Chesapeake Exploration, L.L.C. v. Hyder, Texas Supreme Court June 12, 2015, 2015 Tex. LEXIS 554

The Court held that the language “a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5%) of gross production obtained” does not permit the deduction of post-production costs.

The Hyder family leased 948 mineral acres in the Barnett Shale. Chesapeake acquired the lease. The royalty provision contains three provisions. On oil, the royalty was 25% of the “market value at the well of all oil and other liquid hydrocarbons” produced. On gas, 25% “of the price actually received by Lessee” for gas produced and sold or used. The lease also provided for an overriding royalty with the above language.

Although the provisions of the lease regarding the determination of the proper calculation of neither oil nor gas royalties were at issue, the Court held that the gas royalty provision “does not bear post-production costs because it is based on the price Chesapeake actually receives for the gas.” The Court stated that this is a “proceeds lease,” and that the price-received basis for payment, with nothing more, is sufficient in itself to exempt the royalty owner from post-production costs. While the lease had a provision stating that it was exempt from such costs, the Court held that this language was surplusage.

Chesapeake argued that the term “gross production” referred to production at the wellhead and was tantamount to a provision for payment of royalty on the value at the wellhead. The Court, however, held that the language “cost-free” included post-production costs.