Charles N. Warren et al v. Chesapeake Exploration, L.L.C., 759 F.3d 413 (5th Circuit 2014)
This case determined that royalty language in an oil and gas lease that provided that post-production costs could be deducted from royalty since the royalty was to be determined by “the amount realized by Lessee, computed at the mouth of the well” even though an addendum provided that no post-production costs could be deducted.
The court held that language in the addendum stating that it would supersede any inconsistent provision in the printed form was not controlling since the addendum was not inconsistent with the printed form. More particularly, the court held that since the royalty was determined at the mouth of the well, there would not be any costs assessed at this point but that it would permit such costs to be determined after that point.
The court went on to say that if the lease had said that the royalty was to be a percentage of the amount realized by Lessee, there would be no deduction of post-production costs. The court held that the phrase “amount realized by Lessee, computed at the mouth of the well” means that the royalty is based on the net proceeds, and the physical point to be used as the basis for calculating net proceeds is the mouth of the well.