The Corpus Christi/Edinburg Court of Appeals has reversed a sizable judgment against an oil and gas producer in a dispute over the interpretation of the royalty clause in two oil and gas leases.
Devon Energy Production Company, L.P., Devon Energy Corporation, BPX Operating Company, and BPX Production Company v. Robert Leon Oliver, et al. (No. 13-25-00131-CV; February 26, 2026) arose from a dispute over the interpretation of oil and gas leases. Devon’s predecessor-in-interest and Plaintiff royalty owners entered into two leases involving 110 wells on over 3,700 acres of land in DeWitt County. Plaintiffs sued Defendants for underpayment of royalties. The trial court granted Plaintiffs’ motion for summary judgment, finding that (1) Plaintiffs’ royalty interest is not valued “at the well,” (2) the correct formula for the royalty calculation is “one-fifth of market value … on the day of sale,” and (3) Devon breached the parties’ leases to the extent that they paid royalties under a different formula. After a trial on damages, the jury was instructed on the trial court’s summary judgment findings and awarded damages of $15,800,937, $9,915,188 against Devon and 6,857,896 against BPX. Defendants appealed.
In an opinion by Justice West, the court of appeals reversed and remanded. The first issue involved the valuation point under the leases. As SCOTX held in Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996), if “the royalty valuation point is ‘at the well,’ a post-production clause did not require that the royalty bear post-production costs that would be incurred downstream from the valuation point.” 939 S.W.2d at 123, 131. Consequently, a lease that values the royalty at “market value at the well” renders a post-production clause “surplage as a matter of law.” On the other hand, “leases based on ‘gross amounts received’ (e.g., gross proceeds) mean that royalties are paid based on the amount paid to the producer at the point of sale without (1) deducting post-production costs incurred by the producer pre-sale (such as processing and transportation costs) or (2) crediting post-production costs that will be incurred by downstream purchasers. Devon Energy Prod. Co., L.P. v. Sheppard, 668 S.W.3d 332, 341 (Tex. 2023). The issue in this case was which kind of leases the parties executed.
Defendants argued that the leases provided a valuation point “at the wells as of the day it is run to the pipe[]line or storage tanks.” Plaintiffs didn’t dispute that the leases said that but argued that the actual valuation point was a fact issue for the jury to decide. At trial Plaintiffs argued that the valuation point was the Magellan East Houston Terminal and that the royalty should be paid at the downstream point where all post-production costs had been incurred. They based this argument on an ambiguity they alleged was created by addenda to the original leases. But the court of appeals found no such ambiguity. The addenda didn’t expressly provide a valuation point. Instead, they superseded the post-production cost language in the original lease to specify which costs would not burden the royalty. “The lease establishes the royalty fraction, yardstick, and valuation point,” the court stated, “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.” Applying the Heritage rule, therefore, the court concluded that the addenda’s description of post-production costs was “mere surplusage” because “there are not post-production costs borne ‘at the well’ over which the language could govern.” And “unlike in Sheppard, the lease at issue does not specify another payment model to be remitted in addition to the royalty payment specified ‘at the well ….’”
The court held that the trial court erred in granting summary judgment to Plaintiffs based on the downstream valuation point, which “allowed the jury to assess damages based on the price at the Houston Ship Channel—a valuation point where the crude oil has incurred all post-production costs and is the most valuable according to the parties ….” That error was far from harmless and probably caused the rendition of an improper judgment. The court thus reversed and remanded for further proceedings.
