American Oil and Gas Reporter - January 2016 - 152

ment and home building, the effects could
be felt greatly. USFWS's proposed regulation could put much of this economic
development at risk.
The USFWS's reinterpretation of critical habitat and proposed expansion of
authority are not supported by the ESA
and are at odds with the intent of Congress
that critical habitat be limited in scope
and focus on the immediate survival
needs of species. Species conservation
and environmental protection are critical
to all stakeholders, but this protection

must include a reasonable regulatory
structure that is based in law and allows
responsible economic activity to continue.
The Independent Petroleum Association
of America supports the designation of
critical habitat when it is done in a manner
that is consistent with the ESA, and balances conservation and economic development. However, these proposals grant
unprecedented new authority to the USFWS, and could expand significantly
both the size of future critical habitat

designations and the magnitude of their
impact on job creators and private
landowners. This is the wrong choice for
our economy and our environment. ❒

DAN NAATZ is senior vice president
of government relations and political
affairs for the Independent Petroleum
Association of America. Previously,
Naatz served as chief of staff to former
U.S. Senator Craig Thomas, R-Wy.

TIPRO Seeks Royalty Decision Review
AUSTIN, TX.-The Texas Independent
Producers & Royalty Owners Association
is asking the Texas Supreme Court to reconsider its decision on how to interpret
overriding royalty interest (ORRI) law,
warning in its amicus brief that the ruling
will affect thousands of ORRIs across
Texas.
TIPRO is joining Barnett Shale operators in asking the Texas Supreme Court
to reconsider its decision to award a Fort
Worth family more than $574,000 in royalties in a lawsuit filed against Chesapeake
Energy Corp.
"If allowed to stand, the ruling that
the ORRI prohibits the deduction of postproduction costs will result in substantial
unintended windfalls for ORRI owners,"
warns TIPRO President Ed Longanecker.
"It also may call into question the commercial viability of marginal wells, leading
to the possible plugging of wells across
the state, and thus less production and
royalty revenue."
The lease, signed Sept. 1, 2004, by
the Hyder family, covers 1,047 surface
acres and 948 mineral acres in Johnson
and Tarrant counties, Tx. According to
court documents, the lease also allowed
Chesapeake to drill from well sites lying
adjacent to or near the leased premises.
As of Dec. 1, 2011, 22 wells had been
completed on the leased acreage and
seven completed off the lease.
The dispute arose from the two parties'
interpretations of the royalty and overriding
royalty clauses, court documents state, with
Chesapeake contending the royalty clause
applicable to the wells on the leased premises
allowed it to deduct the Hyder family's
share of post-production costs and expenses.
The Hyders countered that their royalty interest was not subject to post-production
costs or expenses, and further contended
the overriding royalty clause applicable to
the off-lease wells allowed the family to
deduct Chesapeake's share of costs from
the family's overriding royalty.

A trial judge ruled in favor of the Hyders on Aug. 7, 2012, awarding damages
for breach of the royalty and overriding
royalty clauses, attorneys' fees and interest.
Chesapeake appealed. and early in 2014,
the Texas 4th Court of Appeals again
ruled in favor of the Hyder claim. The
company again appealed, lost in its initial
Supreme Court ruling issued in August
2015, and asked for a rehearing.
Among the other parties filing briefs
on behalf of Chesapeake are the Texas
Oil & Gas Association, Sandridge Exploration & Production, BP America Inc.,
Devon Energy Corp., EOG Resources
Inc., and XTO Energy Inc. Briefs supporting the Hyder claims have come from
the Texas Land & Mineral Owners' Association, National Association of Royalty
Owners-Texas, the city of Fort Worth,
and a group of more than 20,900 royalty
owners in Johnson and Tarrant counties.
Heritage Decision
Angela Staples, legal counsel for the
Permian Basin Petroleum Association,
compares the Hyder case with Heritage
Resources Inc. v. Nationsbank. In that
1996 Texas Supreme Court decision, she
says royalty provisions required the lessee
to pay a certain percentage of the gas produced on the lease at market value. The
contract included a statement that there
were to be no deductions for processing,
dehydration, compression, transportation,
or other costs to market the gas.
Commenting that many leases rely on
Heritage language to allocate post-production costs, Staples says the Supreme
Court cites Heritage in its Hyder decision.
The Hyder family argues that including a
disclaimer modeled on Heritage frees the
overriding royalty from post-production
costs. But Staples says the Texas Supreme
Court found that a disclaimer of that holding
could not free a royalty of post-production
costs when the lease text did not do so.
"Luckily for the Hyders, the court de-

152 THE AMERICAN OIL & GAS REPORTER

termined that, '(H)ere, the lease text
clearly frees the gas royalty of post-production costs, and reasonably interpreted,
we conclude, does the same for the overriding royalty,'" she quotes. "The court
made it a point to specifically say, 'The
disclaimer of Heritage Resources' holding
does not influence our decision.'"
The Hyder decision shows that including the Heritage language does not,
by itself, require that all royalties be free
of post-production costs, Staples says,
and should never have that effect if other
language in the lease says otherwise. She
recommends leases be written using common, rather than industry, definitions.
TIPRO Brief
TIPRO's amicus brief asserts the
Supreme Court's initial ORRI opinion
misses the mark, and urges the justices
to grant a motion for rehearing, reverse
its opinion, and rule the ORRI doesn't
prohibit deducting post-production costs.
"While some may argue that this case
may be limited to its facts, the statement
by the court in its opinion will be twisted
and may lead to conclusions by lower
courts that change the relationship of the
parties to an oil and gas lease-a relationship that always has been purely contractual (and) based on the express terms
of the agreement between the parties,"
TIPRO says.
The association contends the interpretation contains four errors that require
reversal:
* The court is relying on the reserved
royalty clause in one paragraph as a tool to
interpret the ORRI clause in another paragraph. Unlike the reserved royalty, the
ORRI is not for wells producing hydrocarbons from the subject lease, but rather is
assigned to wells drilled into other leases.
* The ORRI is an in-kind royalty
provision for volumes produced from
those other leases, and is paid in gas volumes. Respondents don't have an option

American Oil and Gas Reporter - January 2016

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