The dispute centers on a 1960 deed in which B.A. Puig Jr. reserved a one-sixteenth royalty interest when selling Webb County ranchland to Palafox Exploration Company. The deed reserved 'an undivided one-sixteenth (1/16) of all the oil, gas and other minerals' that 'may be produced from the above described acreage, to be paid or delivered to Grantor...as his own property free of cost forever.' Fasken Oil and Ranch Ltd., the current operator and successor to Palafox, had historically calculated the Puigs' royalty by deducting postproduction costs—transportation, processing, and treatment expenses—from downstream sales prices to arrive at the wellhead value of the raw minerals.
Writing for the unanimous court, Justice Jane N. Bland emphasized that the deed's language creates a geographic limitation tied to production rather than processing. 'By its plain language, the deed reserves a royalty on minerals "produced from the above described acreage," not a royalty on minerals transported, processed, or otherwise enhanced for sale at an unspecified downstream point,' Bland wrote. The court explained that 'production is the process of bringing minerals to the surface, and production for raw gas occurs at the wellhead,' distinguishing raw minerals from enhanced products sold downstream.
The court delivered particularly pointed language about the limits of contract interpretation, stating that the Puigs' construction 'would improperly convert the royalty interest from a royalty on raw products at the well to a royalty on refined, downstream products.' Justice Bland emphasized the court's role is constrained: 'We cannot rewrite or add to the deed to reach such a result.'
The case began in 2021 when the Puig heirs—Baldomero A. Puig III, Emily P. Kenna, James W. Puig, and Priscilla P. Oberton—challenged Fasken's decades-old practice of deducting postproduction costs. The trial court granted summary judgment for the Puigs, ruling that the 'free of cost forever' language precluded deduction of postproduction costs except for severance taxes. The San Antonio Court of Appeals affirmed in 2024, relying on the Supreme Court's 2016 decision in Chesapeake Exploration v. Hyder to conclude that the cost-free language expressed intent to eliminate downstream costs.
The Supreme Court rejected the Puigs' argument that 'free of cost forever' transforms the royalty calculation from wellhead value to downstream proceeds. Justice Bland explained that such cost-free language 'merely restates the rule that a royalty interest is free of costs incurred in exploring for and producing the raw minerals' and 'does nothing to change the valuation point.' The court noted that to deviate from the general rule requiring royalty owners to bear postproduction costs, parties must 'plainly and in a formal way' express intent to operate differently through specific language about downstream valuation points or explicit cost allocations.
The court distinguished the influential Hyder decision, explaining that the San Antonio Court of Appeals had improperly relied on isolated language while ignoring crucial contextual differences. In Hyder, the lease contained a parenthetical specifically exempting 'production taxes' from cost-free treatment, which the court said demonstrated intent to allocate other postproduction costs differently. 'It would make no sense to state that the royalty is free of production costs, except for postproduction taxes,' the court had explained in Hyder, comparing such language to stating 'no dogs allowed, except for cats.' The Puig deed contained no such specific postproduction cost references.
This ruling reinforces the established principle that Texas mineral royalties bear postproduction costs unless parties clearly contract otherwise through specific downstream valuation language or explicit cost-shifting provisions. The decision provides clarity for the oil and gas industry on interpreting cost-free language in older deeds, particularly those created during the mid-20th century boom in Texas mineral development.
The Supreme Court rendered partial summary judgment for Fasken and remanded the case to the trial court for proceedings consistent with the opinion. The ruling eliminates what could have been substantial liability for operators who have historically calculated royalties using the wellhead valuation method across thousands of similar mineral deeds throughout Texas.