Texas Appellate Court Upholds Post-Production Expense Ruling

On March 2nd, the Thirteenth District Court of Appeals issued their ruling on Burlington Resources v. Texas Crude and Amber Harvest. It was the first case ruling since the Texas Supreme Court ruled in Chesapeake v. Hyder in which the court upheld lease provisions that prohibited the drilling company from deducting post-production costs from overriding lease payments.

In the Chesapeake case, the Texas Supreme Court upheld previous court rulings that the payment of “cost-free” royalties could not include deductions for post-production costs. Chesapeake Exploration, LLC argued that “cost-free” meant free from production costs, not post-production costs.

The Burlington v. Texas Crude case involved similar language in an overriding royalty arrangement. Using the Supreme Court’s ruling in Chesapeake v. Hyder, the Appellate judges held that the higher court had set out the interpretation of such an overriding interest language. Like Chesapeake, Burlington could not deduct post-production costs from an overriding royalty payment.