SUMMARY: The Corpus Christi–Edinburg Court of Appeals held that volume “deficiency fees” owed under minimum-volume terminal throughput agreements, and a price reduction a crude purchaser imposed when sales fell below a minimum volume, were a form of transportation cost deductible as post-production costs from an overriding royalty.
This case returned to the court of appeals after the Texas Supreme Court held, in Burlington Resources Oil & Gas Co. LP v. Texas Crude Energy, LLC, 573 S.W.3d 198 (Tex. 2019), that Burlington could deduct post-production costs from Texas Crude’s overriding royalty. The question this time was whether “deficiency fees” count as post-production costs. An operator that commits to minimum daily volumes pays for that capacity whether or not its production fills it, and the court found “virtually no judicial authority” addressing the resulting “deficiency fees.”
Texas Crude Energy, LLC owned overriding royalty interests in the Sugarloaf Wells, operated by Burlington Resources Oil & Gas Company LP, a ConocoPhillips subsidiary, and assigned them to its affiliate, Amber Harvest, LLC. This article refers to Texas Crude and Amber together as the royalty owners. The Prospect Development Agreement and Joint Operating Agreement governing the interests contain no language limiting post-production costs. After the 2019 remand, the parties agreed to stay the case, including all discovery, so the royalty owners could audit Burlington’s royalty payments. In 2024 the trial court lifted the stay, and the royalty owners amended their petition to allege that Burlington improperly deducted roughly $75,000 in deficiency fees under three terminal throughput agreements and a crude oil supply agreement with BP Products.
Burlington moved for summary judgment, attaching the four agreements and two affidavits. Under each throughput agreement, ConocoPhillips agreed to pay a per-barrel fee tied to a “minimum daily throughput volume” and owed the full charge even when it delivered less. The agreements called the shortfall portion a “deficiency fee.” Under the supply agreement, BP paid a lower price when sales fell below a minimum volume, and the lower price flowed into the weighted average sales price used to calculate the royalty. A certified public accountant stated by affidavit that the full throughput charge, deficiency component included, was “incurred for the purpose of transporting the actual produced and delivered volumes” to ConocoPhillips’s points of sale. The royalty owners argued that Burlington could not deduct fees it “chose to incur” and that paid for transportation “not actually used to transport” oil. They submitted no evidence of their own.
The court sided with Burlington. Reviewing the motion under the traditional summary judgment standard, it consulted the Williams & Meyers treatise, as the Supreme Court had done in the 2019 appeal. The treatise defines transportation costs as “the costs of transporting oil or gas to a market” and says nonoperating interests usually bear a proportionate share of them absent an express agreement to the contrary. Relying on the uncontroverted evidence, the court reasoned that ConocoPhillips could not have secured “firm, reliable service” for the wells’ anticipated production without the minimum-volume commitment. It concluded that the entire fee, “regardless of whether the fee is labeled deficiency or throughput,” was a transportation expense “because without payment of the fee, Burlington would be unable to transport the oil produced from the Sugarloaf Wells.” The court also classified the BP price reduction as a transportation cost, calling it “another penalty,” with little further explanation. It cited Commissioner of the General Land Office v. SandRidge Energy, Inc., 454 S.W.3d 603 (Tex. App.—El Paso 2014, pet. denied), which said firm transportation charges “clearly” qualify as transportation costs.
The sanctions award fared differently. The trial court had found that Burlington abused the discovery process and awarded the royalty owners $239,003 in attorney’s fees and $48,312 in expenses under Rules 215.1(d) and 215.3. The court of appeals held that both rules apply to the discovery process, and that Rule 215 “cannot be applied” where, as here, “the parties requested, and the trial court granted, a stay of the discovery process.” It reversed and rendered judgment denying the motion.
This appears to be the first Texas appellate decision to treat minimum-volume deficiency fees as deductible post-production costs, and it leaves two questions open. First, the court relied on SandRidge’s statement that firm transportation charges “clearly” qualify as transportation costs but did not discuss the rest of that opinion. The SandRidge leases allowed deduction only of costs “actually incurred” in transporting the gas sold, and the El Paso court held that firm transportation charges for pipeline space “not ultimately used” were not actually incurred in connection with that gas. It also left in place a fact issue on whether the charges were reasonably incurred. Because the Burlington court described the governing agreements as containing no language limiting post-production costs, SandRidge may be distinguishable, but the court did not say so. Second, whether the commitments were reasonably sized to expected production, and whether the shortfall charges were reasonably incurred, are questions the opinion never asks. The royalty owners put on no evidence about either, so the court had no occasion to draw a line, and the opinion draws none.