Heritage Resources, Inc. v. Nationsbank

• Decision Date: 09 March 1995
• Docket Number: No. 08-94-00062-CV,08-94-00062-CV
• Citation: Heritage Resources, Inc. v. Nationsbank, 895 S.W.2d 833 (Tex. App. 1995)
• Parties: HERITAGE RESOURCES, INC., Appellant, v. NATIONSBANK, Co-Trustee under the will of David B. Trammel, Deceased, et al., Appellees.
• Court: Texas Court of Appeals

Page 833

895 S.W.2d 833

HERITAGE RESOURCES, INC., Appellant, v. NATIONSBANK, Co-Trustee under the will of David B. Trammel Deceased, et al., Appellees.

No. 08-94-00062-CV.

Court of Appeals of Texas El Paso.

March 9, 1995.

Rehearing Overruled April 12, 1995.

John R. Woodward, Woodward & Shaw, Dallas, for appellant.

Robert Scogin, Kermit, Ben A. Douglas, Rick K. Disney, Douglas, Kressler & Weuster, P.C., Ft. Worth, for appellees.

Before BARAJAS, C.J., and KOEHLER and LARSEN, JJ.

OPINION

LARSEN, Justice.

This case involves construction of royalty clauses in several oil and gas leases in Winkler County. We affirm.

FACTS

Nationsbank is trustee for several owners of undivided fractional interests in gas, oil, and other minerals inherited under the will of David B. Trammel and leased to Heritage Resources, Inc. Heritage operates the wells and owns an undivided fractional interest in each of them. In January 1989, bank personnel noticed that Heritage was making a severance/handling deduction from royalty payments under the leases. The severance deduction was for taxes, and the bank had no quarrel with that. The handling deduction, however, was for transportation after production. To that the bank objected, asking for reimbursement for all handling charges, as the lease language specifically prohibited deduction for any costs of marketing the gas. The language at issue reads:

[T]here shall be no deductions from the value of Lessor's royalty by reason of any required processing, cost of dehydration, compression, transportation, or other matter to market such gas.

Heritage refused to reimburse the royalty owners for amounts it had deducted for post-production transportation from the wellhead. The bank brought suit against Heritage to recover the amounts of "handling expenses" which Heritage had deducted from royalty payments since 1985. The trial court entered partial summary judgment in favor of Nationsbank, holding that the relevant lease language prohibited deduction of transportation costs from the royalties. After a bench trial, the trial court entered judgment awarding Nationsbank, as co-trustee, and the royalty owners, $271,444.29 for transportation deductions made between September 1985 and April 1993, plus interest and attorneys fees.

Heritage brings seven points of error. It urges that the trial court erred as a matter of law in interpreting the royalty clause to prohibit deduction of transportation costs; that there is legally or factually insufficient evidence that Heritage deducted any transportation costs from the royalties; and that Heritage should not be liable for the total amounts of transportation costs because division orders on certain wells specifically authorized deduction of transportation costs from royalties and were binding upon the royalty owners until revoked.

INTERPRETING THE ROYALTY CLAUSE

In its Points of Error One through Three, Heritage claims that the trial court erred by misinterpreting the royalty clause of the leases; in concluding that deduction of the transportation costs was a breach of contract for which plaintiffs were entitled to damages in the amount equal to the deductions; and by concluding that Heritage had violated statutory mandates making it liable for the transportation costs, without regard to whether it had breached its contract. As these points are closely related, we address them together.

The clauses at issue vary only slightly from lease to lease. They read:

3. The royalties to be paid Lessor are ...

(b) on gas, including casinghead gas or other gaseous substances produced from the land, or land consolidated therewith, and sold or used off the premises or in the manufacture of gasoline or other products therefrom, the market value at the well of 1/5 of the gas so sold or used, provided that on gas sold at the well the royalty shall be 1/5 of the amount realized from such sale provided, however, that there shall be no deductions from the value of Lessor's royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas.

Or:

3. In consideration of the premises, Lessee covenants and agrees ...

(b) To pay the Lessor 1/4 of the market value at the well for all gas (including all substances contained in such gas) produced from the leased premises and sold by Lessee or used off the leased premises; provided, however, that there shall be no deductions from the value of Lessor's royalty by reason of any required processing, cost of dehydration compression, transportation, or other matter to market such gas.

Or:

3. Lessee shall pay the following royalties subject to the following provisions: ...

(b) Lessee shall pay the Lessor 1/4 of the market value at the well for all gas (including all substances contained in such gas) produced from the leased premises and sold by Lessee or used off the leased premises, including sulphur produced in conjunction therewith; provided, however, that there shall be no deductions from the value of Lessor's royalty by reason of any required processing, cost of dehydration, compression, transportation, or other matter to market such gas. [All emphasis added].

First, Heritage argues that the lease language "there shall be no deductions from the value of Lessor's royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas" cannot mean that Heritage must pay royalties based upon the market value at the wellhead; if this were so, it claims, the amount of royalty would depend entirely upon the point of sale and would have no relation at all to the market value of the gas at the well, thus rendering the portion of the royalty clause calling for payment of a fraction of market value at the well meaningless.

Heritage's theory is based upon two premises: that "the value of Lessor's royalty" is directly tied to market value at the well; and that "market value at the well" must necessarily take into consideration transportation costs, as the amount a buyer is willing to pay for gas at the wellhead is inextricably tied to the amount the buyer must pay to transport the gas to its ultimate use site, or to the site at which it will be resold. Thus, Heritage argues, the lease guarantee that lessor's royalty will not be reduced means only that Heritage cannot deduct more in post-production costs than the reasonable cost of transporting the gas to its market and the cost of other processing necessary to market it. As these costs are inherently part of determining market value at the well, Heritage was entitled to deduct the handling charges as it did. We disagree for the following reasons.

A royalty is the landowner's share of gas production, free of production expenses. Although not subject to costs of production, royalty interests are usually subject to costs incurred after production, such as production or gathering taxes, costs of treating the gas to render it marketable, and costs of transportation to market, where the royalty interest is payable (as here) "at the well." 3 H. Williams, Oil & Gas Law, § 645.2 at 598 (1993). Nevertheless, this general rule is subject to modification by the parties. Martin v. Glass, 571 F.Supp. 1406, 1410 (N.D.Tex.1983), aff'd, 736 F.2d 1524 (5th Cir.1984); see also Robert v. Swanson, 222 S.W.2d 707, 711 (Tex.Civ.App.--Eastland 1949, writ ref'd n.r.e.). The dispute in this case arises from lease language giving the royalty as a fraction of "market value at the well," the means by which royalty interests are usually measured, while providing that there shall be no deduction from the royalty interest for post-production costs, costs for which royalty owners are usually liable.

We construe a gas lease under the general rules governing the construction of contracts. The intent of the parties is controlling and where the terms of the lease are unambiguous, the parties' objective intent is determined by the language of the lease itself without resort to parol evidence. Hutchings v. Chevron U.S.A., Inc., 862 S.W.2d 752, 757 (Tex.App.--El Paso 1993, writ denied). We determine the controlling intent not from what the parties may have intended, but failed to express, but from the intention actually expressed in the lease as written. Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731 (Tex.1981); Southwest Airlines Co. v. Jaeger, 867 S.W.2d 824, 829 (Tex.App.--El Paso 1993, no writ). In determining the intent of the parties, we examine the entire instrument, making every attempt to harmonize and give effect to all provisions of the contract so that none is rendered meaningless. Hutchings, 862 S.W.2d at 756.

Here, to adopt Heritage's interpretation of the post-production clause would render it meaningless, as the generally understood definition of royalty payments would then apply and any qualification would be unnecessary. The bank's (and trial court's) interpretation, on the other hand, allows all provisions to be harmonized, giving meaning to each. This is so because gas royalty payments are usually subject to post-production costs; if the royalty provisions at issue here did not contain the language excluding post-production costs, there would be no issue because the accepted definition of royalty interest, as set out above, would control. The parties here elected to specifically exempt royalties from post-production costs, however, and they must have intended something by this language. The lease shows that the parties contemplated gas sales away from the wellhead, and that...