The Oil and Gas Addendum

Back in February I advised landowners to keep an eye on the discretionary appeal granted by the Texas Supreme Court in Fasken Oil and Ranch LTD, et al. v. Puig, et al. (No 24-1073, January 16, 2026). See, Texas Supreme Court Agrees to Hear Arguments on Whether ‘Free of Cost’ Clause in 1960 Deed Prohibits the Deduction of Post-Production Costs (February 2026). At issue in Fasken was whether the following clause in the 1960 Deed insulated the royalty from post-production costs:

“all the oil, gas and other minerals, except coal, in and under or that may be produced from the above-described acreage, to be paid or delivered to Grantor, B.A. Puig, Jr., as his own property, free of cost forever. . . “

 The landowners, the Puig Family, argued that the scope and effect of the “free of cost” language in the 1960 Deed was controlled by the Texas Supreme Court’s decision in Chesapeake Exploration LLC v. Hyder, 483 S.W.3d 870 (Tex. 2016). In Hyder, the Texas Supreme Court ruled that a royalty clause which provided for a “perpetual cost-free” royalty was sufficient to exempt the royalty from all post-production costs. See, Hyder, 483 S.W. 3d at 874 (“[T]he general term cost-free does not distinguish between production and post-production costs and thus literally refers to all costs”).  The Puig Family contended that the 1960 Deed should be construed in the same manner (i.e. no deductions).  The trial court agreed with the Puig Family and entered judgment in their favor.

On appeal, the Fourth Circuit Court of Appeals in San Antonio affirmed. In a well-reasoned and concise opinion, the Court of Appeals concluded that the “free of cost” language was functionally no different from the “perpetual cost free” clause in Hyder:

“[W]e likewise do not see a significant distinction between the language used in Hyder and the language in the case. Thus, just as Hyder, the ‘free of cost forever’ language in the [1960] Deed here does not distinguish between production or post-production costs and thus literally refers to all costs”

Fasken, p.8, Since Fasken had failed to adduce evidence demonstrating that the parties specifically intended to limit the clause to only production costs, the Court of Appeals was compelled to apply the clause as drafted and, as per Hyder, exempt all post-production costs. The author submits that the Court of Appeals’ opinion was faithful to the actual language in the 1960 Deed and consistent with Texas law.

The Court of Appeals also correctly rejected Fasken’s convoluted valuation point argument. Before the trial court and on appeal, Fasken argued that the 1960 Deed implicitly valued the royalty at the wellhead. As I cautioned back in February, this theory was and is alarming as the 1960 Deed did not expressly reference or designate any valuation point.  Fasken instead suggested that the mere use of the word “produced” in the 1960 Deed reflected an intent to value the royalty at the wellhead. As support for this novel interpretation, Fasken argued that the term “production” typically refers to where “actual physical extraction from the land occurs” (i.e. the wellhead). Since the 1960 Deed stated that the royalty was based on all oil and gas “produced” from the subject parcels, this, according to Fasken, created a valuation point at the wellhead, thereby inviting application of the net-back method. See, Pennsylvania Superior Court Rules That Royalty Clause Referencing Both ‘Gross Proceeds’ and ‘At the Well’ Was Ambigous (May 2022). This was pure fiction. In essence, Fasken simply manufactured a valuation point out of thin air.

The Court of Appeals was not fooled. The Court of Appeals observed that the term “produced” would likely have been used in the 1960 Deed regardless of whether the valuation point was expressly referenced as being at the wellhead or at the point-of-sale. The panel opined that “. . . regardless of the location of the valuation point, the minerals would still have to be produced at some point in time.”  The court characterized Fasken’s theory as “a strained extension of current law” as the gas must actually be produced for any royalty to be generated and payable.  As such, Fasken’s construction of the term “produced” was unreasonable: the mere use of the term “produced” did not magically create a valuation point at the wellhead. Accordingly, the Court of Appeals affirmed the trial court’s order granting summary judgment in the favor of the Puig Family. 

In January 2026, the Texas Supreme Court granted Fasken’s petition for review. Two months later the panel heard oral argument. On April 10, 2026, the Texas Supreme Court issued its opinion and reversed the Court of Appeals.

The logic and rationale espoused by the Texas Supreme Court is flawed. First and foremost, the panel put form over substance by refusing to give effect to the phrase “free of cost forever.” Instead, the High Court engaged in a rigid and mechanical analysis fixated on finding a valuation point somewhere in the 1960 Deed.  The panel operated from the erroneous premise that every royalty must bear post-production costs unless: i) the underlying lease expressly sets a royalty valuation point at the point-of-sale or ii) the underlying lease contains terms “that add some or all post-production costs to the royalty.”  Because the 1960 Deed did neither, the Texas Supreme Court wrongly deduced that the 1960 Lease must therefore have a valuation point at the wellhead. The problem, however, was that the 1960 Deed cited no valuation point. Not to be deterred by the parties’ actual agreement, the Supreme Court endeavored to “find” language somewhere in the 1960 Deed that supported this conclusion.

It did so by adopting “hook-line-and-sinker “Fasken’s convoluted valuation point argument – the same one that was soundly rejected by both the trial court and the Court of Appeals. Without citing any direct precedent, the Texas Supreme Court asserted that:

“[P]roduced from the above-described acreage is the opposite of a term that sets a valuation point at a downstream point. While minerals must be produced regardless of a royalty interest valuation point, in the absence of language calling for a royalty on transported, processed, treated or otherwise enhanced minerals downstream, a royalty on minerals “produced” is a royalty valued at the wellhead.”

Fasken, p.10. It is respectfully submitted that the Supreme Court’s fixation on finding a valuation point was unwarranted and inconsistent with the intent of the parties.

Second, the Supreme Court’s insistence that the term “free of cost forever” merely referred to the general rule that the royalty did not bear production costs is suspect.  While it is true that the driller generally bears all costs associated with the planning, construction and completion of a gas well (i.e. known as “production costs”), it is nonsensical to infer that the 1960 Deed had to expressly re-state this general rule in order to make it binding on the parties. See, Types of Costs: Production Costs v. Post-Production Costs (April 2024). The language in the 1960 Deed did not distinguish between production or post-production costs.  As the Texas Supreme Court previously noted in Hyder, such language must therefore apply to all costs. Nonetheless, the Fasken panel ignored this principle and simply concluded that:

“[A]bsent reference to another valuation point or calculation method in the deed, the cost-free language merely restates the rule that a royalty interest is free of costs incurred in exploring for and producing the raw materials.”

Fasken, p.11. The panel injected further confusion into the royalty analysis by proclaiming that the “cost-free language commonly refers to production costs only.”  This is troubling. Many royalty clauses over the years have been negotiated and drafted utilizing this specific term-of-act with the understanding that “cost-free” means no post-production costs.  Now, after Fasken, this may not be the case.

 So, what’s the takeaway from Fasken? More precise drafting. Although not binding on Pennsylvania courts, drillers here in the Keystone State may try to argue that merely saying that a royalty is “cost-free” may not be enough to fully insulate the royalty from deductions. Additional language clarifying and confirming that the royalty valuation point is at the point-of -sale and not at the wellhead may be necessary.  Should you have any questions or concerns about the royalty clause in your oil and gas lease, please contact Robert J. Burnett at 412-228-2221 or email him at rburnett@hh-law.com