On June 12, the Texas Supreme Court upheld rulings by two lower courts that post-production costs had been improperly withheld by Chesapeake Energy Corp. from royalty payments for production of natural gas in the Barnett Shale.
The state high court’s 5-4 decision in Chesapeake Exploration, LLC v. Hyder clarifies when post-production costs may be exempted from overriding royalty interests. The court stated that generally, an overriding royalty on production of gas and oil is not burdened by production costs, but must carry a share of post-production costs, unless there is an agreement that states otherwise. The court stated that the only question to be decided in the lawsuit was whether there was an agreement allocating post-production costs, and the court concluded that there was.
The Texas Supreme Court agreed with San Antonio’s Fourth Court of Appeals, which in turn had sided with a court in Tarrant County, Texas, which awarded the Hyder family about $1 million.
In the Hyder case, the state high court revisited its 1996 ruling in Heritage Resources Inc. v. NationsBank. Before Hyder, the default rule had been that royalty interests were subject to post-production costs, which may include taxes and expenses for transportation and treatment. While case law recognized that post-production costs could be allocated by agreement, the court’s ruling in Heritage Resources made it difficult in practice. The “default rule” that post-production costs may be charged to royalty owners has now been significantly weakened.