Opinion ID: 1447840
Heading Depth: 1
Heading Rank: 4

Heading: deductibility of post-production gas compression charges the texas and louisiana approach

Text: Texas and Louisiana jurisprudence provides the better reasoned view. It utilizes a production/cost dichotomy [20] which distinguishes production costs from post-production costs. Lessees are allowed to deduct the cost of compression from the royalty interest when it is termed post-production. In Merritt v. Southwestern Elec. Power Co. [21] the Louisiana appellate court holds that unless the parties agree otherwise, a lessee can deduct a proportionate share of post-production compression costs from the royalty payments under a market-value-at-the-well royalty provision. Neither the lease nor the division order in Merritt expressly permitted or prohibited a deduction for compression costs. [22] Although the well could produce without the compression, the pressure was insufficient to push the gas into the pipeline. [23] The court stated that compression which is necessary for the gas to reach the wellhead is a production cost, but compression that is necessary only to push the gas from a producing well into a pipeline is a post-production cost or marketing cost which is deductible from royalty payments. [24] In Martin v. Glass [25] the U.S. District Court for the Northern District of Texas, applying Texas law, holds that on the basis of a net-proceeds-at-the-well royalty provision, the royalty interest owners could be charged their proportionate share of the cost of compression to move the gas from producing wells into the gathering line. The court based its decision on a finding that gas production had already been obtained from the wells before compression. [26] In a factually similar case, Parker v. TXO Production Corp ., [27] the Texas Court of Appeals, citing Martin with approval, holds that, absent contrary terms in the lease, (1) compression costs to increase production are not chargeable to the non-operating royalty interests, but that (2) post-production costs of compressing gas to make it deliverable into a purchaser's pipeline are normally to be borne proportionately by the operator and the royalty interest owners. [28]