Fifth Court Creates Pre-1960 Carve-Out from Netback Methodology for 'Market Value at the Well' Conveyances
The Fifth Court of Appeals reversed summary judgment for Ovintiv in a dispute over a 1938 Sabine Royalty Trust conveyance, holding that 'market value at the well' language prohibits post-production cost deductions for transportation and processing between the wellhead and gas plant even when no market exists at the wellhead. The decision distinguishes pre-1960 conveyances containing 'market value' clauses from modern royalty instruments using 'proceeds' or 'amount realized' language, creating a potential carve-out from Texas Supreme Court netback methodology based on historical clause formulations.
Background
Ovintiv Inc. faced claims from Sabine Royalty Trust over royalty payment calculations under a 1938 conveyance. The trust's interest stems from an instrument requiring payment based on 'market value at the well'—language predating modern royalty clause formulations. The dispute centers on whether Ovintiv may deduct costs incurred after gas leaves the wellhead but before reaching the processing plant where it is ultimately sold.
The Legal Issue
The core question presented whether the 'market value at the well' provision in the 1938 conveyance permits netback calculation methods when no actual market exists at the wellhead. Ovintiv argued that absent a wellhead market, it could calculate market value by working backward from the downstream sales price, deducting transportation and processing costs incurred between the wellhead and point of sale. Sabine Royalty Trust contended the conveyance's plain language placed all post-wellhead costs on the lessee, regardless of market conditions at the wellhead.
The Fifth Court's Analysis
The Fifth District Court of Appeals reversed the trial court's summary judgment for Ovintiv, holding that the 1938 conveyance's 'market value at the well' language creates a cost-bearing obligation distinct from modern royalty formulations. The court distinguished recent Texas Supreme Court precedent permitting netback calculations, finding that pre-1960 conveyances with 'market value' terminology impose different obligations than contemporary clauses using 'proceeds' or 'amount realized' language. Under the court's interpretation, the historical 'market value at the well' formulation requires the lessee to bear all costs incurred between the wellhead and the gas processing plant, even when no functioning market exists at the wellhead itself.
Implications for Practitioners
The decision creates uncertainty for operators holding interests under pre-1960 conveyances, particularly those containing 'market value at the well' or similar historical formulations. The court's distinction between modern royalty clauses—where recent Texas Supreme Court authority may permit netback deductions—and pre-1960 conveyances suggests that favorable netback precedent may not apply uniformly across all royalty instruments. Operators must evaluate whether their conveyances contain historical 'market value' language or modern formulations when assessing cost allocation obligations.