Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012.    REUTERS /STEVE SISNEY /LANDOV

The Texas cases involving royalty claims against Chesapeake and Total are beginning to result in published appellate opinions

Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012. REUTERS /STEVE SISNEY /LANDOV

Chesapeake Energy Corporation’s 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012. REUTERS /STEVE SISNEY /LANDOV

The Fifth Circuit, sitting in diversity and applying Texas law, upheld a trial court’s dismissal as a matter of law of a royalty-underpayment claim challenging post-production deductions. The lease at issue value royalty as “the amount realized by Lessee, computed at the mouth of the well” – directly invoking Texas’s Heritage Resources rule. Therefore, even though “no deductions” language appeared in an addendum to the lease, the “at the mouth of the well” language prevailed, thereby allowing the lessee to take full deductions against royalty. See Warren v. Chesapeake Exploration, L.L.C., 759 F.3d 413, 416 (5th Cir. 2014).

The Fifth Circuit, sitting in diversity and applying Texas law, upheld a trial court’s summary judgment against a royalty-underpayment claim challenging post-production deductions. The lease at issue value royalty as “the market value at the point of sale of 1/4 of the gas sold or used” – directly invoking Texas’s Heritage Resources rule. Therefore, even though language in the same clause as follows: “free of all costs and expenses related to the exploration, production and marketing of oil and gas production from the lease including, but not limited to, costs of compression, dehydration, treatment and transportation,” the “at the point of sale” language prevailed, thereby allowing the lessee to take full deductions against royalty. See Potts v. Chesapeake Exploration, L.L.C., 760 F.3d 470, 471 & 474-75 (5th Cir. 2014)

In Chesapeake Exploration, L.L.C. v. Hyder, __ S.W.3d __, 59 Tex. Sup. J. 290 (Tex. 2016), the Texas Supreme Court evaluated an overriding royalty provision for “a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5.0%) of gross production obtained,” which contained also an express disclaimer of the Heritage Resources rule. The court held that the “cost free” language, as well as the lack of “at the well” language (or like language), exempted the overriding royalty interest from bearing any post-production deductions. The court expressly held that the Heritage Resources disclaimer played no role in its decision.