Ruling is considered precedent setting and a significant departure from past rulings
(Dallas) July 21, 2014 – For the first time in fourteen years, The United States Court of Appeals for the Fifth Circuit has offered hope that lessors of certain oil and gas leases may by agreement alter the general rule that post-production costs such as compression and transportation shall be deducted from the lessor's royalty.
On July 16, 2014, in Warren v. Chesapeake Exploration, LLC, 24 U.S. App. LEXIS 13562 (5th Cir. July 16, 2014), the court held that the district court should not have dismissed with prejudice the claims asserted against Chesapeake by Abdul and Joan Javeed. The district court had dismissed those claims based upon the Texas Supreme Court's decision in Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996).
"The Court potentially opened the door for claims against Chesapeake based upon Chesapeake's rampant deductions from royalties– despite the clear language of the oil and gas leases that such deductions are not to be taken," said Robert O'Boyle of Strasburger & Price, LLP, lead counsel for the Javeeds.
While acknowledging that the parties cannot contract to change the allocation of post-production costs under an "at the well" royalty lease, the Fifth Circuit held that it is not apparent from the Javeeds' complaint, involving a "point of sale" royalty lease, that the Javeeds cannot assert a claim against Chesapeake. The Court cited Chesapeake Exploration, LLC v. Hyder, 427 S.W.3d 472, 476 (Tex. App.—San Antonio 2014, pet. filed), in which the Texas Court of Appeals held that it was improper, based upon language similar to the Javeed lease, for Chesapeake to have ignored contract language and deducted certain post-production costs from the lessee's royalty.
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