HOUSTON, March 5, 2019 - In a significant case closely watched by the oil and gas industry, the Texas Supreme Court issued an opinion on March 1, 2019, unanimously agreeing with Baker Botts that Burlington Resources Oil & Gas Company LP, a subsidiary of ConocoPhillips Company, was entitled to deduct post-production costs when calculating overriding royalty interest (ORRI) payments to Texas Crude Energy, LLC. In so holding, the Supreme Court reversed the judgment of the court of appeals, which had affirmed the trial court’s summary judgment holding that the ORRI did not bear post-production costs.
The Court held that the question of whether the ORRI assignments and other agreements between the parties permitted Burlington to deduct post-production costs turned on which valuation point the parties had chosen for the ORRI: at the well or at the downstream point of sale. The assignments provided that the ORRI shall be delivered “into the pipelines,” but valued the ORRI (when taken in cash) based on the “amount realized” from the arm’s-length sale of production. The Court agreed with Burlington that this “into the pipelines” language established the valuation point at the wellhead, which courts have long construed to require the royalty owner to bear its share of post-production costs incurred after the well when, as here, the production is sold downstream after transportation and processing.
The Court rejected Texas Crude’s reliance on Chesapeake Exploration, LLC v. Hyder, 483 S.W.3d 870 (Tex. 2016) to argue that the “amount realized” language trumped the wellhead valuation language and required the royalty to be based on the full downstream sales price, without deduction. The Court held that while Hyder was informative, the interpretive question turned on the particular language chosen by the parties, which differed from that in Hyder. The Court reasoned that the parties’ joint operating agreement (JOA) provided additional support for its holding because the JOA required Burlington to pay all interest owners (of any type) based on “the actual net proceeds received for such production”—language that the Court has previously construed to authorize the deduction of post-production costs. The Court noted that Burlington’s interpretation also avoided unreasonable results.
Baker Botts Litigation Team Includes:
Macey Reasoner Stokes, Partner argued the case at the Texas Supreme Court, with assistance from Jason Newman (Partner), Tom Phillips (Partner), Tina Q. Nguyen (Senior Associate), Mark Little (Senior Associate), and Amy Heard (Associate).
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