Opinion ID: 1225461
Heading Depth: 1
Heading Rank: 5

Heading: Wood v. TXO

Text: ¶ 8 In Wood, the court declined to extend the Johnson holding to allow lessees to deduct compression costs from royalty interests. The lessee in Wood built compressors on the premises because the natural pressure from the wells turned out insufficient to deliver the gas into the purchaser's on-site pipeline. [12] The lessee then subtracted from the royalty payments the lessors' proportionate share of the compression costs. The lessors sought to recover these costs. [13] The court held that, absent an agreement between the parties to share compression costs, the lessee must bear the entire expense of gas compression. [14] ¶ 9 The pronouncement noted that other jurisdictions are split on the question whether the lessors must bear their proportionate share of compression costs. While Louisiana and Texas jurisprudence allows the lessee to deduct compression costs, [15] the court preferred the Kansas and Arkansas approach that prohibits such deductions. [16] Hesitant to assign costs to the lessor who has no input into the lessee's marketing decisions, the court concluded that the lessee's implied duty to market encompasses all market preparation costs, including compression. [17] ¶ 10 Rejecting the lessee's argument that compression used to push the gas into the purchaser's pipeline is analogous to transportation and therefore deductible under Johnson, the opinion distinguished the facts in Wood from those in Johnson. In the latter case, the court held that the lessor must bear its share of transportation costs when the only possible point of sale is off the leased premises. [18] When (as in Wood ) the point of sale is on the leased premises, the court does not require the lessor to share in the transportation costs. [19] In order to deduct compression costs from the royalty interest, the lessee must include in the lease a cost-apportionment clause. [20] ¶ 11 In Wood I was in dissent, preferring the Louisiana and Texas view that distinguishes production from post-production costs. [21] Under the latter approach, the lessee is responsible for all costs of production while post-production costs are shared proportionately by both parties. [22] Production should be considered completed and royalty determined at the wellhead, the point at which the gas or oil is severed from the ground. [23] If compression is necessary solely to deliver the gas from the wellhead into the purchaser's pipeline, it is a post-production cost to be shared by both parties. [24] On the other hand, if compression is necessary to produce the gas or to lift the gas up to the wellhead, then it is a cost of production which the lessee alone should bear. [25] ¶ 12 My dissent noted that the Kansas and Arkansas royalty approach unduly saddles the lessee with the entire expense of gas compression, including post-production compression costs, as an unfair burden for failing to include a cost-apportionment clause in the lease. [26] I took the position that we should not assign to one party the duty of including the critical provision and then freeing the other from responsibility. [27]