Royalty Obligations on Free-Use Gas Redux

Gray Reed

Gray Reed

Recall our recent post on Carl v. Hilcorp Energy Company from the U.S. District Court for the Southern District of Texas discussing the lessee’s royalty obligations on gas used off the premises in a market-value lease. See now, Fitzgerald v. Apache Corporation: Different judge; same district; similar facts, lease provisions, and contentions; same skunk at the royalty owner’s garden party; semi-similar reasoning.

The issue was whether Apache was paying royalty on the correct amount of gas used off-lease.

Fitzgerald conceded that whether gas is sold or used off-lease, her royalty was based on the market value, which requires the deduction of PPC’s. However, she was unable to explain how she could both be owed royalties on gas consumed in the post-production process and receive a royalty payment at market value for gas that is sold.

Fitzgerald conceded that her royalty payment for gas used off-lease would be subject to deductions. But if all gas used off-lease is consumed in PPC’s for gas that is sold, there is no amount of remaining gas used for which a royalty payment could be calculated. Therefore, Fitzgerald failed to explain how the gas consumed in the process could have a market value greater than zero. Said the court, she needed to allege:

  • some amount of gas used off-lease,
  • for which the market value amounts to more than zero,
  • for which, when properly accounted, she would be entitled to a net gain of royalty payment.

Fitzgerald only alleged that Apache deducted PPC’s, and that Apache deducted costs that it was permitted to deduct from the market value of gas sold; thus, she did not allege that Apache underpaid her royalties for gas sold or used off the lease.

Without allegations to support that Fitzgerald was underpaid royalties, Fitzgerald failed to state a claim for breach. Even if her allegations were sufficient to state such a claim, she did not allege actual damages (an essential element of a breach of contract claim) resulting from the breach.

A musical interlude for the Carl’s, Fitzgerald’s, and others in the same juridical boat.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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