Face Challenges Confidently

171 Cartwright v. Cologne Prod. Co.

Wednesday, September 2nd, 2015

Richard F. Brown

Cartwright v. Cologne Prod. Co., 182 S.W.3d 438 (Tex. App.—Corpus Christi 2006, pet. denied), holds that post-production costs are deductible proportionately from the royalty interest under the lease and division order in question. The lessee, Cologne, ran the gas produced from the lease through gathering lines, treatment facilities and compressors, all located on the leased premises. The compression was necessary to enter the sales pipeline. Cologne deducted the treating and compression costs proportionately from the royalty share. The court never quoted the royalty provision from the 1922 lease, but the applicable division order read as follows:

In making settlements for the interests of the undersigned in said proceeds, you are authorized to use the net proceeds received by you at the wells when the gas is sold at the wells; but if sold or used off of the premises, you are authorized to use the market value at the wells of the gas so sold or used off of the premises, such market value at the wells is in no event to exceed the net proceeds received by you from such sale.

The Court relied on existing authority to describe the general rule for the deduction of post-production costs as follows:

Production costs are the expenses incurred in exploring for mineral substances and in bringing them to the surface. Absent an express term to the contrary, these costs are not chargeable to the non-operating royalty interest. Whatever costs are incurred after production of the gas or minerals are normally proportionately borne by both the operator and the royalty interest owners. These post-production costs include taxes, treatment costs to render the gas marketable, compression costs to make it deliverable into a purchaser’s pipeline, and transportation costs. The parties may, however, modify this general rule by agreement.

The court found the “royalty provision language” in this case to be indistinguishable from the division order in Judice v. Mewbourne Oil Co., 939 S.W.2d 133 (Tex. 1996), which held that “at the well” means before value is added by preparing the gas for market.” Thus, notwithstanding some of the uncertainty which has existed as to the deduction of post-production costs since the decision in Heritage Res. v. NationsBank, 939 S.W.2d 118 (Tex. 1996), the Corpus Christi court in Cartwright unequivocably re-asserts conventional wisdom on the deduction of post-production costs.