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Southland Royalty Co. Royalties on Gas Leases in New Mexico Class Action

Gas Well in New Mexico

This class action takes on Southland Royalty Company, LLC on the subject of royalties for some 300 gas leases in which it has an interest. The complaint alleges that Southland permits third-party operators to work its leases and that these third-party operators do not pay the full amount of what is owed in royalties. The complaint claims that Southland is ultimately responsible for the payments.

As stated in the class definition below, the lessors (who own and lease out the rights to the gas under their lands) have one of two types of provisions for payment of royalties in their agreements. One is a proceeds royalty provision; the other is a gross proceeds royalty provision. Both are at issue in this case.

Southland doesn’t necessarily operate the wells connected to its leases; instead, it let third parties do so. In that case, the third parties pay the royalties. 

At least some of the leases have a free fuel provision, which allows lessees to use gas, oil, and water (except well water) found on the land for their operations on the land. According to the complaint, these are the only deductions permitted under the leases.

The third-party operators have agreements with other companies that own gathering systems and processing plants. These other companies charge the third-party companies for processing the raw gas. These expenses are supposed to belong to the third-party operators and should not be deducted from the royalties.

However, the complaint says, the third-party improperly calculate and pay the royalties due, which should be based “upon the sale proceeds received on the sale of residue gas, natural gas liquids, and condensate to third party purchasers. Instead, the Third-Party Operators deduct various post-production costs from the sales price of the natural gas products in their calculation and payment of royalties…”

The class for this action is all persons and entities who received royalties since January 1, 2015 from an entity other than Southland (that is, from a third-party operator) on the sale of natural gas products produced and sold by the third-party operator from wells located in New Mexico, according to a lease where Southland owed lessee interests and which obligates the lessee to pay royalties based on either (a) a specified percentage of “the proceeds of the gas, as such, for gas from wells where gas only is found” (proceeds royalty provision), or (b) a specified percentage “of the gross proceeds each year, payable quarterly, for the gas from each well where gas only is found” (gross proceeds royalty provision).

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