How Texas courts read a gas royalty clause on post-production costs
Two owners can hold leases that look alike and still be paid on different amounts, because the words that value the gas are different. This page reads four Texas Supreme Court opinions and says what each one decided about its own lease or deed, and no more.
This is general information, not legal advice. It covers Texas courts only. It reports what four opinions decided about the words in their own leases and deeds. It doesn't tell you what your lease means or whether a deduction on your stub is allowed. An oil and gas attorney who reads your lease can.
A royalty is usually free of the cost of producing the gas but not of the cost of getting it ready for sale and to market, and the parties to a lease or deed can agree to something else. The Texas Supreme Court says so in each of the four opinions below. What settles a case is the wording. In Heritage (1996), a lease that valued the royalty at the well was read to take reasonable transportation cost out of the sale price, even though it also said no deductions could come out of the value of the royalty. In Hyder (2016), a gas royalty paid on the price the lessee actually received did not bear post-production costs, and neither did a "cost-free" overriding royalty in that lease. In Sheppard (2023), Eagle Ford leases that told the producers to add certain price reductions to gross proceeds were enforced as written, including reductions a downstream buyer took. In Fasken (2026), a 1960 Webb County deed that reserved a royalty "free of cost forever" in minerals "produced" from the land was read as a royalty valued at the wellhead. None of the four says what your lease means.
1The usual rule and two ways the words change it
Justice Baker's 1996 opinion in Heritage, written for five justices, puts the usual rule this way: royalty "is not subject to the costs of production," but it "is usually subject to post-production costs, including taxes, treatment costs to render it marketable, and transportation costs." It adds that "the parties may modify this general rule by agreement." The three later opinions repeat the rule. Sheppard says it in terms of when the cost is incurred: usually the royalty is free of the expenses of bringing minerals to the surface (production costs) but not of the expenses incurred after that to make production marketable (post-production costs).
Fasken (2026) describes two primary ways the parties can free a royalty of the post-production costs it usually bears:
- Set the point where the royalty is valued downstream of the well. Fasken says a deed calling for valuation on the "amount realized," "proceeds," "gross value received" or another gross-proceeds term is "based on point-of-sale proceeds," and that absent limiting language such terms "may create a royalty free from postproduction costs." A footnote adds that other terms, such as "net" or "at the well," can require the royalty owner to bear those costs.
- Use explicit terms that add some or all post-production costs back into the royalty base.
A footnote in Fasken adds that in recognizing those two methods the Court does "not foreclose others."
Both opinions in Heritage and Fasken say that when a royalty is valued at the well, a "no deductions" or "cost-free" sentence doesn't by itself move the valuation point. Fasken reads Hyder as a case where added language in the lease gave the term "cost-free" its context.
Two words from the home page glossary come up throughout: market value at the well and post-production costs.
2Heritage (1996): market value at the well
Heritage Resources, Inc. v. NationsBank, No. 95-0515, 939 S.W.2d 118 (Tex. 1996). Opinion issued April 25, 1996; rehearing overruled March 21, 1997.
The words
The Court said the critical clause in all three leases was the requirement to pay a fraction of "the market value at the well" of the gas. Each lease also carried a proviso. In one of them:
Lease clause, in partTo pay the Lessor [a fraction] of the market value at the well for all gas (including substances contained in such gas) produced from 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.
What happened
Heritage was the lessee and operator. It sold gas off the leased premises and, before figuring royalty, took out the cost of moving the gas from the wellhead to the point of sale. NationsBank, as trustee for royalty owners, said the "no deductions" proviso forbade that. The parties did not dispute two facts: the price Heritage received was the market price at the point of sale, and the transportation costs it deducted were reasonable.
What the Court decided
The Court reversed the court of appeals, which had held for the royalty owners, and rendered judgment that NationsBank take nothing. It held the leases did not require royalties on the market value at the point of sale. There was no evidence of comparable sales, so it used the other method it described, which subtracts reasonable post-production marketing costs from the market value at the point of sale. On the parties' concessions, what Heritage had paid was the correct amount.
The opinion written for five justices reasoned that, given the commonly accepted meanings of "royalty" and "market value at the well," the proviso sentences "merely restate existing law." The concurring opinion of two justices, in a passage Hyder later quotes, put it this way: "Value at the well is already net of reasonable marketing costs."
Where it stands now
The vote changed on rehearing in 1997. Hyder (text and n. 25) and Sheppard say Justice Owen's concurring opinion became the plurality opinion, and Fasken (n. 14, describing a 2021 opinion) adds that the opinion written for the Court in 1996 became a concurrence. The dissent from the denial of rehearing (960 S.W.2d 619) gives the count: Chief Justice Phillips moved to Justice Owen's concurrence, Justice Enoch recused, and the Court was deadlocked four to four, so rehearing was overruled by operation of law. The docket shows rehearing overruled March 21, 1997, and the judgment stood. The later opinions cite both parts of Heritage. This page says which of the two it is quoting.
Hyder says Heritage "holds only that the effect of a lease is governed by a fair reading of its text." Sheppard quotes the concurring opinion for a related point: "Parties to a lease may allocate costs, including post-production or marketing costs, as they choose."
It did not decide that every deduction is allowed on a lease that values gas at the well. The method it applied subtracts reasonable costs, and reasonableness was conceded there. Whether a given charge is reasonable, and what a differently worded lease means, were not before the Court.
3Hyder (2016): price received and "cost-free"
Chesapeake Exploration, L.L.C. v. Hyder, No. 14-0302, 483 S.W.3d 870 (Tex. 2016). Opinion delivered January 29, 2016, with the denial of rehearing. It withdrew and replaced the Court's opinion of June 12, 2015. The Court affirmed, five justices to four.
The words
The Hyder family leased 948 mineral acres in the Barnett Shale. The Court noted that counsel for the lessors and the original lessee negotiated and drafted the lease. It had three royalty provisions.
| Royalty | The words | What the Court said |
|---|---|---|
| Oil | 25% of "the market value at the well of all oil and other liquid hydrocarbons" | Bears post-production costs, because it is paid on market value at the well. |
| Gas | 25% "of the price actually received by Lessee" for the gas, and expressly "free and clear of all production and post-production costs and expenses" | Does not bear post-production costs. The price-received basis "is sufficient in itself." The added "free and clear" sentence "has no effect on the meaning of the provision" and might be emphasis or surplusage. |
| Overriding royalty on certain directional wells | "a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5.0%) of gross production obtained" | The clause in dispute. Held free of post-production costs. |
What happened
Chesapeake sold the gas to an affiliate, which gathered and transported it and sold it to third parties. The affiliate paid Chesapeake a price worked out from those third-party sales prices less post-production costs, and Chesapeake paid the Hyders five percent of that lower price. The Hyders said the base should be the sales price. In the Supreme Court, Chesapeake did not dispute that "the price actually received by the Lessee" meant the sales price its affiliate received, and the Hyders did not argue that price was unfair.
What the Court decided
The Court held that the overriding royalty's "cost-free" language covers post-production costs, so that royalty does not bear them. It said "cost-free" can be read as emphasizing freedom from production costs, which is how drafters often use it, but that as a general term it literally refers to all costs, so Chesapeake had to show it nevertheless could not reach post-production costs in this lease. The Court did not accept Chesapeake's arguments to the contrary. The exception for the royalty's share of production taxes, which the Court has called post-production expenses, cut against Chesapeake's reading, although the Court also noted that a taxes exception to freedom from production costs is not uncommon in leases. Each lessor also had the right to take its royalty in kind, and the Court said the chance of bearing post-production costs that way did not mean the lessors bore them when the royalty was paid in cash. Fasken later called the taxes exception the most notable of the lease's added language.
The lease also said the holding in Heritage "shall have no application to the terms and provisions of this Lease." The Court said Heritage does not hold that a royalty cannot be made free of post-production costs, and that a disclaimer of its holding "cannot free a royalty of postproduction costs when the text of the lease itself does not do so." Here the text did.
The lease was a negotiated Barnett Shale lease with three separate royalty clauses. The Court's conclusion rested on the words of that lease and did not say a "cost-free" clause always frees a royalty of post-production costs. Fasken says a cost-free clause alone does not do that when the royalty is valued at the well.
4Sheppard (2023): costs added to gross proceeds
Devon Energy Production Co. v. Sheppard, No. 20-0904, 668 S.W.3d 332 (Tex. 2023). Opinion delivered March 10, 2023. Seven justices were in the majority, with Justice Devine writing. Justice Blacklock dissented and Justice Young did not participate.
The words
Five Eagle Ford Shale leases were at issue, signed in 2007, 2010 and 2011. The parties described the case as a bellwether for as many as 200 other leases with the same language. The gas royalty was on "the gross proceeds realized from the sale of such gas, free of all costs and expenses, to the first non-affiliated third party purchaser under a bona fide arms length sale or contract." Then came an unusual paragraph:
Lease paragraph 3(c), as quoted in the opinionIf any disposition, contract or sale of oil or gas shall include any reduction or charge for the expenses or costs of production, treatment, transportation, manufacturing, process[ing] or marketing of the oil or gas, then such deduction, expense or cost shall be added to . . . gross proceeds so that Lessor's royalty shall never be chargeable directly or indirectly with any costs or expenses other than its pro rata share of severance or production taxes.
In the Sheppard leases, Addendum L, headed "ROYALTY FREE OF COSTS," said its terms controlled over paragraph 3 and "shall not be treated as surplusage despite the holding in" Heritage and its companion case, Judice v. Mewbourne Oil Co. The Crain leases make Addendum L control over the counterparts of paragraphs 3(a) and 3(b) but do not mention the counterpart of 3(c). The opinion numbers the paragraphs as the Sheppard leases do.
What happened
The producers sold to unaffiliated buyers at points downstream of the wellhead and paid royalty on the gross proceeds they received. Some sales contracts set the price as a published index price less an amount for the buyer's later costs. One example was a crude oil contract at index price minus $18 per barrel for "gathering and handling, including rail car transportation." Others were gas processing agreements that paid an index price for natural gas liquids less a transportation and fractionation fee. The producers did not add those amounts to the royalty base. The landowners said the leases required it. The producers said only their own pre-sale costs had to be added back.
What the Court decided
The Court affirmed summary judgment for the landowners on ten disputed issues: price adjustments with a stated purpose matching the costs the paragraph lists, whether the adjustment was a fixed amount or the buyer's actual costs. Those amounts "must be 'added to' 'gross proceeds'" before the royalty is figured. It called the leases "proceeds plus" leases, and the language "atypical." It said the landowners cited no precedent requiring royalty on post-production costs downstream of the point of sale, "But the parties to a mineral lease could unquestionably make that agreement."
The Court put limits on its own holding. It said this does not mean any "reduction or charge" in a buyer's later dispositions "must be included in the royalty base ad infinitum," and that it addressed "only the specific language of the provisions before us as applied to the disputed issues on appeal." The court of appeals had ruled for the producers on 13 other issues, such as adjustments with no stated purpose, and those were not before the Supreme Court, which expressed no opinion on them.
It did not decide that a gross-proceeds royalty in an ordinary lease reaches costs a buyer incurs after the point of sale. The Court said there was nothing common, usual or standard about the paragraph 3(c) language, and that it was enforcing those leases as written. Most of the exemplar sales contracts the opinion lists concern crude oil, condensate and natural gas liquids, and the first one listed is a crude oil and condensate sale.
5Fasken (2026): a 1960 deed in Webb County
Fasken Oil and Ranch, Ltd. v. Puig, No. 24-1033 (Tex. Apr. 10, 2026). Justice Bland delivered the opinion of the Court. The Court's docket shows the mandate issued May 22, 2026.
The words
This case is about a royalty reserved in a deed, not a royalty in a lease. In 1960 B. A. Puig, Jr. sold Webb County ranchland and reserved a nonparticipating royalty. The deed reserved:
Deed language, in partan undivided one-sixteenth (1/16) of all the oil, gas and other minerals, except coal, in, to and under or that may be produced from the above described acreage, to be paid or delivered to Grantor, B. A. Puig, Jr., as his own property free of cost forever.
What happened
Fasken, the successor to the buyer, operates oil and gas wells on the relevant leaseholds. After it produces the minerals, it transports, treats, processes and sells them as condensate and natural gas. It had historically taken the costs between the wellhead and the point of sale out of the price of the processed gas to reach the value it used for the royalty on the produced minerals. In 2021 the royalty owners challenged that and asked for a declaration that their royalty is free of downstream post-production costs. The trial court and the court of appeals agreed with them, and the court of appeals relied on Hyder.
What the Court decided
The Court reversed. It held that "free of cost forever" refers to raw minerals produced at the wellhead, not to processed minerals sold downstream, so the phrase doesn't preclude deducting post-production costs from a downstream sales price to arrive at the market value of the raw minerals produced at the wellhead. It rendered partial summary judgment for Fasken and sent the case back to the trial court.
Its reasons, in short:
- The deed described minerals "produced from the above described acreage." The Court read that, absent contrary language, as a royalty valued at the well. It said "forever" refers to time, not to a place where the royalty is valued.
- The deed had no term setting a downstream valuation point, no gross-proceeds term and no language adding post-production costs to the royalty base.
- The deed did not say who chooses whether the royalty is paid in cash or in kind. In Hyder the lessors held that choice.
- Fasken reads Hyder as resting on that lease's added language, most notably the exception for production taxes. The Puig deed has no reference to post-production expenses.
The Court noted the royalty owners did not dispute that their payments had historically borne post-production costs, and said its construction "turns solely on the deed's text."
It construed one 1960 deed, not a lease, and it did not say what any other deed or lease means. The question before it was whether the deed's "free of cost forever" language precludes deducting post-production costs. It sent the case back to the trial court for further proceedings.
6The four side by side
| Opinion | The interest and its words | What the Court decided |
|---|---|---|
| Heritage (1996), No. 95-0515 | Lease royalty on "market value at the well," plus a proviso against deductions for processing, dehydration, compression, transportation or other costs to market. | The proviso did not change the market-value-at-the-well measure. Reasonable transportation cost came out of the point-of-sale price. |
| Hyder (2016), No. 14-0302 | Three royalties in one Barnett Shale lease: oil at market value at the well, gas on "the price actually received by Lessee," and a "cost-free" overriding royalty. | The oil royalty bears post-production costs (no oil was produced). The gas royalty does not. The cost-free overriding royalty does not, on that lease's words. |
| Sheppard (2023), No. 20-0904 | Eagle Ford leases with a gross-proceeds royalty and a paragraph requiring certain reductions or charges to be added to gross proceeds. | Under those leases, buyer-side price adjustments with a stated purpose matching the listed costs are added to gross proceeds before royalty is figured. |
| Fasken (2026), No. 24-1033 | A 1960 deed reserving a nonparticipating royalty in minerals "produced from the above described acreage," "free of cost forever." | Under that deed, the royalty is valued at the wellhead, and post-production costs can be deducted from a downstream price to reach that value. |
7The same gas, three clauses, made-up numbers
Here is why the wording moves the check. Take one royalty of 1/4 on 10,000 Mcf of gas sold in a month at a plant outlet for $3.00 an Mcf, after the lessee paid $0.60 an Mcf, a reasonable cost, to gather, compress, treat and move the gas there. Severance tax, and your decimal's share of the unit, are left out to keep the arithmetic plain.
Illustration with made-up numbers, not any real lease
| If the clause works like | Base per Mcf | Arithmetic | Royalty |
|---|---|---|---|
| Market value at the well, worked back from the sale (the Heritage method) | $3.00 less $0.60 = $2.40 | 10,000 × $2.40 × 1/4 | $6,000 |
| Price the lessee actually received, no deduction (the Hyder gas royalty) | $3.00 | 10,000 × $3.00 × 1/4 | $7,500 |
| Gross proceeds plus an added-to paragraph, where the sale contract says the price is net of $0.10 for the buyer's later costs (a Sheppard-style clause) | $3.00 plus $0.10 = $3.10 | 10,000 × $3.10 × 1/4 | $7,750 |
The first two differ by $1,500, which is 1/4 of $0.60 on 10,000 Mcf. The last two differ by $250, which is 1/4 of $0.10 on 10,000 Mcf. The first row rests on the method Heritage described when there are no comparable sales. The second rests on Hyder's statement that a price-received basis is enough by itself to keep post-production costs off the royalty. The third only shows the shape of a clause like Sheppard's. The Court decided that lease's own words, and your lease's words may differ.
Which row, if any, matches your lease. That depends on every word of the royalty clause and the rest of the lease, and on the deed or unit papers around it. An oil and gas attorney who reads them can say.
8What Section 91.402 says about division orders and "market value"
Section 91.402 of the Texas Natural Resources Code includes three provisions that touch on these clauses. This page quotes them and does not say how a court would apply them. None of the four opinions above cites Chapter 91.
- Subsection (c)(2). A division order containing the provisions the subsection allows "does not amend any lease or operating agreement between the interest owner and the lessee or operator or any other contracts for the purchase of oil or gas."
- Subsection (h). Signing a division order, whether with the lessee or with another party, "shall not change or relieve the lessee's specific, expressed or implied obligations under an oil and gas lease, including any obligation to market production as a reasonably prudent lessee." A division order provision between a payee and its lessee that contradicts a lease provision "is invalid to the extent of the contradiction."
- Subsection (i). A division order may be used to clarify royalty settlement terms in the lease. For oil or gas "sold in the field where produced or at a gathering point in the immediate vicinity," the terms "market value," "market price," "prevailing price in the field," or other such language, when used as a basis of valuation in the lease, "shall be defined as the amount realized at the mouth of the well by the seller of such production in an arm's-length transaction."
Subsection (i) is limited by its own words to oil or gas sold in the field where produced or at a gathering point in the immediate vicinity. How (i) fits with (c)(2) and (h) on a particular lease and division order is a question for an attorney.
The home page lists what comes off a gas check.
9What this page leaves out
- Other opinions. The four opinions cite others on the same subject, including Judice v. Mewbourne Oil Co. (1996), French v. Occidental Permian Ltd. (2014), Burlington Resources Oil & Gas Co. v. Texas Crude Energy, LLC (2019), BlueStone Natural Resources II, LLC v. Randle (2021) and Carl v. Hilcorp Energy Co. (2024). This page did not read them and says nothing about what they hold.
- Implied duty to market. A footnote in Hyder quotes a 2013 case for the point that a duty to market is implied in leases that base royalty on the price received by the lessee. This page does not cover that duty.
- Other states. Sheppard notes that a minority of jurisdictions charge producers with paying royalty on a "marketable product" absent an agreement to the contrary. Louisiana has its own rules; see the Louisiana note on the home page.
- Your paper. Pooling clauses, unit agreements, gas purchase contracts and amendments can all change the answer for your interest, and none is discussed here.
Sources
Last checked . Every page below was opened that day. Court opinions and the Texas statutes site change, and an opinion can be followed by another one, so check the current text before relying on any of it.
- Heritage Resources, Inc. v. NationsBank, No. 95-0515, 939 S.W.2d 118 (Tex. 1996)Full text of the opinion, the concurrence and the dissent, as published by the Caselaw Access Projecthttps://static.case.law/sw2d/939/html/0118-01.htmlOpened September 29, 2026
- Heritage Resources, Inc. v. NationsBank, No. 95-0515, 960 S.W.2d 619 (Tex. 1997)Dissent on the denial of rehearing, dated March 21, 1997https://static.case.law/sw2d/960/html/0619-01.htmlOpened September 29, 2026
- Supreme Court of Texas, case page for No. 95-0515Docket entries: opinion issued April 25, 1996; rehearing overruled March 21, 1997https://search.txcourts.gov/Case.aspx?cn=95-0515&coa=cossupOpened September 29, 2026
- Chesapeake Exploration, L.L.C. v. Hyder, No. 14-0302, 483 S.W.3d 870 (Tex. 2016)Opinion delivered January 29, 2016, and the dissent, from the Court's docket. The docket page lists both the January 29, 2016 opinion and the withdrawn June 12, 2015 opinion.https://search.txcourts.gov/Case.aspx?cn=14-0302&coa=cossupOpened September 29, 2026
- Devon Energy Production Co. v. Sheppard, No. 20-0904 (Tex. Mar. 10, 2023)Opinion and dissent, from the Court's docket. The reporter citation 668 S.W.3d 332 is the one Fasken uses for this case.https://search.txcourts.gov/Case.aspx?cn=20-0904&coa=cossupOpened September 29, 2026
- Fasken Oil and Ranch, Ltd. v. Puig, No. 24-1033 (Tex. Apr. 10, 2026)Opinion of the Court, from the Texas Judicial Branch. The docket page shows the mandate issued May 22, 2026: https://search.txcourts.gov/Case.aspx?cn=24-1033&coa=cossuphttps://www.txcourts.gov/media/1462566/241033.pdfOpened September 29, 2026
- Texas Natural Resources Code, chapter 91, subchapter JSection 91.402(c)(2), (h) and (i), quoted in section 8 of this page. The statutes site said its statutes were current through the 89th 2nd Called Legislative Session, 2025.https://statutes.capitol.texas.gov/Docs/NR/htm/NR.91.htmOpened September 29, 2026
- This site's home pageGlossary entries for market value at the well and post-production costshttps://naturalgas.land/#terms
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