Texas Oil and Gas Attorney Blog
The Texas Supreme Court recently considered oil and gas leases that involved the interaction of the “free use of gas” clause and the royalty due on gas used off the leased premises.
In Carl v. Hilcorp Energy Co., ___ S.W.3d ___, 2024 WL ___ (Tex. May 17, 2024), individuals brought a class action against Hilcorp, claiming Hilcorp owed royalties on gas used off-lease for post-production activities. According to the leases, royalties were paid based on the value of gas at the well, and this language allows deduction of post-production expenses. The leases stated that Hilcorp must pay as royalties “on gas . . . produced from said land and sold or used off the premises . . . the market value at the well of one-eighth of the gas so sold or used.” The leases also provided that Hilcorp “shall have free use of . . . gas . . . for all operations hereunder.”
The Court was answering two certified questions from the Fifth Circuit. In answering those questions, the Court held that a market-value-at-the well lease containing an off-lease-use-of-gas clause and free-on-lease-use clause can be interpreted to allow for the deduction of gas used off lease in the post-production process. The Court also discussed that the deduction could use either the value per unit of gas, or the units of gas, to determine the gas upon which royalties must be paid, since either calculation yielded approximately the same results.