Royalty and Royalty Interests: Netback Methodology

摘要

In this phase of the bankruptcy proceeding, various oil and gas lessors executed leases with the farmor of the Debtor that provided for royalty to be paid at "the market price at the well for the gas so used . . .." After the Debtor earned the farmout, it expended substantial capital in attempting to develop a gathering line network to move the gas from the wells to a treatment plant. Debtor calculates the royalty based on the amount it receives from the third party who treats the gas. The Debtor passes on the third party treatment costs based oh the volumetric contributions of all of the wells. Plaintiffs filed this adversary action asserting that they are entitled to be paid without reduction for the post-production expenses incurred by the Debtor. In determining whether or not the plaintiffs are entitled to a royalty calculated at the outlet valve of the treatment plant, the court reviewed various Kentucky decisions which dealt with the issue. Because the parties have clearly stated that the market price is to be determined "at the well" the plaintiffs are not entitled to a downstream market price and the Debtor is entitled to use die netback methodology in order to determine what the market price at the well should be. Extrinsic evidence is inadmissible because the royalty clause language is unambiguous. The court also rejected the claim that the Debtor should be estopped from using the netback methodology due to alleged parol representations made by the Debtor's predecessors in interest to the plaintiffs. The court thus granted the Debtor's motion for partial summary judgment.