Opinion ID: 728159
Heading Depth: 2
Heading Rank: 1

Heading: HEYCO's Obligation to Pay Royalties on the Settlement Proceeds

Text: 15 We first address whether HEYCO breached its duty to pay royalties by failing to pay the state its royalty share of the settlement proceeds received from El Paso and Transwestern. Our inquiry begins with the gas royalty clause of the New Mexico statutory lease, which reads in part as follows: 16 Subject to the free use without royalty, as hereinbefore provided, at the option of the lessor at any time and from time to time, the lessee shall pay the lessor as royalty one-eighth part of the gas produced and saved from the leased premises, including casing-head gas. Unless said option is exercised by lessor, the lessee shall pay the lessor as royalty one-eighth of the cash value of the gas, including casing-head gas, produced and saved from the leased premises and marketed or utilized, such value to be equal to the net proceeds derived from the sale of such gas in the field.... 17 N.M. Stat. Ann. § 19-10-4.1 (Michie 1994). 6 18 Although the terms of the New Mexico oil and gas lease are prescribed by statute, the lease itself is a contract between the State as lessor on the one hand and HEYCO as lessee on the other. We therefore apply general New Mexico contract principles in ascertaining the effect of the particular provisions of the lease. See Leonard v. Barnes, 75 N.M. 331, 404 P.2d 292, 302 (1965) (noting that an oil and gas lease is merely a contract between the parties and is to be tested by the same rules as any contract). Unless its provisions are ambiguous, the lease must be given the legal effect resulting from a construction of the language contained within the four corners of the instrument. Owens v. Superior Oil Co., 105 N.M. 155, 730 P.2d 458, 459 (1986) (citing cases). A contract is ambiguous when its language can be fairly and reasonably construed in different ways. Harper Oil Co. v. Yates Petroleum Corp., 105 N.M. 430, 733 P.2d 1313, 1316 (1987). 19
20 Here, we find the royalty clause to be clear and unambiguous: Under its plain terms, the lessee need only pay the lessor as royalty one-eighth of the cash value of the gas ... produced and saved from the leased premises.... N.M. Stat. Ann. § 19-10-4.1 (Michie 1994) (emphasis added). Thus, the lessee is not obligated to pay a royalty on the cash value of the gas in the abstract, but only on the cash value of gas which is actually produced and saved from the leased property. See Diamond Shamrock Exploration Co. v. Hodel, 853 F.2d 1159, 1165-68 (5th Cir.1988) (holding that under similar production-type royalty clause, royalties are not due on 'value' or even 'market value' in the abstract, but only on the value of production saved, removed or sold from the leased property.). This construction of the lease agreement not only is compelled by the plain language of the royalty clause, but also comports with the interpretation adopted by the majority of courts which have addressed the production-type royalty clause. See, e.g., Mandell v. Hamman Oil & Ref. Co., 822 S.W.2d 153, 165 (Tex.Ct.App.1991) (citing Diamond Shamrock, 853 F.2d at 1167-68) (Production is the key to royalty.); Killam Oil Co. v. Bruni, 806 S.W.2d 264, 267 (Tex.Ct.App.1991) ([T]he lease entitled the [lessor] to royalty payments on gas actually produced.); State v. Pennzoil Co., 752 P.2d 975, 981 (Wyo.1988) (By its clear terms, [the lease] manifests the intention of the parties that royalty payments were to be made only in the event of production from the lease, that is, after physical extraction of the gas from the land and its sale or use.); Diamond Shamrock, 853 F.2d at 1165 ([R]oyalties are not owed unless and until actual production....). 21 In State v. Pennzoil Co., the Wyoming Supreme Court was called upon to interpret a similar lease provision requiring the payment of royalties on gas ... produced from said land saved and sold or used off the premises .... 752 P.2d at 976 (emphasis in original). At issue in that case was whether the State of Wyoming was entitled, as lessor, to a royalty on recoupable take-or-pay payments received by the lessees. Id. The State argued that the royalty clause was ambiguous and thus should be interpreted broadly to require royalties on all proceeds relating to th[e] gas whether or not actual production and sale had occurred. Id. at 978-79. The court rejected this argument, holding that the express terms of the lease required actual production of gas to trigger the lessees' duty to pay royalty: 22 The word production has an established legal meaning when used in a royalty or habendum clause of an oil and gas lease. Production requires severance of the mineral from the ground.... [T]he lease demonstrates that the parties intended the general meaning of production. ... This language manifests the proposition that royalties are due only upon physical extraction of the gas from the ground and its removal. 23 Id. at 979 (citations omitted). 24 Similarly, in Diamond Shamrock Exploration Co. v. Hodel, 853 F.2d 1159, 1163 (5th Cir.1988), the Fifth Circuit construed a federal off-shore lease calling for royalties of a certain percentage, in amount or value of production saved, removed, or sold from the leased area. The court held that this language expressly conditioned the payment of royalties upon production of gas, id. at 1165, and that [f]or purposes of royalty calculation and payment, production does not occur until the minerals are physically severed from the earth. Id. at 1168. Thus, the court concluded, because take-or-pay payments are not payments for produced gas, but rather are payments for the pipeline-purchaser's failure to take produced gas, such payments are not subject to the lessor's royalty interest. Id. at 1167. 25 Other courts have applied the reasoning of Pennzoil and Diamond Shamrock to hold that, under a production-type royalty clause, no royalties are due on cash payments received in settlement of the take-or-pay provision of a gas supply contract. In Mandell v. Hamman Oil & Ref. Co., 822 S.W.2d 153, 164 (Tex.Ct.App.1991), for example, the Texas Court of Appeals held that royalties were not due on the take-or-pay portion of a settlement because [t]ake or pay is not a payment for production; it is a payment for nonproduction. 7 Similarly, in Killam Oil Co. v. Bruni, 806 S.W.2d 264, 268 (Tex.Ct.App.1991), the court held that a lessor was not entitled to royalties on the settlement proceeds arising from the take-or-pay provision of the contract ... because under a standard lease, take-or-pay payments do not constitute any part of the price paid for produced gas.... Accord Lenape Resources Corp. v. Tennessee Gas Pipeline Co., 925 S.W.2d 565, 569-70 (Tex.1996); TransAmerican Natural Gas Corp. v. Finkelstein, 933 S.W.2d 591, ---- - ---- (Tex.Ct.App.1996) (en banc); Roye Realty & Developing, Inc. v. Watson, No. 76,848, 1996 WL 515794, at  9, 949 P.2d 1208, ---- (Okla. Sept.10, 1996); Independent Petroleum Ass'n of Am. v. Babbitt, 92 F.3d 1248, 1259-60 (D.C.Cir.1996). 26 From these cases, we believe that three guiding principles emerge that are applicable to the issues here. First, royalty payments are not due under a production-type lease unless and until gas is physically extracted from the leased premises. Second, nonrecoupable proceeds received by a lessee in settlement of the take-or-pay provision of a gas supply contract are specifically for non-production and thus are not royalty bearing. Third, any portion of a settlement payment that is a buy-down of the contract price for gas that is actually produced and taken by the settling purchaser is subject to the lessor's royalty interest at the time of such production, but only in an amount reflecting a fair apportionment of the price adjustment payment over the purchases affected by such price adjustment. 27 In adopting this three-part framework, we reject the Commissioner's suggestion that the production language in the royalty clause lease should not be strictly construed. The Commissioner argues that the entire lease agreement should be evaluated in light of the parties' intent in entering into the contract, which the Commissioner characterizes as a cooperative venture between lessor and lessee to develop the land and split all economic benefits arising therefrom. The Commissioner's cooperative venture theory is an extension of the so-called Harrell rule. See Thomas A. Harrell, Developments in Nonregulatory Oil and Gas Law, 30 Inst. on Oil & Gas L. & Tax'n 311 (1979). Under the Harrell rule, a gas lease is a symbiotic endeavor in which the lessor contribut[es] the land and the lessee contribut[es] the capital and expertise necessary to develop the minerals for the mutual benefit of both parties. Id. at 334. A corollary to the cooperative venture theory is the argument that buy-down or buy-out settlement payments enable the lessee to sell the released gas on the open market at a cheaper price, and, accordingly, that subsequent production and sale of such gas to a third party should be deemed to be at a price consisting of two figures: the spot price received from the third party and an allocated portion of the settlement payment. The Commissioner relies on two cases which have applied the Harrell rule to require the payment of royalties on take-or-pay settlement proceeds: Frey v. Amoco Prod. Co., 943 F.2d 578 (5th Cir.1991) [Frey I ], withdrawn in part on reh'g and question certified, 951 F.2d 67 (5th Cir.1992) (per curiam), certified question answered, 603 So.2d 166 (La.1992) [Frey II ], reinstated in part on reh'g, 976 F.2d 242 (5th Cir.1992) (per curiam); and Klein v. Jones, 980 F.2d 521 (8th Cir.1992), aff'd after remand, 73 F.3d 779 (8th Cir.1996), cert. denied, --- U.S. ----, 117 S.Ct. 65, 136 L.Ed.2d 27 (1996) (applying Arkansas law). 28 In Frey, a private lessee-producer received a $66.5 million take-or-pay buy down payment from a pipeline company. $20.9 million of this amount represented a nonrecoupable settlement payment; the remaining $45.6 million represented a payment for accrued take-or-pay deficiencies, but which the pipeline could later recoup in the form of make-up gas. Frey I, 943 F.2d at 580. The royalty clause in the relevant lease agreement required the producer-lessee to pay a royalty on gas sold by Lessee [at] one-fifth (1/5) of the amount realized at the well from such sales. Id. (brackets in original.) Although the lessee eventually paid royalties on the recoupable portion of the settlement (as the corresponding make-up gas was taken), no royalties were ever paid on the $20.9 million in nonrecoupable settlement proceeds. The lessors filed suit in federal district court seeking payment of royalties on the nonrecoupable settlement proceeds. Applying Louisiana law, the district court ruled against the lessors. 708 F.Supp. 783, 787 (E.D.La.1989), rev'd, 943 F.2d 578 (5th Cir.1991). The Fifth Circuit reversed, holding that a royalty was due the lessors under the express terms of the lease agreement, which tied royalties to sales of gas rather than the production of gas. See Frey I, 943 F.2d at 581. In so holding, the Fifth Circuit distinguished its earlier Diamond Shamrock decision, where take-or-pay payments were held not subject to a royalty under a lease agreement requiring royalties to be paid on the amount or value of production saved, removed, or sold. Id. (emphasis in original). The Diamond Shamrock case was distinguishable, the Fifth Circuit concluded, because unlike the sale of gas, which in Louisiana is accomplished at the time the gas purchase contract is executed, the production of gas requires actual severance of the minerals from the ground. Id.; see also id. at 588 (Jones, J., concurring) ([W]e are not attempting to overrule the Diamond Shamrock case, whose outcome depended upon a standard production-type royalty clause.). 29 On rehearing, the Fifth Circuit withdrew that portion of its opinion dealing with the royalty issue and certified the question to the Louisiana Supreme Court. Frey v. Amoco Prod. Co., 951 F.2d 67 (5th Cir.1992) (per curiam). Responding to the certified question, the Louisiana Supreme Court agreed with the Fifth Circuit's distinction between the production-type royalty clause construed in Diamond Shamrock and a clause requiring royalties to be paid on the sale of gas. See Frey II, 603 So.2d at 179. According to the court, the sale of gas--as opposed to the production of gas--occurs under Louisiana law when the gas purchase contract is executed. Id. (citing La. Civ.Code. Ann. arts. 1767, 1775, 2450, 2471 (West 1987)). Thus, the settlement proceeds constituted a part of the amount realized by the lessee from the sale of gas, and the lessors therefore were entitled to a royalty share under the express terms of the lease agreement. Id. at 178. 30 Although the Louisiana Supreme Court found that the settlement payments were part of the amount realized from the sale of gas, the court chose not to base its decision on this fact alone. Rather, the court also invoked Professor Harrell's cooperative venture theory. Frey II, 603 So.2d at 173. In this regard, the court noted that under Louisiana law, an oil and gas lease is a cooperative venture in which the lessor contributes the land and the lessee the capital and expertise necessary to develop the minerals for the mutual benefit of both parties. Id. (citing Henry v. Ballard & Cordell Corp., 418 So.2d 1334, 1338 (La.1982)). Based on Professor Harrell's rule, the Frey II court gave the royalty clause an expansive reading, id., such that the receipt by the lessee of any economic benefit traceable to the mineral lease triggers the lessee's duty to pay royalties: 31 The lease represents a bargained-for exchange, with the benefits flowing directly from the leased premises to the lessee and the lessor, the latter via royalty. An economic benefit accruing from the leased land, generated solely by virtue of the lease, and which is not expressly negated, is to be shared between the lessor and the lessee in the fractional division contemplated by the lease. 32 Id. at 174 (citations omitted). Applying this reasoning, the court held that the take-or-pay settlement payments were subject to the lessor's royalty interest because the payments were traceable to the lessee's right to develop and explore the property--a right expressly granted by the lease agreement. Id. at 180. 33 The Eighth Circuit's decision in Klein v. Jones, 980 F.2d 521 (8th Cir.1992), aff'd after remand, 73 F.3d 779 (8th Cir.), cert. denied, --- U.S. ----, 117 S.Ct. 65, 136 L.Ed.2d 27 (1996) applied the Harrell rule to a standard production-type lease arrangement. In Klein, the court reversed a district court's order that certain payments made to the lessee-producer arising out of a take-or-pay dispute were not subject to the lessor's royalty interest under Arkansas law. 980 F.2d at 533. In remanding the case, the Eighth Circuit opined that Arkansas, like Louisiana, would apply the cooperative venture approach in interpreting oil and gas leases. Id. at 531 (We also recognize ... that a lease arrangement is in the nature of a cooperative venture ... to develop the minerals for the mutual benefit of both parties.). 34 We believe Frey II and Klein are distinguishable from the instant case. First, the Frey II and Klein courts adopted the cooperative venture approach largely because of unique state statutes which expanded the definition of royalty in mineral leases. In Louisiana, for instance, the Mineral Code states: 35 Royalty, as used in connection with mineral leases, means any interest in production, or its value, from or attributable to land subject to a mineral lease, that is deliverable or payable to the lessor or others entitled to share therein.... Royalty also includes sums payable to the lessor that are classified by the lease as constructive production. 36 La.Rev.Stat. Ann. § 31:213(5) (West 1989). Similarly, the Arkansas statutes provide that [i]t shall be the duty of both the lessee ... [and the purchaser] to protect the royalty of the lessor's interest by paying to the lessor or his assignees the same price, including premiums, steaming charges, and bonuses of whatsoever name for royalty oil or gas that is paid the operator or lessee under the Lease for the working interest thereunder. Ark.Code. Ann. § 15-74-705 (Michie 1987). Both the Frey II and Klein courts relied on these statutory provisions in concluding that royalties were due on all economic benefits, including take-or-pay settlements, attributable to the leased land. See Frey II, 603 So.2d at 171-72 (noting the expansive definition of royalty provided in the Louisiana mineral code); Klein, 980 F.2d at 529 (noting the Arkansas legislature's attempt to expand the scope of 'royalty' by special definitions and concepts). In contrast, the New Mexico statutes do not contain an expanded definition of royalty. 8 Rather, New Mexico's only pertinent statute specifically connects the payment of royalties to the production of gas. N.M. Stat. Ann. § 19-10-4.1 (Michie 1994) (royalties are due on gas which is produced and saved from the leased premises). Thus, because Frey and Klein were decided against a different statutory backdrop, we do not find their reasoning persuasive here. See John S. Lowe, Defining the Royalty Obligation, 49 SMU L.Rev. 223, 257 (1996) ([B]oth Frey and Klein were based in part upon unusual state statutes that may expand the royalty obligation.... Most states ... apparently have no such legislation. Thus, to the extent that Frey and Klein were based upon statutory language, they may stand alone.). 37 Second, the fact that New Mexico has expressly conditioned the payment of royalties upon production of gas distinguishes this case from Frey, where the relevant royalty clause was triggered by sales of gas. Both the Fifth Circuit in Frey I and the Louisiana Supreme Court in Frey II recognized this crucial distinction. See Frey I, 943 F.2d at 581 (The Lease affords royalty on the amount realized from sales, not on production.); Frey II, 603 So.2d at 179 (The Frey-Amoco Lease explicitly predicates Amoco's obligation to pay royalty on the sale of gas.... Had the parties desired to condition the payment of royalties on production of gas, the Lease could easily have so provided.). 38 Third, the cooperative venture theory advocated by Professor Harrell has not apparently received very much additional support, and several recent cases have eschewed that approach in favor of a literal reading of the lease terms. For example, in Independent Petroleum Ass'n of Am. v. Babbitt, 92 F.3d 1248, 1259-60 (D.C.Cir.1996) [IPAA ], the court declined to require royalties to be paid upon payments to settle or adjust contract obligations unless such payments were recoupable against production and were, in fact, recouped by the settling party through actual production taken by the settling party. The mere fact that the lessee-producer ultimately produced gas freed up by the settlement and sold it on the spot market to other buyers did not provide a nexus between that production and the settlement payment such that royalties were due on the settlement payment. (Of course, the lessee-producer would owe royalties on the spot price actually obtained for any such replacement sales.) The IPAA court explained: 39 When gas is actually severed and sold to a substitute purchaser, the settlement payment does not serve as payment for the gas. The link between the funds on which royalties are claimed and the actual production of gas is missing.... The relevant question in both cases [take-or-pay payments and contract settlement payments], under Diamond Shamrock, is whether or not the funds making up the payment actually pay for any gas severed from the ground. When take-or-pay payments (or settlement payments) are recouped, those funds do pay for severed gas. But when payments (of either variety) are nonrecoupable, the funds are never linked to any severed gas. Therefore, no royalties accrue on those payments. 40 IPAA, 92 F.3d at 1259-60 (footnote omitted). The Texas Court of Appeals reached the same result in TransAmerican Natural Gas Corp. v. Finkelstein, 933 S.W.2d 591 (Tex.Ct.App.1996) (en banc overturning of prior panel decision reported at 04-95-00365-CV (Tex.Ct.App. Apr. 13, 1996)). There, the court rejected the argument that take-or-pay settlements should be allocated to subsequent production sold on the spot market to third parties. The court stated, we reaffirm ... that a royalty owner, absent specific lease language, is not entitled to take-or-pay settlement proceeds, whether or not gas is sold to third parties on the spot market. Id. at 600; accord Roye Realty & Developing, Inc. v. Watson, No. 76,848, 1996 WL 515794, at  9, 949 P.2d 1208 (Okla. Sept.10, 1996); see also Lenape Resources Corp. v. Tennessee Gas Pipeline Co., 925 S.W.2d 565, 569-70 (Tex.1996) (holding that the pay option under a take-or-pay contract is not a payment for the sale of gas). But see Williamson v. Elf Aquitaine, Inc., 925 F.Supp. 1163, 1168-69 (N.D.Miss.1996) (following the panel decision in TransAmerican Natural Gas Corp. v. Finkelstein which, as noted above, was subsequently reversed by the Texas Court of Appeals sitting en banc). 41 Because the present case involves a standard production-type lease and arises under New Mexico statutory law (which is devoid of provision similar to those in Arkansas and Louisiana expanding the lessee's royalty obligation), we predict that New Mexico would not adopt the cooperative venture approach. We therefore apply the plain terms of the statutory lease and conclude that the state is not entitled to a royalty unless the contested proceeds received by HEYCO were ultimately recouped by HEYCO in exchange for actual production of gas from the leased tracts--i.e., physical extraction of the gas from the ground and its removal. Pennzoil, 752 P.2d at 979. 9 42 2. Are the El Paso and Transwestern settlement proceeds attributable to the production of gas? 43 Our conclusion that royalty is tied to production does not, of course, end our inquiry. We must now determine whether the El Paso and Transwestern settlement proceeds, or any portions thereof, were paid to HEYCO for produced gas as opposed to simply buying out contractual obligations. We can attribute the settlement payments to production only if, and to the extent, the settling purchaser recoups recoupable take-or-pay payments by taking future make-up gas or takes actual production at a reduced price because of the settlement provisions. 44 The district court granted summary judgment to HEYCO on the ground that the settlement proceeds received by HEYCO were not tied to actual production of gas. Our independent review of the record, however, leaves us less certain of this fact, at least as to certain portions of the settlement proceeds. We believe there exists a genuine issue of material fact whether the El Paso and Transwestern settlement proceeds are attributable solely to take-or-pay deficiencies (i.e., non-production), or whether they are attributable, at least in part, to a price adjustment for the actual production of gas from the SLO lands acquired or to be acquired by El Paso or Transwestern. We therefore reverse the grant of summary judgment in favor of HEYCO on the royalty issue and remand to the district court for further proceedings on this question. 45 Although not entirely clear, the record in this case suggests that HEYCO sought payment from the pipelines for: (1) the difference in price between what the pipelines should have paid under their gas supply contracts with HEYCO and the lower spot market price they actually paid for gas produced prior to the settlement (past price deficiencies) 10 ; (2) the difference between what the pipelines would have been required to pay under the gas supply contracts and the estimated future spot market price for the gas (future price deficiencies) for future production subsequent to the settlement taken under the modified gas supply contracts; 11 and (3) the difference in value between the volumes of gas the pipelines were required to take under the take-or-pay provisions of the contracts and the lesser quantities of gas actually taken by the pipelines both prior to (accrued take-or-pay deficiencies) and subsequent to (future take-or-pay obligations) the settlements. 46 As we have noted, the duty to pay royalty under a lease which conditions royalty payments on production is not triggered unless and until gas is physically extracted from the leased premises. Diamond Shamrock, 853 F.2d at 1168; Pennzoil, 752 P.2d at 979. Thus, proceeds received by the lessee in settlement of the take-or-pay provision of a gas supply contract (for either accrued take-or-pay deficiencies or to abrogate future take-or-pay obligations) are not royalty bearing because they are payments for non production. Mandell, 822 S.W.2d at 164; Killam Oil, 806 S.W.2d at 268. Although it does not appear here that any portion of the settlement payment for reduced volume of gas taken was, or will be, recoupable by future production, if there is such a recoupment tied to actual production, at that point any payments so recouped would be royalty-bearing. IPAA, 92 F.3d at 1259-60. 47 With regard to any portions of the settlement attributed to a reduction in price, HEYCO does have a duty to pay the state a royalty on those portions of the settlements which are attributable to past price deficiencies because any such payment represents HEYCO's recovery of underpayments for gas already produced and sold from the leased SLO lands. Cf. IPAA, 92 F.3d at 1262 & n. 7 (Rogers, J., dissenting) (noting that the parties there conceded that amounts paid to resolve disputes over the price of past production are royalty bearing and considering that payments to obtain future price reductions are also royalty bearing). However, any component of the settlements that pertain to future price reductions present a more difficult question. Because we hold that the New Mexico statutory lease form does not require the payment of royalty unless and until gas is physically severed from the ground, a lessee would not be required to remit royalties up front on those amounts which are paid by a pipeline company to buy down the price of future production under the supply contract. At the same time, however, it would grant a windfall to the lessee if the lessee were permitted to retain the entire lump sum cash buy down without ever paying a royalty to the state on the buy-down settlement amount that is used as a partial up-front payment for later gas that is produced and taken at below-contract prices. As the Commissioner correctly points out, if the producer receives $1.00 m.c.f. today, before the gas is taken, and then receives an additional $1.00 m.c.f. in three months when the gas is actually produced and taken, royalty should be paid on $2.00 m.c.f. To hold otherwise allows the producers to pocket $1.00 of the price without justification. Br. of Comm'r at 19 n. 3. Moreover, if royalties were not ever payable on that portion of a settlement attributable to future price reductions on actual production taken by the settling purchaser, a lessee would be encouraged to avoid its royalty obligation by accepting large nonrecoupable payments in exchange for reduced prices on future production. 48 With these competing considerations in mind, we hold that the lessee's duty to pay royalty on that portion of a settlement which is attributable to future price reductions is not triggered until that future production is actually taken by the settling purchaser. Thus, when a lessee negotiates a buy down payment in exchange for a reduced future price term, the state has no right to a royalty up front on that portion of the settlement proceeds. However, as the Commissioner's hypothetical illustrates, when the future production under the purchase contract is taken at the newly bought-down price, the state should receive a royalty based on both: (1) the proceeds obtained by the lessee from the sale of gas at the bought-down price; and (2) a commensurate portion of the settlement proceeds that is attributable to price reductions applicable to future production under the renegotiated gas sales agreement as production occurs. We believe this approach is faithful to the express terms of the New Mexico statutory lease, which condition royalty payments on actual production. This approach also eliminates a lessee's incentive to circumvent the royalty clause by maximizing lump sum settlements while minimizing the future price of gas. 49 Because the record has not been fully developed on this question, we must remand this case to the district court in order to determine which portions of the settlement are attributable to nonrecoupable take-or-pay payments (and thus are not royalty bearing), and which portions are attributable to past and future price deficiencies (and thus are royalty bearing to the extent that the payment is linked to actual production taken by the settling purchaser at below-initial contract prices). The district court also must determine what percentage of the sums attributable to future price deficiencies currently are subject to the state's royalty interest. The record is not clear on this point, but because the HEYCO/Transwestern settlement was reached in 1989, more than seven years ago, it is possible that Transwestern has already taken all of the then-anticipated production upon which the future price reductions were based. If this is the case, the state would be entitled immediately to its royalty share on the entire amount of the settlement attributable to future price deficiencies. However, if Transwestern has to date taken only a portion of the anticipated production at the bought down price, then only a pro rata amount of the buy down proceeds currently would be subject to the state's royalty interest. As noted, the record before us does not adequately answer these difficult questions, and thus summary judgment at this point is premature. We acknowledge the complexity of the district court's task on remand, yet we expect the parties will present additional evidence as to the allocation of the settlement proceeds and will cooperate fully with the district court in conducting this difficult accounting process. 12