## Facts

- Royalty owners (including First Baptist Church of Pyote) leased gas rights to Amoco Production Company under leases providing a 1/8 royalty based on “proceeds” from gas sales.
- Amoco, as working-interest owner and operator, pooled the leases with other interests and marketed pooled production to multiple purchasers.
- Gas was sold to four purchasers, including Pioneer Natural Gas Company, which paid about 50% less than other purchasers for comparable gas due to a preexisting long-term contract.
- Amoco allocated all gas attributable to the royalty owners’ interests to Pioneer at the lower price, while gas from the same well attributable to other interests was sold at higher prices.
- The record supported a finding that Amoco’s allocation to the low-price contract yielded Amoco a collateral benefit by enabling higher pricing on other previously dedicated leases.
- The trial court found Amoco breached an implied covenant to market in good faith and awarded damages measured by the difference between royalties paid under Pioneer’s price and royalties that would have been paid using the higher Lone Star price for the same well and period.

## Issues

1. Whether a gas lease with a “proceeds” royalty clause includes an implied covenant requiring the lessee to market the lessor’s gas in good faith.
2. Whether allocating all lessors’ gas to a substantially lower-priced purchaser, while the lessee obtained a collateral benefit elsewhere, constituted a breach of that implied covenant.
3. Whether enforcing the implied covenant effectively imposes a market-value obligation inconsistent with a proceeds-based royalty clause.

## Decision

- The court of appeals affirmed judgment for the royalty owners, recognizing an implied covenant requiring the working-interest owner to act in good faith in marketing the gas and holding the evidence sufficient to support breach and the damages measure.
- The Texas Supreme Court, in a per curiam disposition, refused the writ (no reversible error), leaving the judgment intact.
- The Supreme Court cautioned that the result should not be read to impose an absolute duty to sell at market value under a proceeds clause; below-market pricing is probative of bad faith but not conclusive.

## Legal Principles

- A lessee/working-interest owner under a gas lease may be subject to an implied covenant to market the royalty owner’s gas in good faith, even when royalty is based on “proceeds.”
- A proceeds royalty clause does not, by itself, require the lessee to obtain market value; the parties’ choice between “market value” and “proceeds” royalty formulations is enforced as written.
- Evidence that gas was sold at a rate substantially below prevailing prices can support an inference of bad-faith marketing, particularly when coupled with proof the lessee obtained a collateral benefit at the lessor’s expense.
- Damages for bad-faith marketing may be measured by comparing actual royalties paid to royalties that would have been paid using a higher, comparable price for gas from the same well and time period.

## Conclusion

The courts held that a proceeds-based gas royalty clause does not eliminate the lessee’s implied duty to market in good faith; allocating lessors’ gas to a markedly lower-priced contract to advance the lessee’s separate interests supported liability and damages measured by comparable higher-priced sales from the same well.


Amoco Prod. Co. v. First Baptist Church of Pyote, 611 S.W.2d 610 (Tex. 1980) (per curiam)