all language contradicting the “at the well” language must be ignored; so no royalty is owed on fuel gas used off the premises.