Face Challenges Confidently

030 Killam Oil Co. v. Bruni

Thursday, September 3rd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of some significance to you.
Killam Oil Company v. Bruni, 806 S.W.2d 264 (Tex. Civ. App.–San Antonio 1991, no writ history), holds that Texas royalty owners are not entitled to share in take-or-pay payments under the typical royalty clause in the lease. Gas was sold under a gas contract containing a take-or-pay provision requiring the pipeline either to take a specified annual quantity of gas or pay the producers for gas not taken. This particular contract had a five-year makeup provision, but the case is silent as to whether the payment would be lost by the pipeline company, if gas was not timely made up. Gas was not taken, payments were made to the producers, and the producers refused to share the proceeds with the royalty owner.
The royalty owner sued to share in the proceeds. Various issues and claims were severed, so that the only issue on appeal was whether the royalty owner was entitled to a royalty share under the royalty provision in the lease. The royalty clause in this particular lease provided:

The royalties to be paid by lessee are: . . . (b) on gas, including casinghead gas and all gaseous substances, produced from said land and sold or used off the premises or in the manufacture of gasoline or other product therefrom, the market value at the mouth of the well of one-eighth of the gas so sold or used provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such; . . . (emphasis added)

The court held:

[U]nder a standard lease, take-or-pay payments do not constitute any part of the price paid for produced gas, nor do they have the effect of increasing the price paid for gas that was taken. These payments are made when gas is not produced, and as such, bear no royalty.

Although this is a case of first impression in Texas, it follows other cases which in other contexts have held that “production” means the actual physical extraction of the mineral from the soil. These cases have arisen in litigation involving advance payments, production in paying quantities, and market value. Bruni is also consistent with recent decisions in federal court. Not resolved is the question whether royalty owners might achieve an equivalent recovery under another theory such as breach of marketing duty, breach of duty of good faith and fair dealing, unjust enrichment, equitable reformation, etc.