Wellhead Measurement - Oil & Gas Dispute

Austin Texas Litigation Attorney Trial Lawyer

Feb 27, 2015 — by Jeff Mundy
Tags: Civil Litigation

It is well settled that an "oil and gas lease is a contract, and its terms are interpreted as such." Tittizer v. Union Gas Corp., 171 S.W.3d 857, 860 (Tex.2005). The construction of a contract is a question of law that we review de novoChrysler Ins. Co. v. Greenspoint Dodge of Houston, Inc., 297 S.W.3d 248, 252 (Tex. 2009). A court's primary goal in interpreting a contract is to give effect to the parties' intent as expressed in the writing. Luckel v. White819 S.W.2d 459, 461-63 (Tex. 1991). That intent is garnered from the language of the contract, which is considered in its entirety in an effort to understand, harmonize, and effectuate all its provisions, so that none will be rendered meaningless. Anadarko Petroleum Corp. v. Thompson94 S.W.3d 550, 554 (Tex. 2002). "No single provision taken alone will be given controlling effect; rather, all the provisions must be considered with reference to the whole instrument." Coker, 650 S.W.2d at 393. Further, the Court should not construe a contractual provision in a manner that is unreasonable or absurd. See Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530 (Tex. 1987).

Lastly, we are mindful that the parties to a lease agreement are considered the masters of their own choices. See Cross Timbers Oil Co. v. Exxon Corp., 22 S.W.3d 24, 26 (Tex.App.--Amarillo 2000, no pet.). It is the parties who select the terms and provisions to be included, and in so choosing, "each is entitled to rely upon the words selected to demarcate their respective obligations and rights." Id. "Simply put, we cannot change the contract merely because we or one of the parties comes to dislike its provisions or thinks that something else is needed in it." Id. (citing HECI Explor. Co. v. Neel982 S.W.2d 881, 888-89 (Tex. 1998))….

 

A wellhead measurement determines the volume of the gas produced at the wellhead for the purpose of calculating the amount of the royalty due. See Bowden v. Phillips Petroleum Co., 247 S.W.3d 690, 704 (Tex. 2008). Paragraph 4(B) requires that the royalty be calculated on such a measurement.*fn8The royalty is therefore owed on the substance so measured: raw gas, including all of its components.Sowell v. Natural Gas Pipeline Co. of Am., 789 F.2d 1151, 1157-58 (5th Cir. 1986)(analyzing Texas law). See also Bowden, 247 S.W.3d at 706. "[W]hen there is a wellhead measurement, payment is due for gas in its natural state, not on the liquid hydrocarbons which are later extracted." ConocoPhillips Co. v. Incline Energy, Inc., 189 S.W.3d 377, 381 (Tex.App.--Eastland 2006, pet. denied)(citing Carter v. Exxon Corp., 842 S.W.2d 393 (Tex.App.--Eastland 1992, writ denied)). The reason for this rule is simple: "the volume of gas exiting the tailgate [of a processing plant] is smaller than the volume at the wellhead because natural gas liquids and impurities such as water vapor are condensed from the gas stream[.]" Dynegy Midstream Services, Ltd. Partnership v. Apache Corp., 294 S.W.3d 164, 167 (Tex. 2009). Consequently, Appellants argument for that construction of 4(B) renders paragraph 4(B)'s wellhead measurement requirement meaningless. If 4(B) required separate royalty payments on methane and later-extracted carbon dioxide, there would be no purpose whatsoever in measuring the volume of the raw gas stream at the wellhead.

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