Post-production cost deductions have long been a source of dispute between royalty owners and operators in Texas. Recent case law — most notably the Texas Supreme Court’s decision in Devon v. Sheppard — has reshaped how these costs are interpreted under certain oil and gas leases.
In short:
- Gross Proceeds leases protect royalty owners from bearing post-production costs up to the point of sale.
- Proceeds Plus leases go further, also shielding royalty owners from post-sale costs when those costs are reflected in the sales price — even if this results in a royalty value higher than the price actually received by the operator.
- The Sheppard decision confirms that custom lease language can override industry-standard interpretations, making the exact wording of your lease critical to determining cost allocation.
I had the great opportunity to present this to the National Association of Land and Title Analysts in Miami, and though it may be helpful to everyone. The attached presentation breaks down: