## Facts

- Royalty owners held interests under a mineral lease requiring Amoco to pay a royalty on gas sold equal to one-fifth of the “amount realized at the well.”
- Amoco sold gas under a long-term purchase contract containing a take-or-pay provision obligating the purchaser to either take specified quantities or pay for shortfalls.
- The purchaser and Amoco disputed take-or-pay obligations, leading to litigation and a settlement.
- Amoco received approximately $66.5 million under the settlement for take-or-pay obligations and related contract rights.
- The royalty owners sued, claiming a proportionate share of the settlement proceeds under the lease royalty clause.
- Amoco denied royalty was owed, asserting royalties were payable only on proceeds from gas physically produced and sold.

## Issues

1. Whether an “amount realized at the well” royalty clause for “gas sold” requires payment of royalties on take-or-pay settlement receipts received without contemporaneous physical delivery of gas.
2. Whether, and to what extent, settlement payments tied to a gas sales contract constitute royalty-bearing proceeds attributable to gas committed under the lease rather than non-royalty contract damages.

## Decision

- The Louisiana Supreme Court answered the certified question in favor of the royalty owners.
- The court held that the lease required royalty sharing in economic benefits Amoco realized that were attributable to the leased gas, including take-or-pay-type settlement proceeds to the extent properly characterized as part of the return for gas committed under the lease and sales contract.
- The court rejected a rigid view that royalties may be paid only on the sale of physically delivered gas.
- The court indicated that amounts not fairly attributable to the gas (i.e., purely non-gas contract-damage components) would not be royalty-bearing.

## Legal Principles

- A royalty clause based on the “amount realized” is construed to capture the lessee’s actual economic return attributable to the lessor’s gas, not merely the per-unit price of molecules physically delivered at a given time.
- Take-or-pay consideration functions as compensation for dedicating reserves and making gas available under a sales contract; when attributable to leased gas, it may fall within royalty-bearing “amount realized.”
- A lessee may not structure marketing arrangements or settlements to divert gas-related value away from the royalty interest.
- Only settlement components derived from, and fairly attributable to, the gas commitment (as opposed to unrelated damages or non-gas claims) are subject to royalty under an “amount realized” clause.

## Conclusion

The court held that, under Louisiana law, an “amount realized” gas royalty clause can require the lessee to pay royalties on take-or-pay settlement proceeds to the extent those proceeds represent economic value received for gas dedicated and made available under the lease-related sales contract, even when no contemporaneous physical delivery occurred.


Frey v. Amoco Prod. Co., 603 So. 2d 166 (La. 1992)