**This article is not a substitute for the advice of an attorney.**

An application for appeal currently pending before the New Mexico Court of Appeals could impact how royalties are calculated and paid to royalty owners under New Mexico law.

In 2003, a class action lawsuit was brought against Devon on behalf of several hundred royalty and overriding royalty owners in the San Juan Basin.  The lawsuit alleged that Devon improperly reduced royalty payments when it deducted from royalties a share of the costs of compressing, dehydrating, treating, and transporting coalbed natural gas from the wellhead to the interstate pipeline.

One of the central questions in this case is whether New Mexico recognizes the Marketable Condition Rule.  The Marketable Condition Rule, recognized by several states including Colorado, requires that an producer bear all costs to place gas into marketable condition and prohibits these costs from being imposed on royalty owners.  Other states, such as Texas, have rejected this rule and allow these deductions to be taken from royalty payments.

Recently, Santa Fe Judge T. Glenn Ellington held that the Marketable Condition Rule applies in New Mexico and imposes upon an oil producer, such as Devon, an obligation to put natural gas into marketable condition and includes the requirement that the producer bear all of the necessary costs to place the gas into a condition acceptable to be bought and sold in a commercial marketplace that were not apportioned by express agreement of the parties.

Devon now seeks to have the Court of Appeals decide whether New Mexico does, in fact, recognize the Marketable Condition Rule.  If the application for appeal is granted, the parties would file briefs and potentially participate in oral argument before the Court of Appeals.  If denied, the parties would continue litigating the case in the trial court, with any appeal to follow trial.

Photo by Olivia Mitchell, UNM School of Law

*Additional disclaimer:  Tiffany Dowell previously worked for the law firm representing the Class in this litigation prior to joining Texas A&M Agrilife Extension.