Opinion ID: 1829970
Heading Depth: 3
Heading Rank: 5

Heading: Sulfur Production

Text: The jury awarded the State $4,379,048 for royalties due on sulfur production. We reverse the judgment on that verdict. As discussed above, the full wellstream gas includes hydrogen sulfide, which must be removed to sweeten the gas. The process requires the extraction of molten sulfur from the deadly and corrosive hydrogen sulfide gas. Exxon sells the resulting sulfur and pays royalties on the net amount realized as required under paragraph 5(b). The State argues that Exxon should have calculated the royalties not on the profits it makes from selling sulfur, but on the gross proceeds from the sale of sulfur. It argues that the removal of sulfur is not a manufacturing process but a process necessary to sweeten the gas and, therefore, that the product should be covered by the gross-proceeds language of paragraph 5(a) and not by the net-proceeds language of paragraph 5(b), as Exxon treats it. Exxon argues that the sulfur is manufactured from hydrogen sulfide removed from the full wellstream and that it is, therefore, a manufactured product covered under the net-proceeds language of paragraph 5(b). Exxon has deducted from the gross proceeds the noncapital costs of manufacture and has paid royalties only when it realized a profit. Because sulfur is a constituent part of the gaseous hydrocarbon minerals extracted from the well that requires a manufacturing process to produce, we hold that Exxon's royalty calculations are correct and that that determination could have been made from within the four corners of the leases. We find that the trial court erred in denying Exxon's motion for a JML on this issue. Therefore, we reverse the judgment insofar as it awards the State $4,379,048 for additional royalties on sulfur production.