In oil and gas lease negotiations, there’s usually some horse trading between the mineral estate owners and the exploration and production companies about how certain production costs will be allocated. Sometimes, however, serious conflicts can erupt over interpreting vague contractual terms.
Recently, in Chesapeake Exploration v. Hyder, the Texas Supreme Court dealt with a dispute between two affiliates of Chesapeake Energy Corp. and mineral estate owners in the Hyder family about whether the oil and gas lease negotiated among the parties allowed for Chesapeake to deduct postproduction costs from the mineral estate owners’ overriding gas royalties. An overriding royalty, a term commonly used in the oil and gas business, is an interest similar to a royalty interest but which is carved out of the working interest of an existing lease. It is commonly expressed as a fraction of production from the lease but is generally free of exploration and development costs.
Originally, Oklahoma-based Chesapeake fought to deduct postproduction costs from both the royalties and the overriding royalties. However, the trial court and the Fourth Court of Appeals in San Antonio ruled in this case for the Hyders on all claims. Chesapeake appealed to the Texas Supreme Court only on the issue of deductibility of postproduction costs from the Hyders’ overriding royalty. In a 5-4 decision, the high court ruled that Chesapeake had improperly deducted postproduction costs from the mineral estate owners’ natural gas royalties.
Read more at Texas Lawyer.
This is an interesting case from Texas. While it does not have any control in North Dakota, our courts often look to Texas for precedent when addressing title and lease issues. If you have any questions about your lease or need other assistance with your mineral holdings, give me a call at 701.223.2000 and I’ll be glad to help.