Mitchell Ayer Quoted in Law360 on Royalty Ruling

“Royalty Ruling Boosts Energy Cos. In Permian Basin Fights”

A Texas Supreme Court opinion allowing Occidental Permian Ltd. and other oil and gas producers to charge royalty owners for their share of removing carbon dioxide from natural gas is a significant win for the energy industry as enhanced recovery methods become more common, lawyers say.

The opinion, released Friday, affirms a lower court ruling that stripped a group of royalty owners led by Marcia French of a more than $10 million judgment following a bench trial that found they’d been underpaid for oil and gas produced from her land by Occidental Permian, also known as Oxy. The opinion found Oxy had appropriately charged the group for the post-production costs of making gas and other liquids marketable by removing carbon dioxide that had been injected into the reservoir to boost production.

The fundamental disagreement between the royalty owners and Oxy was whether removing the carbon dioxide should have been considered part of the post-production efforts, meaning royalty owners would proportionately share in the cost.

Mitch Ayer, an oil and gas attorney at Thompson & Knight LLP, says the court reached a logical conclusion in interpreting the language in the lease about processing costs under “market value at the well.” He says to determine the market value after the gas leaves the well, you have to subtract the costs necessary in order to sell it, and when extracting carbon dioxide is necessary to get marketable gas, those costs should be shared with royalty owners.

“If you have this language in your lease, which is one of the most common royalty provisions to have, especially in older leases, this gives you much more certainty,” Ayer says.