Face Challenges Confidently

083 Judice v. Mewbourne Oil Co.

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 significance to you.
In Judice v. Mewbourne Oil Co., 39 Tex. S. Ct. J. 533 (April 25, 1996) Mewbourne deducted a pro rata part of post-production compression costs from lessor’s royalty. The royalty under the leases was to be a fractional part of the “market value at the well” of the gas produced. Relying upon Heritage Resources, decided the same day, the Court held that under a market value royalty clause the royalty is payable net of any value added by compressing the gas after it leaves the wellhead. Therefore, Mewbourne was entitled under its leases to allocate to the royalty owners their proportionate share of the reasonable costs of post-production compression.
Having settled the meaning of the royalty clause with respect to post-production compression costs, the Court turned to the effect to be given to division orders executed by the lessors. One form of division order provided that settlement was to be based on “net proceeds realized at the well” and deleted all of the rest of the form, which expressly allowed deductions for compression costs. The Court ruled that “ net proceeds” expressly contemplates deductions and that its interpretation of “at the well” means before value is added by preparing the gas for market. The handwritten deletions did not change what was left in the division order, so that under this division order, compression costs were deductible. A second form of division order provided that settlement was to be based on “gross proceeds realized at the well.” The Court concluded this form was ambiguous and allowed to stand a jury finding that the parties intended that royalty was to be payable with out deductions for compression.
The significance of the case is that it confirms in the highest court in the state that postproduction compression costs are to be deducted from royalty under market value royalty clauses. It also illustrates that the execution and effect of division orders continues to be a source of litigation.