Opinion ID: 1447840
Heading Depth: 1
Heading Rank: 2

Heading: principles governing deductibility of post-production costs

Text: Oil and gas producing states differ on whether the lessor should bear any burden of the compression cost  Louisiana and Texas allow the lessee to deduct this cost, [5] while Arkansas and Kansas do not. [6] I would today adopt the former view, supported by the majority of commentators, that post-production compression costs are deductible from the lessor's royalty interest. [7] Most oil and gas leases require the lessee to bear production costs. [8] Gas is measured at the wellhead, [9] and payment is based on the price of gas at the well both under the lease here in suit as well as under most leases. [10] Because the price of gas is determined at the well, the lessee's implied duty to market the gas does not include the burden of expenses incurred after the gas passes through the wellhead, or post-production costs. [11] If compression is necessary to effect delivery into the pipeline, it is a post-production cost which, absent an express contrary provision in the lease, should be proportionately shared by the lessor. On the other hand, if compression is necessary to produce the gas, or to get the gas up to the wellhead, then compression is a cost of production to be borne by the lessee.