## Facts

- Royalty owners held interests under oil and gas leases covering land in Zapata County, Texas; KCS Resources, Inc. was the lessee’s successor.
- The leases used a bifurcated royalty provision for gas:
  - Gas “sold at the wells”: royalty based on the “amount realized.”
  - Gas “sold off the premises”: royalty based on the “market value at the well.”
- KCS entered a long-term gas purchase agreement with a pipeline company setting a contract price and fixing the sale point at a processing plant located off the leased premises.
- Because sales occurred off-premises, KCS paid royalties under the leases’ “market value at the well” measure rather than on the contract proceeds.
- Over time, automatic price escalations in the long-term contract caused the contract price to rise substantially above prevailing market prices.
- The royalty owners sued, alleging (1) breach of the express royalty clause by not paying on the higher contract proceeds and (2) breach of implied covenants, including an implied duty to reasonably market gas for the royalty owners’ benefit.
- The trial court granted summary judgment for KCS; the court of appeals affirmed.

## Issues

1. Whether an off-premises “market value at the well” royalty clause requires payment based on market value even when the lessee’s long-term contract price exceeds market value.
2. Whether implied covenants (including the implied covenant to reasonably market) can require royalties based on above-market contract proceeds despite an express market-value royalty clause.
3. Whether the long-term contract price is determinative evidence of “market value” under a market-value royalty clause.

## Decision

- The Supreme Court of Texas affirmed summary judgment for KCS.
- The Court held the leases unambiguously required royalties based on “market value at the well” for gas sold off the premises, not on the lessee’s actual contract proceeds.
- The Court held implied covenants could not be used to alter or contradict the express market-value royalty standard.
- The Court rejected treating the long-term contract price as controlling for market value where the contract price reflected above-market escalations rather than current open-market pricing.

## Legal Principles

- When a Texas oil and gas lease bases off-premises gas royalties on “market value,” royalty is measured by objective market value, not by the particular price obtained under a long-term sales contract, even if that contract price exceeds market value.
- The “market value” and “amount realized/proceeds” royalty measures are distinct; courts enforce the measure the parties chose in the lease.
- Implied covenants are enforceable only to the extent consistent with express lease terms and cannot be implied to convert a market-value royalty clause into a proceeds-based obligation.
- Market value is generally tied to current open-market conditions; a long-term contract price may be considered, if at all, only as non-controlling evidence and not as a substitute for market value.

## Conclusion

The court enforced the leases’ express market-value royalty clause for off-premises gas sales, holding that royalty owners were entitled to market value rather than the lessee’s above-market contract proceeds, and that implied covenants could not be used to rewrite that unambiguous royalty bargain.


Yzaguirre v. KCS Res., Inc., 53 S.W.3d 368 (Tex. 2001)