In a case that attracted a lot of interest from producers and royalty owners, the Texas Supreme Court has reversed a San Antonio Court of Appeals decision holding that an oil and gas deed that reserved a royalty on minerals “produced from the above described acreage” means a royalty on gas produced at the well.
Fasken Oil and Ranch Ltd., et al. v. Puig, et al. (No. 24-1033; April 10, 2026) arose from a dispute over the construction of a deed reserving a non-participating royalty interest on mineral production that is “free of cost forever.” In 1960 Puig and his wife sold their ranch to Palafox Exploration Company. The deed reserved a non-participating royalty interest in Puig’s favor. The parties in this case are their successors. In 2021 Puig sued Fasken, challenging Fasken’s deduction of Puig’s share of postproduction costs and seeking damages for underpaid royalties. Puig sought a declaratory judgment ruling that their NPRI could not be burdened with such costs. The parties filed competing motions for partial summary judgment on the deduction issue. The trial court granted Puig’s motion and denied Fasken’s. On Fasken’s motion, the trial court allowed a permissive interlocutory appeal asking the court of appeals to construe the language “free of cost forever.” The court of appeals accepted the invitation.
In an opinion by Justice Rios, the court of appeals affirmed. Under ordinary circumstances, the court observed “a royalty owner’s ‘royalty is free of the expenses incurred to bring minerals to the surface (production costs) but not expenses incurred thereafter to make production marketable (postproduction costs)’” (citation omitted). Here the parties executed a deed reserving a royalty interest in minerals that may be produced “free of cost forever.” Fasken argues that “costs” means “production costs” only. In Chesapeake Exploration, L.L.C. v. Hyder, 483 S.W.3d 870 (Tex. 2016), SCOTX held that a royalty clause providing for “a perpetual, cost-free (except only its portion of production taxes) overriding royalty interest of five percent (5.0%) of gross production obtained” from certain wells did not require the royalty owner to pay postproduction costs. As the court of appeals noted, “[t]he Hyder court acknowledged that it would make no sense for the ‘cost-free’ language to refer only to production costs, yet except a postproduction expense (i.e., taxes) from its application.” The upshot of Hyder was that “the general term ‘cost-free’ does not distinguish between production and postproduction costs and thus literally refers to all costs ….” Fasken sought review, which SCOTX granted.
In an opinion by Justice Bland, SCOTX reversed and remanded to the trial court. The parties disputed whether the deed’s language stating that minerals produced from specified acreate “free of cost forever” meant valuation at the wellhead or valuation based on the downstream sales price. Unless the lease specifies otherwise, an NPRI is subject to postproduction costs incurred to prepare minerals for sale downstream. But as Justice Bland pointed out, the Court has “recognzied two primary ways parties may free a royalty interest from the postproduction costs it usually bears: say so in the lease or add postproduction costs to the royalty base. “This deed,” she wrote, “does neither.”
According to the Court, “[t]he term ‘free of cost forever’ does not change the valuation point or formally relieve the royalty of any postproduction costs incurred to enhance the value of the minerals.” Instead, the term refers to the costs of exploration and production. Additionally, the deed provided that the royalty “is ‘to be paid or delivered,’ meaning that it can be paid in cash or delivered in kind at the well.” In contradistinction to Hyder, this deed did not designate which party could choose between the two options. If that provision allowed the royalty owner to choose the cash option free of postproduction costs, the royalty owner would take it everytime. Conversely, if it allowed the producer to choose, the producer would choose the in kind likewise free of postproduction costs. That doesn’t make much sense. “A contract that permits either party to manipulate the price via the method of delivery without establishing who chooses the method,” the Court stated, “is far less plausible than a contract, that by fixing valuation of the royalty based on minerals produc4ed at the wellhead, provides for a royalty of equal value regardless of the method of delivery.”
The Court thus reversed the court of appeals, rendered partial summary judgment in favor of Fasken, and remanded the case to the trial court for further proceedings.
