Devon Energy Prod. Co., L.P. v. Sheppard

This Texas Supreme Court case involved a royalty calculation dispute between landowners and producers in the Eagle Ford Shale. The parties agree that the landowners’ royalty is free of costs and expenses between the wellhead and the point of sale. At issue is whether the landowners’ royalty is free of sales price deductions to third parties accounting for downstream costs.

The subject leases had a remarkably expansive royalty provision: “Lessor’s royalty shall never be chargeable directly or indirectly with any costs or expenses [other than taxes].” The producers interpreted this provision as freeing the lessors’ royalties only from pre-sale expenses. The landowners interpreted this provision to require payment beyond the producers’ gross proceeds by adding sales price deductions accounting for downstream costs or expenses to the royalty calculation.

The court affirmed summary judgment for the landowners because the plain language of the lease did not restrain royalty calculations only to pre-sale expenses. Because price deductions accounting for downstream postproduction costs indirectly charge the lessors, the producers must add these discounts to the royalty calculations. The court noted that while this royalty calculation is not industry standard, neither was the broad and “highly unique” leasing provision.