Deductions of post-production costs have become the focal point for many disputes between mineral interest owners, as commodity prices continue to remain substantially lower than during the peak of the recent shale drilling revolution. In June 2015, the Texas Supreme Court applying Texas state law, issued a split decision in the matter captioned Chesapeake Exploration, L.L.C. v. Hyder, 58 Tex. Sup. Ct. J. 1182, 2015 Tex. LEXIS 554 (2015). In Hyder the Texas Court found that under the terms and conditions of the involved oil, gas and mineral lease Chesapeake could not deduct post-production costs from an overriding royalty interest. The Hyder case marks the first recently reported win for a royalty interest owner in Texas concerning responsibility for certain post-production costs.

Prior to Hyder, the recent Texas litigation concerning the proper deduction of post-production costs was primarily determined by Federal Courts. While each case is necessarily determined upon the involved oil, gas and mineral lease terms and conditions, the Texas Federal Court decisions generally found that the deduction of post-production costs were proper. Those watching the judicial development of this issue have speculated as to whether there would be a split between the relatively consistent findings of the Texas Federal Courts and the anticipated decisions from the Texas State Courts. While it is still too early to predict with much certainty, Hyder appears to be an indication of such a split.

While a few cases concerning post-production costs have been pursued in Louisiana, the issue has thus far attracted much more attention in the Texas Courts. The Texas decisions, particularly those rendered by the Federal Courts, are nonetheless of interest in Louisiana as the United States Fifth Circuit Court of Appeals has appellate review jurisdiction over both the Texas and Louisiana Federal District Courts. Although Texas and Louisiana laws differ in certain areas, it must be anticipated that the United States Fifth Circuit Court of Appeals decisions issued in Louisiana will be consistent with its Texas rulings. If this indeed turns out to be the case, Louisiana State Court’s could, as maybe happening in Texas, split with their Federal counterparts. As each oil, gas and mineral lease must be evaluated based upon its specific terms and conditions, there appears to be a great deal of room for judicial developments on this application of costs issue.  As of now, it is possible that Hyder only represents the potential for a split between the Louisiana State Courts and Louisiana’s Federal Courts.

If you have questions concerning how these issues may impact you, call one of our experienced attorneys for a more thorough discussion.