Research list
Royalty Deductions by State: Marketable Product or At the Well, and the Cases That Decide It (2026)
Royalty deductions by state follow one of two rules: the marketable product rule, which keeps the cost of readying gas for sale with the operator, and the at the well rule, which lets it be deducted. Here is each producing state’s rule with the case or statute that sets it, quoted.
Where to look first
Gas is rarely sold at the well: it is gathered, compressed, treated and moved before a buyer pays. Whether those post-production costs come out of the owner’s royalty depends first on the lease’s words and then on the state’s rule, which falls into two camps, marketable product and at the well.
| Question | Answer |
|---|---|
| Which states follow the marketable product rule? | Colorado, Oklahoma and Kansas; West Virginia goes further and requires the lease to allocate costs expressly |
| Which value royalty at the well? | Texas, Louisiana, North Dakota, New Mexico, Michigan and Kentucky, with Pennsylvania allowing netback by statute |
| Where does the lease alone decide? | Ohio, where the Supreme Court declined to set a default, and Arkansas, where the cases turn on each lease’s wording |
| Where is it set by statute? | Wyoming, unless the lease expressly says otherwise |
| Where is it unsettled? | Virginia and Utah, by the cases found |
How we checked
Each holding was read in the full opinion or statute on October 5, 2026, mostly from the Caselaw Access Project’s published files, and each quotation checked against it. Where only an intermediate appellate court has ruled, the entry says so. A lease is read on its own words, so the state rule is where analysis starts, not where it ends; this is reference, not legal advice.
The states at a glance
1. Colorado, marketable product
The lessee bears the costs of making gas marketable; the implied covenant to market reaches past the wellhead.
- Rule
- Marketable product
“the implied covenant to market obligates the lessee to incur those post-production costs necessary to place gas in a condition acceptable for market”
Garman v. Conoco, Inc., 886 P.2d 652 (Colo. 1994)
Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001): “at the well” wording alone does not allocate costs, and marketability is a question of fact. Garman was an overriding royalty case.
Read on October 5, 2026 in full text: static.case.law
2. Oklahoma, marketable product
Costs to make gas marketable fall on the lessee; later costs are shared only if the lessee proves they enhanced an already marketable product.
- Rule
- Marketable product
“the lessor must bear a proportionate share of such costs if the lessee can show (1) that the costs enhanced the value of an already marketable product”
Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203 (Okla. 1998)
Wood v. TXO Production Corp., 854 P.2d 880 (Okla. 1992): on lease compression may not be deducted from “market price at the well”.
Read on October 5, 2026 in full text: static.case.law
3. Kansas, marketable condition
The lessee alone bears the cost of making the product marketable; transport may be deducted where there is no market at the well.
- Rule
- Marketable condition
“The lessee has the duty to produce a marketable product, and the lessee alone bears the expense in making the product marketable.”
Sternberger v. Marathon Oil Co., 894 P.2d 788 (Kan. 1995)
Fawcett v. Oil Producers, Inc., 352 P.3d 1032 (Kan. 2015): for a wellhead sale, the duty is met when gas is delivered in a condition acceptable to the purchaser in good faith.
Read on October 5, 2026 in full text: static.case.law
4. West Virginia, costs on the lessee unless expressly allocated
The lessee bears costs to the point of sale unless the lease meets a strict test for allocating them to the owner.
- Rule
- Costs on the lessee unless expressly allocated
“must expressly provide that the lessor shall bear some part of the costs incurred between the wellhead and the point of sale”
Estate of Tawney v. Columbia Natural Resources, 633 S.E.2d 22 (W. Va. 2006)
SWN Production Co. v. Kellam, 875 S.E.2d 216 (W. Va. 2022): Tawney remains good law. Leggett v. EQT, 800 S.E.2d 850 (W. Va. 2017): flat rate leases converted by statute bear deductions.
Read on October 5, 2026 in full text: static.case.law
5. Arkansas, lease language controls
No general default rule; a royalty on “proceeds at the well” barred a compression deduction.
- Rule
- Lease language controls
“we find it unnecessary to go beyond the clear language of the agreement between the parties to hold that appellant is not entitled to deduct compression costs”
Hanna Oil & Gas Co. v. Taylor, 759 S.W.2d 563 (Ark. 1988)
SEECO, Inc. v. Snow, 506 S.W.3d 206 (Ark. 2016): where a lease allows reasonable deductions, whether they were reasonable can be tried for a class.
Read on October 5, 2026 in full text: static.case.law
6. Texas, at the well, unless the lease says otherwise
Royalty valued “at the well” bears post-production costs, and a clause forbidding deductions does not change that valuation.
- Rule
- At the well, unless the lease says otherwise
“the commonly accepted meaning of the ‘royalty’ and ‘market value at the well’ terms renders the post-production clause in each lease surplusage as a matter of law”
Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996)
Chesapeake v. Hyder, 483 S.W.3d 870 (Tex. 2016): a lease can make royalty free of post-production costs. Burlington v. Texas Crude, 573 S.W.3d 198 (Tex. 2019): “into the pipeline” delivery allows deductions. BlueStone v. Randle (Tex. 2021): a “gross value received” addendum barred them.
Read on October 5, 2026 in full text: static.case.law
7. Louisiana, at the well
Post-production compression is deductible; compression needed to bring gas to the wellhead is a production cost and is not.
- Rule
- At the well
“this cost is a post-production or marketing cost and is therefore deductible from royalty payments”
Merritt v. Southwestern Electric Power Co., 499 So. 2d 210 (La. Ct. App. 1986)
An intermediate appellate decision; no Louisiana Supreme Court holding was checked.
Read on October 5, 2026 in full text: static.case.law
8. Pennsylvania, netback to the wellhead allowed
The state’s minimum royalty statute permits royalty calculated at the wellhead by the netback method.
- Rule
- Netback to the wellhead allowed
“we hold that the GMRA should be read to permit the calculation of royalties at the wellhead, as provided by the net-back method in the Lease”
Kilmer v. Elexco Land Services, Inc., 990 A.2d 1147 (Pa. 2010)
Construes the state’s minimum royalty act, 58 P.S. 33, which the court calls the GMRA.
Read on October 5, 2026 in full text: static.case.law
9. Ohio, lease language controls
The Supreme Court of Ohio declined to choose between the at the well and marketable product rules.
- Rule
- Lease language controls
“Because the rights and remedies of the parties are controlled by the specific language of their lease agreement, we decline to answer the certified question”
Lutz v. Chesapeake Appalachia, L.L.C., 71 N.E.3d 1010 (Ohio 2016)
No default rule since.
Read on October 5, 2026 in full text: static.case.law
10. North Dakota, at the well, work back allowed
North Dakota joined the at the well majority and rejected the first marketable product doctrine.
- Rule
- At the well, work back allowed
“We join the majority of states adopting the ‘at the well’ rule and rejecting the first marketable product doctrine.”
Bice v. Petro-Hunt, L.L.C., 768 N.W.2d 496 (N.D. 2009)
Blasi v. Bruin E&P Partners, 959 N.W.2d 872 (N.D. 2021): an oil royalty “free of cost into the pipeline” is valued at the well.
Read on October 5, 2026 in full text: static.case.law
11. New Mexico, at the well means wellhead value
Express “at the well” terms value production as it leaves the well, and an implied duty to market cannot override them.
- Rule
- At the well means wellhead value
“unambiguous and means that Plaintiffs are entitled to royalties based on the value of the carbon dioxide gas as it emerges at the wellhead”
Creson v. Amoco Production Co., 10 P.3d 853 (N.M. Ct. App. 2000)
Elliott Industries v. BP America, 407 F.3d 1091 (10th Cir. 2005), applying New Mexico law. No New Mexico Supreme Court holding was found.
Read on October 5, 2026 in full text: static.case.law
12. Michigan, at the well, netback allowed
Expenses may be deducted from the sale price to reach the value at the wellhead.
- Rule
- At the well, netback allowed
“expenses are properly deducted from the price paid in Kalkaska at the point of sale to determine the ‘gross proceeds at the wellhead.’”
Schroeder v. Terra Energy, Ltd., 223 Mich. App. 176 (1997)
A Court of Appeals decision.
Read on October 5, 2026 in full text: static.case.law
13. Kentucky, at the well, work back allowed
Kentucky presumes gas is marketed at the well and rejects the marketable product rule.
- Rule
- At the well, work back allowed
“we allow a presumption that it was marketed ‘at the well,’ with the value (or proceeds) at that point (arrived at if necessary by applying the work-back method)”
Baker v. Magnum Hunter Production, Inc., 473 S.W.3d 588 (Ky. 2015)
Read on October 5, 2026 in full text: static.case.law
14. Wyoming, by statute, free of costs to the market pipeline
Royalty is free of production costs up to the market pipeline, unless the lease expressly provides otherwise.
- Rule
- By statute, free of costs to the market pipeline
- Authority
- Wyo. Stat. 30-5-304 and 30-5-305
“‘Royalty’ means the mineral owner’s share of production, free of the costs of production”
Wyo. Stat. 30-5-304 and 30-5-305
Cabot Oil & Gas v. Followill, 93 P.3d 238 (Wyo. 2004), defines gathering under the statute.
Read on October 5, 2026 in full text: wyoleg.gov
15. Montana, market value, netback where no field market
Royalty may be computed on what the marketing outlet pays, less marketing and transport costs.
- Rule
- Market value, netback where no field market
“royalty may be computed upon receipt from the marketing outlet for the products, less the costs and expenses of marketing and transportation”
Montana Power Co. v. Kravik, 179 Mont. 87 (1978)
A 1978 valuation case; no modern Montana deduction holding was found.
Read on October 5, 2026 in full text: static.case.law
16. Virginia, unsettled
No Virginia appellate court has decided the question for oil and gas leases.
- Rule
- Unsettled
“no Virginia authority has yet addressed this question in the oil and gas lease context”
Legard v. EQT Production Co., 771 F. Supp. 2d 607 (W.D. Va. 2011)
Certification to the Supreme Court of Virginia was denied; later federal rulings were not read.
Read on October 5, 2026 in full text: static.case.law
Common questions
What is the marketable product rule?
The rule that the lessee must bear the costs of making gas marketable before the royalty is figured, followed in Colorado, Oklahoma and Kansas.
What does “at the well” mean for royalty?
That royalty is valued as production leaves the well, so in states like Texas and North Dakota the operator may deduct the costs of getting it from there to the buyer.
Can a lease stop deductions in Texas?
Yes, with the right words: Chesapeake v. Hyder (2016) and BlueStone v. Randle (2021) enforced cost free royalty language, while Burlington v. Texas Crude (2019) allowed deductions under “into the pipeline” wording.
Where do post-production costs stay with the operator unless the lease says otherwise?
In West Virginia, under Tawney: costs past the wellhead stay with the lessee unless the lease expressly allocates them.
Summary
Sixteen producing states have a rule a court or legislature has stated, and they split nearly evenly. Read the royalty clause first, then the state rule; AMR’s lease clauses list shows the clauses that decide it.
Sources
Every page below was opened on October 5, 2026.
- Garman v. Conoco, Inc., 886 P.2d 652 (Colo. 1994)
- Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203 (Okla. 1998)
- Sternberger v. Marathon Oil Co., 894 P.2d 788 (Kan. 1995)
- Estate of Tawney v. Columbia Natural Resources, 633 S.E.2d 22 (W. Va. 2006)
- Hanna Oil & Gas Co. v. Taylor, 759 S.W.2d 563 (Ark. 1988)
- Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996)
- Merritt v. Southwestern Electric Power Co., 499 So. 2d 210 (La. Ct. App. 1986)
- Kilmer v. Elexco Land Services, Inc., 990 A.2d 1147 (Pa. 2010)
- Lutz v. Chesapeake Appalachia, L.L.C., 71 N.E.3d 1010 (Ohio 2016)
- Bice v. Petro-Hunt, L.L.C., 768 N.W.2d 496 (N.D. 2009)
- Creson v. Amoco Production Co., 10 P.3d 853 (N.M. Ct. App. 2000)
- Schroeder v. Terra Energy, Ltd., 223 Mich. App. 176 (1997)
- Baker v. Magnum Hunter Production, Inc., 473 S.W.3d 588 (Ky. 2015)
- Wyo. Stat. 30-5-304 and 30-5-305
- Montana Power Co. v. Kravik, 179 Mont. 87 (1978)
- Legard v. EQT Production Co., 771 F. Supp. 2d 607 (W.D. Va. 2011)
Cite this list
American Mineral Registry. "Royalty Deductions by State: Marketable Product or At the Well, and the Cases That Decide It (2026)." Release 2026.10.1, October 5, 2026. https:// americanmineralregistry.com/ research/ royalty-deductions-by-state
[Royalty Deductions by State: Marketable Product or At the Well, and the Cases That Decide It (2026)](https:// americanmineralregistry.com/ research/ royalty-deductions-by-state), American Mineral Registry, release 2026.10.1 (October 5, 2026).
<a href="https:// americanmineralregistry.com/ research/ royalty-deductions-by-state">Royalty Deductions by State: Marketable Product or At the Well, and the Cases That Decide It (2026)</ a>, American Mineral Registry, release 2026.10.1 (October 5, 2026).
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date = {2026-10-05},
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