Oil and Gas Lawyer Blog
On March 3, 2026, the Texas Supreme Court issued its opinion in Fasken v. Puig, No. 24-1033. It reversed the courts below and held that the words “free of all costs” in a reservation of a non-participating royalty interest did not include post-production costs. The reservation, in a 1960 deed covering lands in Webb County, reads:
There is SAVED, EXCEPTED AND RESERVED, in favor of the undersigned, B. A. Puig, Jr., out of the above described property, an undivided one-sixteenth (1/16) of all the oil, gas and other minerals, except coal, in, to and under or that may be produced from the above described acreage, to be paid or delivered to Grantor, B. A. Puig, Jr., as his own property free of cost forever. Said interest hereby reserved is Non-Participating Royalty . . . .
In Chesapeake v. Hyder, 483 S.W.3d 870 (2016), the Texas Supreme Court ruled on a similar issue. The Hyders’ lease contained an unusual provision granting them an overriding royalty on production from horizontal wells the surface location of which was on the Hyders’ land but whose lateral produced from adjacent land. The reservation of overriding royalty provided that they would receive “a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5%) of gross production” from such wells. Chief Justice Hecht, joined by four other justices, held that the overriding royalty must be paid free of 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.” Four justices dissented; they concluded that, because the overriding royalty was based on “gross production,” it was valued at the well, and so the Court’s prior decision in Heritage v. NationsBank meant that, not withstanding the cost-free language, post-production costs can be deducted.
The Court in Fasken v. Puig adopts the same reasoning as the dissent in Hyder. It held that the language in the royalty reservation “produced from the above-described acreage” established the “valuation point” for the royalty “at the wellhead.” Therefore the Heritage rule applied. The Court distinguished the case from Hyder based on the Hyders’ inclusion of the parenthetical “(except only its portion of production taxes)”:
This exemption, we concluded, showed the parties’ intent to deviate from the general rule.58 Because the Court characterized the taxes as a postproduction cost, “[i]t would make no sense to state that the royalty is free of production costs, except for postproduction taxes.” As the Court put it, such a reading is akin to stating “no dogs allowed, except for cats.”
The Court also distinguished the Puigs’ language from that in Hyder on whether the language established the “valuation point” for the royalty. The Hyder reservation was a royalty on “gross production”; the Puigs’ royalty was on oil and gas “in, to and under and that may be produced”. The Hyder Court considered the language “gross production obtained” to address only “the volume used to value the royalty, not the valuation point.”
To me, it is hard to distinguish Hyder from Puig. Again the rule in Heritage has been resurrected. The Puig reservation does not use the term “at the wells.” Nothing is said or implied about a point of valuation of the royalty. In effect the Court has adopted the dissent’s reasoning in Hyder. I think the Court went out of its way to heed the operators’ caution that the lower courts’ construction of the language in Puig’s reservation, being common in reservations of royalties, would set a precedent for prohibiting post-production-cost deductions in thousands of wells.