In oil and gas lease negotiations, there’s usually some horse trading between the mineral estate owners and the exploration and production companies about how certain production costs will be allocated. Sometimes, however, serious conflicts can erupt over interpreting vague contractual terms.
Recently, in Chesapeake Exploration v. Hyder, the Texas Supreme Court dealt with a dispute between two affiliates of Chesapeake Energy Corp. and mineral estate owners in the Hyder family about whether the oil and gas lease negotiated among the parties allowed for Chesapeake to deduct postproduction costs from the mineral estate owners’ overriding gas royalties. An overriding royalty, a term commonly used in the oil and gas business, is an interest similar to a royalty interest but which is carved out of the working interest of an existing lease. It is commonly expressed as a fraction of production from the lease but is generally free of exploration and development costs.
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