Chesapeake Exploration, L.L.C. v. Hyder

427 S.W.3d 472, 2014 WL 852102, 2014 Tex. App. LEXIS 2439
CourtCourt of Appeals of Texas
DecidedMarch 5, 2014
DocketNo. 04-12-00769-CV
StatusPublished
Cited by6 cases

This text of 427 S.W.3d 472 (Chesapeake Exploration, L.L.C. v. Hyder) is published on Counsel Stack Legal Research, covering Court of Appeals of Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Chesapeake Exploration, L.L.C. v. Hyder, 427 S.W.3d 472, 2014 WL 852102, 2014 Tex. App. LEXIS 2439 (Tex. Ct. App. 2014).

Opinion

OPINION

Opinion by:

SANDEE BRYAN MARION, Justice.

This appeal arises out of a dispute involving the construction of the royalty and overriding royalty clauses in an oil and gas lease (“the Hyder lease”) between Chesapeake Exploration, L.L.C. and Chesapeake Operating, Inc. (collectively “appellants”) and the appellees, who are royalty interest holders.

Appellees filed suit against appellants alleging a breach of the lease. Appellants counterclaimed to recover ovei-paid royalties. After a bench trial, the trial court entered a final judgment in favor of appel-lees, awarding appellees damages for breach of the royalty and overriding royalty clauses, attorney’s fees, and pre-judgment and post-judgment interest. We affirm.

BACKGROUND

The Hyder lease was originally entered into on September 1, 2004, between appel-lees and Four Sevens Oil Co., Ltd. Four Sevens assigned the lease to appellants. The lease covers approximately 1,037 surface acres and approximately 948 mineral acres of land located in Johnson County and Tarrant County, Texas. In addition to the leased premises, the lease also allows appellants to drill from existing well sites that lie adjacent to or near the leased premises (“off-lease wells”). As of December 1, 2011, appellants have drilled and completed twenty-two wells on the leased premises and seven off-lease wells.

[475]*475The dispute between the parties arose from each party’s interpretation of the royalty and overriding royalty clauses. Appellants contend the royalty clause applicable to the wells on the leased premises allows them to deduct appellees’ share of post-production costs and expenses incurred between the “point of delivery” and the “point of sale” from appellees’ royalty payment. Appellees counter that their royalty interest is not subject to any post-production costs and expenses, regardless of where such costs and expenses are incurred. Appellants further contend the overriding royalty clause applicable to the off-lease wells allows them to deduct ap-pellees’ share of post-production costs and expenses from appellees’ overriding royalty. Appellees counter that their overriding royalty interest is not subject to any post-production costs or expenses.

STANDARD OF REVIEW

An oil and gas lease is a contract and must be interpreted as a contract. Tittizer v. Union Gas Corp., 171 S.W.3d 857, 860 (Tex.2005); Hitzelberger v. Samedan Oil Corp., 948 S.W.2d 497, 503 (Tex.App.-Waco 1997, pet. denied). Contract language that can be given a certain or definite meaning is not ambiguous and is construed as a matter of law. Chrysler Ins. Co. v. Greenspoint Dodge of Hous., Inc., 297 S.W.3d 248, 252 (Tex.2009). Interpretation of an unambiguous contract is a question of law and we review the trial court’s interpretation of an unambiguous contract under a de novo standard. EOG Res., Inc. v. Hanson Prod. Co., 94 S.W.3d 697, 701 (Tex.App.-San Antonio 2002, no pet.). In construing an unambiguous lease, our primary duty is to ascertain the parties’ intent as expressed by the words of their agreement. Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex.2002). In doing so, we consider the wording of the lease in light of the circumstances surrounding its adoption and apply the rules of construction to determine its meaning. Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731 (Tex.1981). We must give contractual terms their plain and ordinary meaning unless the instrument shows the parties’ intent to use the terms in a different sense. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex.1996). We “examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless.” Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983).

ROYALTY FOR WELLS ON LEASED PREMISES

A. Background

Because of its relevance to our determination, a brief summary of appellants’ organizational and operational structure is warranted. Chesapeake Exploration, L.L.C., Chesapeake Operating, Inc. (“COI”), Chesapeake Energy Manufacturing, Inc. (“CEMI”), and Chesapeake Midstream Partners, L.P. (“CMP”) are affiliated companies. COI is responsible for the production of gas from the Hyder lease. After gas is produced, COI sells the gas to CEMI. At that point, CEMI takes title to the gas. CMP gathers the gas and transports it to a central point. CEMI then delivers the gas to one of several “points of delivery,” which are physical locations where CMP’s system connects to larger interstate pipelines owned and operated by unaffiliated third party interstate pipeline companies. The gas is . then transported downstream from these points of delivery to various “points of sale.” At these points of sale, title to the gas passes from CEMI to the third party purchaser. Appellants made royalty payments to appellees based on a weighted average sales price calculat[476]*476ed on these sales to various third party-purchasers.

B. The Royalty Clause

The royalty clause in the Hyder lease applies to the wells located on the leased premises. In their first issue, appellants contend this clause entitles them to deduct certain post-production costs and expenses. The relevant portion of the royalty clause sets forth appellants’ royalty obligation as follows:

[Appellants] covenant ] and agree[]'to pay [appellees] the following royalty: (a) twenty-five percent (25%) of the market value at the well of all oil and other liquid hydrocarbons produced and saved from the Leased Premises as of the day it is produced and stored; and (b) for natural gas, including casinghead gas and other gaseous substances produced from the Leased Premises and sold or used on or off the Leased Premises, twenty-five percent (25%) of the price actually received by [appellants] for such gas .... The royalty reserved herein by [appellees] shall be free and dear of all production and post-production costs and expenses, including but not limited to, production, gathering, separating, storing, dehydrating, compressing, transporting, processing, treating, marketing, delivering, or any other costs and expenses incurred between the wellhead and [appellant’s] point of delivery or sale of such share to a third party. [emphasis added]

Appellants acknowledge production costs and expenses incurred before the gas is extracted are excluded from appellees’ royalty interest. However, they argue the royalty clause is constructed in a manner that permits deduction of post-production costs and expenses, such as third party transportation costs incurred between the point of delivery and the point of sale.

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427 S.W.3d 472, 2014 WL 852102, 2014 Tex. App. LEXIS 2439, Counsel Stack Legal Research, https://law.counselstack.com/opinion/chesapeake-exploration-llc-v-hyder-texapp-2014.