## Facts

- Royalty owners leased their land for oil and gas development under a lease containing a pooling clause.
- The pooling clause treated the pooled unit as part of the lease for most purposes, but carved out “the payment of royalties on production from the pooled unit,” and provided that royalties would be shared in proportion to the lessors’ acreage compared to total unit acreage.
- The working-interest owner acquired the lessee’s interest and formed a voluntarily pooled gas unit with other tracts leased by another operator.
- The unit agreement allocated production among tracts on an acreage basis, and the royalty owners ratified the pooling/unitization agreement.
- Gas from the unit was sold under multiple gas-purchase contracts at different prices: the working-interest owner sold under its own contracts, while another lessee sold under a different contract, creating “split stream” sales within the unit.
- The working-interest owner paid the royalty owners based on the prices it actually received under its own contracts for the share of unit production allocated to its tract(s).
- A dispute arose when the royalty owners claimed their royalty should be computed using a unit-wide weighted average of the proceeds from all sales from the pooled unit, multiplied by their acreage participation factor.
- Separate litigation over allocation led to a determination that some gas proceeds received by the working-interest owner were attributable to the other lessee; the working-interest owner sought reimbursement from the royalty owners for royalties previously paid on those proceeds and sought contribution from the other lessee.

## Issues

1. In a voluntarily pooled unit with split-stream gas sales, whether a proceeds-based gas royalty must be calculated using a unit-wide weighted average of all unit sales prices, or instead by the lessee’s actual proceeds from the sale of gas allocated to its tract under the pooling agreement.
2. Whether the working-interest owner could recover royalties paid on proceeds later determined to be attributable to another tract/lessee, and whether contribution between working-interest owners was proper.

## Decision

- The appellate court affirmed the trial court’s judgment.
- The court held the royalty owners were not entitled to a unit-wide weighted-average proceeds method.
- The court approved calculating royalties based on (i) acreage allocation of unit production to the relevant tract and (ii) the actual sales price received under the lessee’s own gas-purchase contracts for that allocated production.
- The court upheld reimbursement to the working-interest owner for excess royalties paid on misallocated gas proceeds and upheld contribution from the other lessee for a portion of the amounts.

## Legal Principles

- In a voluntarily pooled unit, pooling primarily reallocates production volumes by the unit agreement’s allocation method; it does not, without clear contract language, require price equalization across different gas-purchase contracts.
- For a proceeds-type gas royalty, the royalty is generally computed from the proceeds actually received for the gas attributed to the leased premises; after pooling, this means the tract’s allocated share of unit production.
- Language providing for an acreage-based share of “total royalty from the pooled unit” does not, standing alone, convert the royalty into a unit-wide sharing of all unit proceeds at all prices.
- Ratification of a pooling agreement that allocates production by acreage supports applying that allocation and recognizes that separately marketed shares may yield different prices.
- A payor may obtain reimbursement of royalties paid on proceeds later determined not to be attributable to the payor’s interest, with contribution between interest owners available where appropriate under the parties’ allocation arrangements.

## Conclusion

The court treated pooling as an acreage-based production allocation mechanism and held that, absent express language requiring otherwise, a proceeds-based gas royalty in a split-stream pooled unit is calculated using the lessee’s actual contract proceeds for the tract’s allocated production, while permitting reimbursement and contribution to correct royalties paid on misallocated production.


Puckett v. First City Nat’l Bank of Midland, 702 S.W.2d 232 (Tex. App.—Eastland 1985)