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City of Crowley v. TotalEnergies E&P USA, Inc.
Texas Supreme Court denied review in City of Crowley v. TotalEnergies E&P USA, Inc., leaving intact the Fort Worth Court of Appeals' holding that anti-deduction lease language becomes surplusage when the lessee sells gas to its affiliate at the wellhead, triggering market value at the well valuation under Heritage v. NationsBank. The decision reinforces that affiliate wellhead transactions eliminate post-production costs as a matter of law, rendering royalty owner protections against cost-bearing inapplicable when no deductible costs exist between the valuation point and sale.
Analysis
Texas Supreme Court Lets Stand Ruling That Affiliate Wellhead Sales Render Anti-Deduction Lease Language Surplusage
Texas Supreme Court denied review in City of Crowley v. TotalEnergies E&P USA, Inc., leaving intact the Fort Worth Court of Appeals' holding that anti-deduction lease language becomes surplusage when the lessee sells gas to its affiliate at the wellhead, triggering market value at the well valuation under Heritage v. NationsBank. The decision reinforces that affiliate wellhead transactions eliminate post-production costs as a matter of law, rendering royalty owner protections against cost-bearing inapplicable when no deductible costs exist between the valuation point and sale.
Fort Worth Court of Appeals Affirms Wellhead Valuation Point in Barnett Shale Gas Royalty Dispute, Rejecting City's 'Market-Value-Plus' Theory
The City of Crowley challenged TotalEnergies' royalty calculations under a Barnett Shale lease, arguing that because the wellhead sales price reflected the buyer's downstream postproduction costs, the lease required royalties on wellhead market value plus those costs. The Fort Worth Court of Appeals affirmed summary judgment for TotalEnergies, holding that the lease unambiguously fixed the wellhead as the valuation point and that the operator did not 'realize proceeds of production after deduction' merely because the third-party buyer's pricing formula accounted for its own postproduction expenses.