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Law School Case Brief

Yzaguirre v. Kcs Res. - 53 S.W.3d 368 (Tex. 2001)

Rule:

The implied covenant to reasonably market oil and gas serves to protect a lessor from the lessee's self-dealing or negligence. It does not override the express terms of the oil and gas lease whenever a lessee negotiates a sales contract that turns out to be especially lucrative.

Facts:

In 1973, Tomas Chapa Yzaguirre and the other royalty owners or their predecessors in interest granted oil and gas leases to the predecessor of KCS Resources, Inc. (KCS) The leases included a royalty clause providing the royalty for gas sold off the premises was based on "market value." In 1979, KCS entered into a 20-year gas purchase agreement with Tennessee Gas Pipeline Co. (Tennessee Gas) under which Tennessee Gas agreed to purchase the gas at a certain price. The agreement specified the point of sale was to be a processing plant several miles away from the leased property. In 1990, the discovery of a new field caused the agreement price to far exceed the value of the gas. KCS sought a declaratory judgment that it need only pay royalties based on market value rather than the higher gas price prevailing under the agreement. The trial court ruled for KCS, which the appellate court affirmed.

Issue:

Is the open-market price still the correct measure under such a lease when the lessee sells the gas for more than market value under a long-term sales contract?

Answer:

Yes

Conclusion:

The state supreme court found that an alleged implied covenant to reasonably market the oil and gas could not be used to override the plain language of the leases allowing for royalties to be paid at the market rate rather than the higher, actual sales rate.

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