Corpus Christi Court Reverses $15.8 Million Royalty Judgment in DeWitt County Lease Interpretation Dispute Over Valuation Point and Post-Production Costs
The Corpus Christi Court of Appeals reversed a $15.8 million royalty underpayment judgment against Devon Energy and BPX Operating involving 110 oil wells across 3,700 acres in DeWitt County, holding the trial court erred in its lease construction that royalties were not valued "at the well" and that lessors bore no post-production costs. The dispute centered on reconciling form lease language specifying valuation "at the wells as of the day it is run to the pipe line or storage tanks" with addendum provisions requiring a cost-free royalty where "Lessor's royalty on hydrocarbons shall never bear, either directly or indirectly, any portion of" post-production costs.
Background and Business Context
This appeal arises from a royalty underpayment dispute involving two substantively identical oil and gas leases covering over 3,700 acres and 110 oil wells in DeWitt County, Texas. Nine years after the leases were executed between the parties' predecessors-in-interest, lessors Robert Leon Oliver and related entities filed suit alleging that Devon Energy Production Company, L.P., Devon Energy Corporation, BPX Operating Company, and BPX Production Company breached the leases by systematically underpaying royalties. The trial court granted summary judgment for the lessors, determining that the royalty interest was not valued "at the well," that the correct royalty calculation formula was "one-fifth of market value ... on the day of sale," and that the operators had breached the leases by applying any other formula. Following a jury trial solely on damages, the lessors were awarded $15,800,937 in actual damages.
The Lease Provisions at Issue
The central dispute turned on reconciling apparently conflicting provisions in the lease documents. The leases consisted of form provisions followed by an attached addendum. Paragraph one of the addendum provided that "where the provisions of the addendum conflict with the form provisions, the addendum provisions control and supersede."
Paragraph three of the form provisions contained traditional royalty language, stating in relevant part:
As royalty, lessee covenants and agrees: (a) To deliver to the credit of lessor, in the pipelines to which lessee may connect its wells, the equal 1/5th part of all oil produced and saved by lessee from said land, or from time to time, at the option of lessee, to pay lessor the average posted market price of such 1/5th part of such oil at the wells as of the day it is run to the pipe line or storage tanks, lessors interest, in either case, to bear 1/5th of the cost of treating oil to render it marketable pipe line oil ....
Paragraph fifteen of the addendum contained an extensive cost-free royalty clause providing:
Lessor's royalty on hydrocarbons shall never bear, either directly or indirectly, any portion of (A) the costs or expenses to save, store, gather, dehydrate, compress, pipe, truck, transport, treat, separate, process, refine, manufacture or market hydrocarbons on or from the leased premises, (B) the costs or expenses (including depreciation) to construct, repair, renovate or operate any plant or other facilities or equipment used in connection with the treating, separation, extraction, processing, refining, manufacture or marketing of hydrocarbons produced from the leased premises or lands pooled therewith, (C) any other cos[t] ....
The operators argued that the trial court erred in its construction of the lease in both the summary judgment findings and jury instructions. The Court of Appeals agreed, reversing the judgment and remanding the case.