This morning SCOTX will hear arguments in a mineral deed dispute between a producer and royalty owner that could have a significant effect on the amount of royalties owed under a deed that reserves an interest on production that is “free of cost forever” (or similar language).
Fasken Oil and Ranch, Ltd., et. Al v. Puig, et al. (No. 24-1033; granted January 16, 2026; No. 04-23-00106-CV; October 30, 2024) 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 deducation 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 ….”
The court of appeals rejected Fasken’s argument that the deed language was “mere suplusage referring only to production costs that are already exempted from the royalty because [] the royalty provision provides for a valuation at the wellhead.” After all, Fasken contended, because the “net-back approach” used to determine the value of minerals at the well already deducts postproduction costs from the value of the minerals at the point of sale, any language in the deed excluding the burden of postproduction costs from the royalty “is meaningless when the royalty is valued at the well because ‘logic and economics tells us that there are no marketing costs to “deduct” from the value at the wellhead.’” But the problem with Fasken’s argument was that the deed did not contain a valuation point, whether at the well or otherwise. Simply referring to minerals “produced” does not mean “produced at the well.” Thus, under a plain text reading of the deed, Puig reserved a one-sixteenth NPRI free of costs—all costs (except taxes)—forever.
This case has drawn a lot of attention from the industry and mineral owners, with amici TXOGA, TLMA, and the GLO offering opinions.
