XAE CORP. v. SMR PROPERTY MANAGEMENT CO.
1998 OK 51 – Oklahoma Supreme Court
Do I understand this Oklahoma Supreme Court case correctly to say that post production costs such as gathering can be deducted from an overriding royalty interest, even if the ORRI assignment states: “said overriding royalty to be free and clear of all costs and expenses of development, production and operation, save and except production taxes, severance taxes and ad valorem taxes applicable thereto” ?
For many years there were never any deductions taken from my ORRI, other than taxes. Now with the new horizontal wells they are taking out a big chunk for gathering costs. I’m assuming there’s nothing I can do about that, but wanted to make sure I understand this court case correctly.
The language of the ORMI is important, in Xae the interest was in-kind.
¶3 The parties agree that this clause created an in-kind overriding royalty interest, meaning that the overriding royalty granted was a fraction of the gas produced rather than of the gas sold. The assignment stated that it applied to all extensions or renewals of the oil and gas leases, and contained a proportionate reduction clause. The overriding royalty interests were made subject to previously existing overriding royalty interests and a production payment. The assignment contained no express provision placing a duty on the lessee to market the product.
¶4 Plaintiffs did not take their share of gas in-kind, but instead authorized SMR Property Management Company to market [968 P.2d 1203] their share. SMR, acting as agent for itself and the other defendants, paid plaintiffs for gas produced and sold from the leased premises. SMR deducted from the amounts paid to the plaintiffs a charge for gathering and delivering the gas to an amine treatment facility where large quantities of hydrogen sulfide and carbon monoxide were removed from it. The gas was sold at the outlet from the amine treatment facility. Plaintiffs’ brief states that the amine treatment facilities are located “on or near” the subject leases.
The rational was that override required only delivery at the wellhead, there was no duty to market implied by the override. Therefore, the the cost to market was to be shared. It is important to note that the court focused upon the language of the override and did not foreclose the possibility of a lease written in a way to not allow post-production costs. Also keep in mind that this case applies in Oklahoma.