CARL v. HILCORP ENERGY COMPANY (Opinion)
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The case revolves around a dispute between Anne Carl and related parties (the royalty holders) and Hilcorp Energy Company (the producer) over the calculation of royalties from a mineral lease. The lease stipulates that royalties are to be calculated based on the market value of the minerals "at the well," meaning before any post-production efforts have increased their value. However, the minerals are often not sold until after these efforts have taken place, resulting in a higher sale price. To account for this disparity, the producer deducted the proportionate share of post-production costs from the royalty payment, a method known as the "workback method." The royalty holders were dissatisfied with this reduced payment and sued, arguing that the lease required payment of a royalty on all gas produced from the well.
The case was initially heard in a federal district court, which sided with the producer. The court found that the lease did indeed convey an "at-the-well" royalty, meaning the royalty holders were obligated to share proportionately in the post-production costs. The court also found no fault with the producer's method of accounting for these costs, which involved using some of the gas produced from the well to power post-production activities conducted off the lease. The value of this gas was considered a post-production cost and was therefore deducted from the total volume of gas used to calculate the royalty.
The case was then certified to the Supreme Court of Texas, which affirmed the lower court's decision. The court agreed with the producer's interpretation of the lease and found that the royalty holders, as holders of an "at-the-well" royalty, were indeed obligated to bear their usual share of post-production costs. The court also found that the producer's method of accounting for these costs was permissible. The court concluded that the royalty holders were not shortchanged and that the producer's calculation was one acceptable way to convert the downstream sales price into an at-the-well market value on which to pay the royalty, as required by the lease.
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