This conflict arises on almost every producing well. You own a percentage of the oil and gas. The operator pumps it out. Moving the product to a buyer costs money. The operator deducts a portion of those expenses from your royalty check.
Operators often sign contracts for pipeline space. If an operator fails to fill that reserved space with oil, the pipeline company charges a penalty fee. This raises a specific question. Does the royalty owner have to pay a share of a penalty for empty pipeline capacity?
On August 6, 2026, the Thirteenth District Court of Appeals in Corpus Christi answered that question for a specific set of overriding royalty owners. In Burlington Resources Oil & Gas Company LP v. Texas Crude Energy, LLC, the court upheld a trial court ruling that allowed Burlington to deduct pipeline deficiency fees from overriding royalty payments.
The long road of the Burlington litigation
The dispute between Burlington and Texas Crude Energy spans more than a decade. The origins trace back to a prospect development agreement and a joint operating agreement. Texas Crude Energy owned an :overriding royalty interest in leases operated by Burlington, a subsidiary of ConocoPhillips. Texas Crude later assigned its interest to an affiliate named Amber Harvest. If you want to understand how vulnerable these interests are, you can read about The ORRI Washout Danger: Why Texas Overriding Royalties Can Disappear Overnight.
The founding agreements did not contain limiting language on post-production costs. For nine years, Burlington calculated the monthly royalty payouts by taking the downstream sales price and subtracting the royalty owner’s proportionate share of costs incurred between the wellhead and the point of sale.
On January 15, 2015, the royalty owners filed a lawsuit. They argued Burlington was underpaying them by improperly deducting these post-production expenses from the proceeds received from the downstream sale of the production.
The trial court initially sided with the royalty owners. The judge interpreted the agreements to mean Burlington could not deduct these costs. This decision led to a permissive appeal in 2017, and the appellate court affirmed the trial court’s ruling.
The Supreme Court of Texas reversed that decision in 2019. The high court ruled that the specific assignment language permitted Burlington to charge Texas Crude its proportionate share of expenses when calculating the payments. The Supreme Court remanded the case back to the trial court to determine exactly which costs Burlington could deduct and in what amounts.
How downstream sales change the math
The dispute centers on the math of :post-production costs. According to the court, oil and gas royalty interests are typically free of production expenses but remain subject to post-production expenses. These include taxes and transportation costs.
The term covers processing, compression, transportation, and other money spent to prepare raw oil or gas for sale at a downstream location. Many owners discover The “No Deductions” Mirage: How Three Words in Your Texas Lease Can Erase Your Cost-Free Royalty only after the checks arrive.
When an operator spends money to move the product downstream, the product commands a higher price than it would if sold straight out of the well. Consequently, royalties calculated on products at their downstream point of sale pay out higher amounts than royalties calculated on the same products at the wellhead. Operators argue that because the royalty owner benefits from this price increase, the royalty owner must share in the costs required to achieve it.
In the 2019 decision, the Supreme Court held that the granting clauses in the agreements gave Burlington the right to subtract these costs from the downstream sales prices. This calculation determines the product’s value as it flows into the pipeline, tanks, or other receptacles.
The mechanics of a pipeline deficiency fee
Back at the trial court following the Supreme Court remand, Burlington filed a motion for :summary judgment. Burlington argued it complied with the agreements and only deducted permitted costs, specifically including deficiency fees.
A deficiency fee arises when an operator signs a contract with a pipeline or transportation company to secure space for a certain volume of oil or gas. If the operator fails to produce enough oil to fill the reserved space, the pipeline company charges a penalty for the unused capacity.
Texas Crude argued that Burlington had no authority to deduct fees for transportation space the operator did not use. Texas Crude viewed a deficiency fee as a penalty Burlington chose to incur. They argued the fee was not a direct cost of transporting the raw gas or oil produced by the wells.
Burlington countered that it incurred these fees under transportation and terminal service agreements necessary to move the oil produced from the wells to the downstream location where Burlington sold it. Burlington maintained these fees fit the exact definition of costs the Supreme Court ruled they could deduct.
The standard for summary judgment
The trial court agreed with Burlington. It granted Burlington’s motion for summary judgment and dismissed the claims against the operator. Texas Crude appealed to the Thirteenth District Court of Appeals.
The appellate court noted the high bar required to uphold a summary judgment. Under the Texas Rules of Civil Procedure, a party seeking summary judgment may combine a request under the no-evidence standard with a request for summary judgment as a matter of law. To prevail on a traditional summary judgment, the moving party must establish that no genuine issue of material fact exists and they are entitled to judgment as a matter of law.
The court views the evidence in the light most favorable to the party against whom the judgment was rendered. Following Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, the court must credit evidence favorable to that party if reasonable jurors could. The court must disregard contrary evidence unless reasonable jurors could not.
Burlington supported its motion by attaching the transportation and supply agreements, along with an affidavit from John Saltsman. Saltsman is a ConocoPhillips supervisor who handles fee royalty and severance tax audits and litigation support. His affidavit confirmed the company entered into the transportation and terminal service agreements. Texas Crude did not attach contradicting evidence. The appellate court affirmed the trial court’s summary judgment allowing the deductions.
The side battle over discovery sanctions
During the dispute over deductions, the parties agreed to suspend all discovery and requested a stay from the trial court until the claims were resolved or a party asked to lift the stay. The trial court granted the stay.
Despite the stay on discovery, the trial court later issued an order awarding attorney fees and expenses to Texas Crude under Texas Rule of Civil Procedure 215. The trial court stated that discovery abuse by Burlington was not justified and the award of fees was warranted.
Burlington appealed this sanction. The operator argued no discovery abuse could exist because discovery was stayed and no party had served requests or motions to compel.
The appellate court reviewed the sanctions under an abuse of discretion standard, citing Cire v. Cummings. A trial court abuses its discretion when it acts without reference to any guiding rules or principles. Such actions render the ruling arbitrary or unreasonable.
The appellate court agreed with Burlington. Texas Rule of Civil Procedure 215.1 governs motions for sanctions or orders compelling discovery. Rule 215.3 governs abuse of the discovery process. Because the trial court had halted that active process at the request of both parties, imposing sanctions for discovery abuse was arbitrary. The appellate court relied on TransAmerican Nat. Gas Corp. v. Powell to note that a just sanction must be directed against the actual abuse. The appellate court reversed the sanctions order and rendered judgment that Texas Crude take nothing on the request for attorney fees.
What this means for your overriding royalty
The math shows exactly how a deficiency fee impacts a royalty check.
Assume you own a 0.01 decimal interest in a well. In a given month, the well produces 5,000 barrels of oil. The operator sells the oil at a downstream market for $80 per barrel. The gross revenue is $400,000. Your gross share is $4,000.
The direct cost to transport those 5,000 barrels through the pipeline is $3.00 per barrel, totaling $15,000.
However, the operator reserved space for 10,000 barrels. The pipeline charges a $2.00 deficiency fee for every barrel of reserved space left empty. With 5,000 empty barrels of capacity, the operator incurs a $10,000 deficiency fee.
The total post-production cost is now $25,000. This consists of the $15,000 direct transport cost plus the $10,000 deficiency fee.
Your 0.01 share of that total cost is $250. The operator deducts the $250 from your $4,000 gross share. This calculation leaves you with a net payment of $3,750 before taxes.
Without the deficiency fee, your share of the deductions would be $150, and your net payment would be $3,850. The unused pipeline capacity directly reduces your take-home pay.
What you should check on your own paperwork
If you own an overriding royalty interest, read the granting clause and the valuation clause in the assignment that created your interest.
In the Burlington case, the court relied on specific language in the agreements. The granting clause stated the overriding royalty interests would be delivered “into the pipelines, tanks or other receptacles with which the wells may be connected, free and clear of all development, operating, production and other costs.”
The valuation clause stated the interest would be delivered “free and clear of all royalties and all other burdens and all costs and expenses except the taxes thereon.” It also gave the assignor the option to pay the applicable percentage of the value of the oil or gas produced.
The Texas Supreme Court decided these specific clauses required the royalty owner to bear a share of the costs incurred after the oil reached the pipelines or tanks.
What this does not mean
This ruling is not a blanket authorization for every operator to deduct pipeline penalties from every royalty check in Texas.
The holding applies to a specific set of facts, a specific operating agreement, and specific assignment language. If your lease or assignment contains strong, clearly written language prohibiting the deduction of all post-production costs, your situation differs. Texas courts look at the exact words on the page. One decision on one set of facts does not provide general guidance.
This case deals with an overriding royalty interest created by a prospect development agreement and a joint operating agreement. The rules for standard landowner royalty interests can differ depending on the lease terms.
State law differs as well. A Texas holding is not an Oklahoma rule. It does not apply in Pennsylvania or North Dakota. Always confirm your position with your own attorney or CPA.
Managing a mineral or royalty interest requires knowing exactly what you own and what deductions your operator can take. Selling the interest is one available option. We provide valuations based on the details of your specific title and lease. You can request a mineral rights valuation to see what your interest is worth on the current market.
:overriding-royalty-interest
A percentage of oil and gas revenue carved out of the working interest, free of drilling costs, that usually ends when the underlying lease expires.
:post-production-costs
The expenses an operator pays to move, treat, or compress oil and gas after it leaves the wellhead to prepare it for a buyer.
:summary-judgment
A ruling by a judge that decides a case without a full trial because the core facts are not disputed and the law clearly favors one side.