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Sixth Circuit Court of Appeals Affirms District Court Decision on Royalty Calculations

By Jay Carr

On February 1, 2022, the United States Court of Appeals for the Sixth Circuit affirmed the lower court’s decision in Zehentbauer Family Land, LP, et al. v. TotalEnergies E&P USA, Inc, et al., Case No. 20-3469. The Court held that the lessees’ payment of royalties based on amounts they received from sales to their affiliates at the well was proper and followed the language of the lease. By using the netback method to determine those royalties, “Plaintiffs’ royalties are based on the wellhead value of the gas sold. In fact, there’s no deduction at all. Stated differently, though the Lessees are receiving an amount that is ‘net’ as to the downstream affiliate, it is not ‘net’ from the Lessees’ perspective, but simply the actual cost of the raw product produced by the Lessee production company without any deductions (production or post-production) by the Lessee for its production costs.” Moreover, the court observed that, as a consequence, “Plaintiffs’ royalties are based on those gross proceeds paid to the Lessee. This reading not only squares with the ‘without any deductions or expenses’ language in the affiliate clause, but it also reaches a fair result by ‘avoid[ing] a windfall to landowners.’”

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