On March 10, 2023, the Texas Supreme Court ruled 7-1 in favor of landowners in Devon v. Sheppard, the latest in post-production cost litigation. Justice Devine delivered the opinion of the Court, and Chief Justice Hecht, and Justices Lehrmann, Boyd, Busby, Bland, and Huddle joined. Justice Blacklock filed a dissenting opinion, and Justice Young did not participate.
At issue was a declaratory judgment action to determine the meaning of an “Add-To” provision under the free royalty clause of an oil and gas lease. Under the typical oil and gas lease, lessors do not pay costs related to the production of oil and gas, but depending on how a royalty clause is drafted, a lessor’s royalty may or may not be burdened by post-production costs after oil and gas is extracted. By using specific language in modern leases, courts have affirmed that lessors can free themselves of these post-production cost burdens which are incurred up to the point of sale. A lessee often enters into sales contracts with third-parties who further process produced gas into its constituent parts, resulting in a higher value for production. Indirectly, these contracts result in a lower royalty value to lessors, because a party other than its lessee is incurring the cost of enhancing the value with further post-production processes. In Devon, the question was whether the “Add-To” clause required the lessee to add any adjustments or deductions articulated in these sales contracts to the value of lessor’s royalty. The Texas Supreme Court affirmed, giving full effect to the intent behind the Sheppard lease’s “Add-To” clause.
In support of the landowner, PMBG partner Ricardo E. Morales and associate Louise H. Vollmer filed an amicus brief on behalf of the Texas Land and Mineral Owners Association. This rare win will benefit many PMBG clients, and other land, mineral, and royalty owners across Texas.