Background and Parties

This gas royalty dispute arose from mineral leases covering property in Tarrant County, Texas, in the Barnett Shale play. The City of Crowley (Lessor) leased mineral rights to TotalEnergies E&P USA, Inc. and its affiliated entities (Lessees), who produced and sold natural gas at the wellhead to third-party purchasers. The lease's royalty provision required payment of "the Royalty Fraction of the market value at the point of sale, use, or other disposition," with the parties agreeing that the point of sale was the wellhead. The dispute centered on whether the royalty calculation should include not just the wellhead market value, but also post-sale postproduction costs incurred by the downstream buyer.

The City's 'Market-Value-Plus' Theory

Crowley advanced a novel interpretation of three additional lease provisions: the Total-Proceeds Provision (stating market value "will never be less than the total proceeds received by Lessee"), the Add-On Provision (requiring that "if Lessee realizes proceeds of production after deduction for any expense of [postproduction] ... then the ... deductions will be added to the total proceeds"), and the Postproduction Provision (stating "Lessor's royalty will never bear, either directly or indirectly, any part of the costs or expenses of [postproduction]"). The City argued that because the wellhead sales price was determined by reference to the buyer's downstream resale price minus the buyer's postproduction costs, TotalEnergies was effectively "realiz[ing] proceeds of production after [the third-party buyer's effective] deduction for an[ ] expense of [postproduction]," triggering the Add-On Provision's requirement that "the deductions [must] be added to the total proceeds received by Lessee[s]."

Court's Analysis: Shirlaine Controls

The Fort Worth Court of Appeals rejected the City's interpretation, finding the case controlled by its prior decision in Shirlaine W. Props. Ltd. v. Jamestown Res., L.L.C., which interpreted "nearly identical lease language." The court emphasized that Shirlaine held that when a lease unambiguously "fixe[d] the wellhead as the valuation point" for the royalty, no royalty was due on post-sale postproduction costs because the lessee was not "realiz[ing] proceeds of production after deduction for [postproduction] ... expenses." The court explained that under established Texas law, "[i]f a royalty is based on gas's market value at the wellhead, then the value is determined 'before [the gas] is transported, treated, compressed or otherwise prepared for market.'" While the court acknowledged that wellhead market value is often estimated using the workback method—taking downstream prices and subtracting postproduction costs—this calculation methodology does not transform a wellhead-valuation lease into a proceeds-plus lease.

Because Lessees do not incur any postproduction costs prior to the sale at the wellhead, they assert that they do not "realize[ ] proceeds of production after deduction for an[ ] expense of [postproduction]."

The court found this reasoning dispositive. The Add-On Provision applies only when the lessee realizes proceeds after deducting postproduction expenses, not when a third-party buyer's pricing formula accounts for costs the buyer will incur post-purchase. Because TotalEnergies sold at the wellhead before incurring any postproduction costs, there were "no postproduction expenses prior to the point of sale—the wellhead—so there was nothing to 'deduct[ ]' and no 'deductions [to] be added' to the 'realize[d] proceeds.'"

Implications for Practitioners

This decision reinforces the critical distinction between wellhead-valuation and proceeds-based royalty provisions in Texas oil and gas leases. Even when lease language includes protective provisions stating that royalties will "never bear" postproduction costs or that certain amounts must be "added" to proceeds, courts will not rewrite a clear wellhead-valuation provision into a proceeds-plus formula. The decision is particularly significant for Barnett Shale operators and other producers who sell gas at the wellhead to midstream purchasers whose pricing formulas reference downstream values. Lessors seeking to avoid bearing their proportionate share of postproduction costs through the workback method must negotiate for gross-proceeds language that clearly establishes a downstream point of sale, not merely add-on provisions that reference postproduction costs in the abstract. The Texas Supreme Court denied review on May 1, 2026, leaving the Fort Worth court's interpretation as binding precedent for the region.