## Facts

- The Bruni Mineral Trust, as lessor and royalty owner, executed an oil and gas lease to Killam Oil Company (later joined by Hurd Enterprises) covering certain lands.
- The lease’s gas royalty clause required royalties on gas “produced … and sold or used off the premises” based on market value at the mouth of the well, and on gas “sold at the wells” based on one-eighth of the amount realized.
- Killam and Hurd entered a long-term gas purchase contract with United Texas Transmission Company (UTTCO) containing a take-or-pay provision requiring UTTCO either to take a minimum quantity of gas or pay for gas not taken, with a make-up gas right.
- UTTCO failed to take required volumes and failed to make required take-or-pay payments.
- Killam settled its take-or-pay dispute with UTTCO for $4 million; Hurd settled for $2.8 million.
- The Trust claimed the settlements were royalty-bearing proceeds under the lease and sought one-eighth of those amounts.
- The trial court granted summary judgment for the Trust on its claim for royalties on the settlement proceeds, and the lessees appealed.

## Issues

1. Whether a gas royalty clause limited to gas “produced … and sold or used” (or “sold at the wells”) requires payment of royalties on take-or-pay settlement proceeds received when no gas was produced and sold.

## Decision

- The court of appeals reversed the summary judgment for the Trust and rendered judgment that the Trust take nothing on its claim for royalties on the take-or-pay settlement proceeds.
- The court held the lease’s royalty clause required actual production; take-or-pay payments and their settlement equivalents are triggered when gas is not produced and are not proceeds from gas production and sale.
- The court treated the settlement proceeds as consideration for the purchaser’s contractual obligation to take or pay, and compensation for nonperformance, not as part of the price or market value of produced gas.
- The court limited its ruling to the lease royalty clause and did not decide whether other legal theories could support recovery.

## Legal Principles

- Under a standard Texas gas royalty clause paying royalties on gas “produced” and sold or used, royalty liability requires actual physical extraction of gas.
- Take-or-pay payments (and settlements of take-or-pay obligations) are paid due to non-take/non-delivery and are not part of the price for gas actually produced and sold.
- Absent lease language specifically making such payments royalty-bearing, take-or-pay proceeds are not subject to the lessor’s royalty interest.

## Conclusion

The court held that take-or-pay settlement proceeds are not royalty-bearing under a standard royalty clause limited to gas that is produced and sold or used, reversed the trial court’s summary judgment for the lessor, and rendered a take-nothing judgment on the royalty claim.


Killam Oil Co. v. Bruni, 806 S.W.2d 264 (Tex. App.—San Antonio 1991, writ denied)