In a 5-4 decision issued on Friday, June 11, the Texas Supreme Court ruled in favor of a Fort Worth family in a dispute with Chesapeake Energy over post-production costs that were deducted from royalty checks.
The case could have broad implications for the oil and gas industry and has been closely watched by both royalty owners and energy industry officials. At issue could be what costs energy firms can deduct from royalty payments.
Chesapeake Exploration LLC and Chesapeake Operating Inc. challenged a Fourth Court of Appeals decision that Martha Hyder and family members are entitled to about $1 million after Chesapeake charged them for post-production activities including transferring and delivering gas produced under their lease.
In the majority ruling written by Chief Justice Nathan Hecht, the court said: “Generally speaking, an overriding royalty on oil and gas production is free of production costs but must bear its share of postproduction costs unless the parties agree otherwise. The only question in this case is whether the parties’ lease expresses a different agreement. We conclude it does and therefore affirm the court of appeals’ judgment.”
The Hyder family had leased 948 mineral acres in the Barnett Shale and Chesapeake Exploration L.L.C. acquired the lessee’s interest.
The case has been followed by many property owners and energy industry officials because Chesapeake and several other energy firms have been sued for how post-production costs are deducted from royalty checks.
In its argument before the Texas Supreme Court in March, Chesapeake Energy Corp. had argued that royalty owners cannot avoid paying a share of the costs of distributing natural gas after it’s pumped from the ground by including the phrase “cost-free” in lease agreements.
Attorneys for the Hyder family argued that overriding royalties by default exempt the owner from paying to produce oil and gas.
An amicus brief from the Texas Oil and Gas Association filed in the case indicated that 5,000 oil and gas operators agreed with Chesapeake’s interpretation of the agreement.
Hecht was joined in the majority opinion by justices Paul Green, Phil Johnson, Jeff Boyd and John Devine. The dissenting justices were Jeff Brown, Don Willett, Eva Guzman and Deborah Lehrmann.
The Hyder parties are represented by David J. Drez III, Jeffrey W. Hellberg Jr. and J. Robert Wills IV of Wick Phillips Gould Martin LLP.
Chesapeake is represented by Bart A. Rue and Matthew D. Stayton of Kelly Hart & Hallman LLP.
The case is Chesapeake Exploration LLC and Chesapeake Operating Inc. v. Hyder et al., case no. 14-0302, in the Supreme Court of Texas.