i some introductory principles and definitions
TRANSCRIPT
THE NATURE OF THE MINERAL ESTATE: A GUIDEBOOK FOR THE UNITIATED
Bruce M. Kramer
Maddox Professor of Law Emeritus
Texas Tech University School of Law
Of Counsel
McGinnis, Lochridge & Kilgore
Houston, TX
I SOME INTRODUCTORY PRINCIPLES AND DEFINITIONS
In Texas the owner of the surface estate is also the owner of the mineral estate,
including oil, gas and other minerals in fee simple absolute. That has been the case since 1915
when the Texas Supreme Court decided that issue in Texas Co. v. Daugherty.1 This "unified"
estate, however, can be severed into two or more fee simple estates, one encompassing the
surface estate and one or more encompassing the subsurface or mineral estate. Again, the
Texas Supreme Court nearly 90 years ago settled that issue by stating that a deed that
reserved "all of the oil and minerals" had the following effect: "the minerals in place were
severed by the conveyance from the residue of the soil, and the original land as effectively
divided into two tracts as if the division has been made by superficial lines, or had been severed
vertically by horizontal planes."2 Severance is a term of art in the oil and gas conveyancing
industry. It means:
Separation of a mineral or royalty interest from other interests in the land by grant or
reservation. A mineral or royalty deed or a grant of the land reserving a mineral or
royalty interest, by the landowner before leasing, accomplishes a severance as does the
execution of an oil and gas lease.3
But the power to sever the surface and mineral estates is not limited to merely creating two
independent estates out of one. You can also have a phase severance which applies to the
separate ownership of oil from gas.4 In the Texas Panhandle it is not uncommon for there to be
an owner of the oil estate and a separate owner of the gas estate. That phase severance has
1 Texas Co. v. Daugherty, 107 Tex. 226, 176 S.W. 717 (1915).
2 Humphreys-Mexia Co. v. Gammon, 113 Tex. 247, 260, 254 S.W. 296, 302 (1923).
3 8 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers Oil and Gas Law 960-961 (2012) [Volume 8 of Williams
& Meyers will hereinafter be referred to as the Manual of Terms.] 4 Manual of Terms, note 3 supra at 764.
led to substantial legal issues over the years.5 Furthermore it is becoming increasingly common
for there to be a horizontal severance of the mineral estate. A horizontal severance is:
A conveyance of all, or some portion, of the minerals above or below or between
specified depths, or in a given stratum or horizon, e.g., a conveyance of the minerals in
the Ellenberger Formation, or a conveyance of all minerals at a depth greater (or less)
than 4000 feet beneath the surface.6
Horizontal severances, like phase severances, can lead to substantial title and conveyancing
problems because of the use of descriptive terms, such as the Ellenburger Formation, the
Marcellus Shale Formation or the Bakken Formation, which may not have a single meaning or
may have a meaning that changes over time.7 Even where the instrument uses numerical
references such as "100 feet below the deepest depth drilled" there can be disputes as to
whether the 100 feet measurement is to start from where the well was producing as opposed to
the deepest point reached by the drill stem.8
Because of the power to sever a unified estate into two or more co-equal estates, it is
important to have a basic understanding of what a mineral estate or a mineral interest is. It is
my opinion that the two terms mineral estate or mineral interest are basically interchangeable in
the absence of language to the contrary. A mineral estate/interest essentially means:
. . . the rights, privileges, powers and immunities with regard to the minerals held by the
owner of minerals which by grant or reservation have been severed from the surface
estate.9
As with the unified or surface estate, the duration of a mineral interest or mineral estate is
measured by the historic common law estates in land ranging from the fee simple absolute to
the fixed term for years.10 Furthermore, one can have a future interest in a mineral estate as
would occur when a will leaves Blackacre, a 640-acre mineral estate to my spouse for his or her
5 See e.g., Amarillo Oil Co. v. Energy Agri-Products, Inc., 794 S.W.2d 20, 109 O.&G.R. 524 (Tex. 1990); Hufo Oil v.
Railroad Commission, 717 S.W.2d 405, 100 O.&G.R. 187 (Tex. App.--Austin 1986, writ denied); REO Industries, Inc.
v. Natural Gas Pipeline Co., 932 F.2d 447, 115 O.&G.R. 322 (5th Cir. 1991). In the Appalachian Basin it is common
for the ownership of coal to be separate from the ownership of oil and gas. 6 Manual of Terms, note 3 supra at 477.
7 One of the issues in Amarillo Oil Co., note 5 supra was whether or not the Brown Dolomite Formation was an oil-
bearing strata or a gas-bearing strata. See 1 Ernest E. Smith & Jacqueline Weaver, Texas Law of Oil and Gas §
3.6[E] (2012) [hereinafter Smith & Weaver]. See also Raw Hide Oil & Gas Co. v. Maxum Exploration Co., 766
S.W.2d 264, 105 O.&G.R. 389 (Tex. App.--Amarillo 1988, writ denied); Jinkins v. Bryan, 763 S.W.3d 539, 108
O.&G.R. 568 (Tex. App.--Amarillo 1988, writ denied). 8 Compare Sandefer Oil & Gas Inc. v. Duhon, 961 F.2d 1207, 120 O.&G.R. 22 (5th Cir. 1992) with EOG Resources,
Inc. v. Wagner & Brown, Ltd., 202 S.W.3d 338, 169 O.&G.R. 385 (Tex. App.--Corpus Christi 2006, pet. denied). 9 Manual of Terms, note 3 supra at 606.
10 1 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers Oil and Gas Law § 301 (2012) [hereinafter Williams &
Meyers].
life and upon her death to our children per stirpes.11 Upon the testator's death, the surviving
spouse would own the mineral estate as a life tenant while the children would own an
indefeasibly vested remainder that would become a fee simple absolute upon the death of the
surviving spouse.
A durational estate that is reasonably uncommon when it comes to surface or unified
estates is the so-called "defeasible term interest." Such an interest has been defined as:
A mineral, royalty or nonexecutive mineral interest for a fixed term of years and for an
indefinite period of time thereafter, usually so long as oil or gas is produced.12
But, as with all written documents, one must read the instrument creating a defeasible term
interest to see if that is what the parties intended to create. For example, one can convey a
mineral or royalty interest that if production is occurring at the end of the fixed term, the mineral
or royalty interest would become an interest of infinite duration as opposed to an interest that
will terminate in the absence of production.13
Because a fee simple absolute mineral estate may be divided in ways other than by the
estate's duration, the oil and gas industry has developed terms of art to describe these various
interests. The most common division of a mineral estate occurs when the owner executes an oil
and gas lease. The oil and gas lease is a conveyance of a fee simple determinable estate in
the minerals to the lessee.14 The lessor is therefore the owner of a possibility of reverter that
will become the fee simple absolute in the mineral estate upon the termination or the surrender
of the oil and gas lease.15 The term leasehold interest is not one that is widely used, instead the
term "working interest" is used to describe what the lessee owns after the execution of an oil
and gas lease.16 The key attribute of the "working interest," other than its ownership of the fee
simple determinable estate, is its cost-bearing nature. It has been described as: "the right to
share in well production, subject to the costs of exploration and development."17
11
See e.g., Moore v. Vines, 474 S.W.2d 437, 41 O.&G.R. 82 (Tex. 1971). The cases are fully discussed in Williams &
Meyers, note 10 supra at § 412. 12
Manual of Terms, note 3 supra at 244. See also Williams & Meyers, note 10 supra at §§ 331-336. 13
See Williamson v. Federal Land Bank of Houston, 326 S.W.2d 560, 11 O.&G.R. 299 (Tex. Civ. App.--Texarkana
1959, writ ref'd n.r.e.). 14
See e.g., Stephens County v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W. 290 (1923); Natural Gas Pipeline
Co. of America v. Pool, 124 S.W.3d 188, 168 O.&G.R. 199 (Tex. 2003); In re Devon Energy Production Co., 321
S.W.3d 778 (Tex. App.--Tyler 2010). 15
Natural Gas Pipeline v. Pool, note 12 supra. In Oklahoma, on the other hand, the leasehold interest is a fee
simple subject to a condition subsequent with the lessor retaining a power or termination/right of entry. Stewart
v. Amerada Hess Corp., 604 P.2d 854, 65 O.&G.R. 530 (Okla. 1979). 16
Manual of Terms, note 3 supra at 550 (lease or leasehold interest), 1158-1161 (working interest). 17
Paradigm Oil, Inc. v. Retamco Operating, Inc., 372 S.W.3d 177, 180 (Tex. 2012); Stable Energy, L.P. v. Newberry,
999 S.W.2d 538, 543 (n.2), 150 O.&G.R. 364 (Tex. App.--Austin 1999, pet. denied).
A person owning a "leasehold" or "working" interest, in addition to having the power to
convey all or a portion of that interest may carve out other interests. One such interest that
unfortunately has several different names is the "production payment." A "production payment:
"refers to an interest created out of the lessee's estate which is a share of the minerals
produced from described premises, free of the costs of production at the surface . . . But
a production payment terminates when the lease expires, or sooner if the owner of the
interest has received the agreed quantum of production or dollar amount from the sale of
production."18
The original name given to a "production payment" was an "oil payment" since during the 1930's
when such payments were more common, the only valuable hydrocarbon worth burdening was
crude oil.19 It is not uncommon for the term "oil payment" to include payment for the production
of natural gas where the instrument makes it clear that all production is burdened by the
payment or delivery obligation.
Another type of interest that is usually created by the owner of the working interest is
the "net profits interest."20 A "net profits interest" is:
A share of gross production from a property, measured by net profits from operations of
the property.21
Unlike a "royalty" interest which I will discuss shortly, a "net profits interest" is not measured
solely by production but is measured by the parties' contractual definition of when the working
interest owner has received sufficient revenue from the sales of the hydrocarbons to reimburse
that owner for all of its drilling, production and operational costs. It is incumbent upon the
parties to define the accounting methodology that is to be used before the payments are due
under a "net profits interest" agreement.22 Texas courts have had difficulty in characterizing the
nature of net profits interests in terms of treating them differently than royalty interests and in
18
Manual of Terms, note 3 supra at 824.1 quoting from QEP Energy Co. v. Sullivan, 444 Fed. Appx. 284, 289 (10th
Cir. 2011). See generally, Williams & Meyers, note 10 supra at §§ 420-22. 19
The leading article on oil payments was published in 1942. A.W. Walker, Jr., Oil Payments, 20 Tex. L.Rev. 259
(1942). 20
There is no restriction on the owner of the mineral estate in reserving or granting a net profits interest prior to
the execution of an oil and gas lease, although that is a reasonably rare occurrence. 21
Manual of Terms, note 3 supra at 646. See also Williams & Meyers, note 10 supra at § 424. 22
See e.g., Walston v. Anglo-Dutch Petroleum (Tenge) LLC, 2009 Tex. App. LEXIS 5616 (Tex. App.--Houston [14th
Dist. July 23, 2009); Young Refining Corp. v. Pennzoil Co., 46 S.W.3d 380, 153 O.&G.R. 460 (Tex. App.--Houston [1st
Dist.] 2001, rev. denied).
treating them as real property interests, personal property interests or contract-based
interests.23
There may also be created by either a mineral interest owner or a working interest owner
a "carried interest." Such an interest has been defined as:
A fractional interest in oil and gas property, usually a lease, the holder of which has no
personal obligation for operating costs, which are to be paid by the owner or owners of
the remaining fraction, who reimburse themselves therefor out of production, in any.
The person advancing the costs if the carrying party and the other is the carried party."24
As Professor Masterson noted some 60 years ago:
The numerous different forms these interests are given from time to time make it
apparent that the terms 'carried interest' and 'net profits interest' do not define any
specific form of agreement but rather serve merely as a guide in preparing and
interpreting instruments.25
Carried interests are similar to, but clearly not identical to net profits interest. Net profits
interests typically will last for the life of the lease but payments are not due until the
contractually-set formula for determining when a profit has been attained has been satisfied.
Carried interests may last for the life of the lease but it is more likely that a carried interest will
only last until an agreed to point in time such as when the well is hooked up to a storage tank or
a pipeline. Thus an agreement to be "carried until the tanks" means that the carried party pays
none of the costs of drilling or equipping the well but when the well is connected, the carry ends
and the carried party will be obligated to pay future operational costs. While a "net profits
interest" may be a type of "carried interest," not all "carried interests" are "net profits interests"
since the extent of the carry and what constitutes a "net profit" usually vary.
Carried interests may also be created by virtue of the standard provisions of the AAPL
Model Form Joint Operating Agreements because they provide that if a party to the JOA
chooses to go non-consent as to a particular proposal or project the interest of the non-
consenting party is, in essence, carried until such time as the consenting parties recoup both
23
See PYR Energy Corp. v. Samson Resources Co., 456 F.Supp.2d 786, 164 O.&G.R. 19 (E.D. Tex. 2006); T-Vesco Litt-
Vada v. Lu-Cal One Oil Co., 651 S.W.2d 284, 79 O.&G.R. 127 (Tex. App.--Austin 1983, error ref'd n.r.e.); Berthelot v.
Brinkmann, 322 S.W.3d 365, 174 O.&G.R. 713 (Tex. App.--Dallas 2010, pet. denied); Lyle v. Jane Guinn Revocable
Trust, 365 S.W.3d 341 (Tex. App.--Houston [1st Dist.] 2010, pet. denied). 24
Manual of Terms, note 3 supra at 126. See also Williams & Meyers, note 10 supra at § 424. 25
Discussion Notes, 5 O.&G.R. 396 (1956) following Professor Masterson's review of Ashland Oil & Refining Co. v.
Beal, 224 F.2d 731, 5 O.&G.R. 387 (5th Cir. 1955), cert. denied, 350 U.S. 967 (1956).
the non-consenting party's share of costs out of the non-consenting party's share of revenue, if
any, plus an additional amount usually referred to as the non-consent penalty.26
If things weren't confusing enough regarding the mineral and leasehold estates, courts
and oil and gas attorneys have, at times, been less than clear in their dealings with the terms
"royalty" or "royalty interest." If you call something a "royalty" or a "royalty interest" it will clearly
have two attributes, one negative and one positive. A "royalty" is usually defined as "The
landowner's share of production free of expenses of production."27 That is the affirmative side
of what a "royalty" is. The negative side is that the interest is non-possessory in nature,
meaning that the owner of the "royalty" does not have the right to execute an oil and gas lease
authorizing development of the mineral estate, nor does the owner have the right to self-develop
the mineral estate.28
In modern oil and gas jurisprudence there are three generally-recognized labels that
attach to the generic term royalty interest that describes how they had different creating
documents. There is the landowner's or lessor's royalty which is the interest reserved by the
lessor in the oil and gas lease.29 A second type of royalty is that which is created by the owner
of the leasehold estate who transfers all or a portion of the leasehold estate, reserving for itself,
an overriding royalty interest (ORRI).30 The meaning, however, of an ORRI has changed over
the years since it originally meant any royalty payable by a working interest owner in excess of
the usual landowner's or lessor's royalty.31 Finally we have a royalty interest that is created by a
deed or conveyance. This third type of royalty is sometimes referred to as a non-participating
royalty interest (NPRI), a royalty interest or, in my opinion, more accurately as a freestanding
royalty interest. While the NPRI term is used frequently by courts and commentators, all royalty,
including the first two types described above are nonparticipating, meaning that they do not
have the right to develop the mineral estate nor are they responsible for any of the costs of
production. It is this third type of royalty that has created a substantial amount of confusion in
Texas and elsewhere as to whether the parties to the royalty deed intended to grant or convey a
mineral interest or a royalty interest.32
26
See Gary Conine, Rights and Liabilities of Carried Interest and Nonconsent Parties in Oil and Gas Development,
37 Sw. Legal Fdn. Oil & Gas Inst. 3-1 (1986). 27
Manual of Terms, note 3 supra at 920. 28
Smith & Weaver, note 7 supra at § 2.4[A]. 29
Smith & Weaver, note 7 supra at § 2.4[B][1]. 30
Manual of Terms, note 3 supra at 727-734. 31
Id.. See also Smith & Weaver, note 7 supra at § 2.4[B][3]. 32
See Bruce M. Kramer, Conveying Mineral Interests--Mastering the Problem Areas, 26 Tulsa L.Rev. 175 (1990).
Then, of course, there is a "royalty" that is not a share of production, namely the "shut-in
gas royalty" which is a contractually-based payment triggered by any of a number of conditions
precedent and which is typically either a fixed amount or a fixed amount per acre. A "shut-in
royalty" is: "A payment made when a gas well, capable of producing in paying quantities, is
shut-in for lack of a market for the gas under a shut-in gas well clause."33
There are substantial similarities between ORRI's and production payments.34 Both are
created or carved out of the leasehold estate and both are non-possessory interests in real
property. They are subject to the ad valorem tax and in order to create either of the interests
you need to comply with the Statute of Frauds. Since they are non-possessory in nature,
partition is not an available cause of action and neither can one file a trespass to try title action
since both actions are only applicable to possessory interests.35
You will also see the term "nonexecutive interest" used to describe certain types of
interests. A "nonexecutive interest" is merely an interest that does not have the power to
execute leases. Therefore, all royalty interests are "nonexecutive interests" by definition. A
"nonexecutive mineral interest" generally describes a mineral interest that has been shorn of the
executive right or power. A "nonexecutive mineral interest" is not the same as a "royalty
interest."36
The term "net revenue interest" is not typically found in mineral deeds or leases. It is a
term, however, that appears in purchase and sale agreements relating to oil and gas assets as
a means of describing: "the lessee's share of production after satisfaction of all royalty,
overriding royalty, oil payments, or other nonoperating interests."37
II THE FIVE FOOTED MINERAL INTEREST
33
Manual of Terms, note 3 supra at 972. See also Williams & Meyers, note 10 supra at § 631-32. 34
Williams & Meyers, note 10 supra at § 422.3. 35
Smith & Weaver, note 7 supra at § 2.4[E]. 36
See State National Bank of Corpus Christi v. Morgan, 135 Tex. 509, 143 S.W.2d 757 (1940) where the owner of a
royalty interest was held not to be entitled to share in a production payment created by the lease whereby the
owner of a nonexecutive mineral interest would have been so entitled. 37
Manual of Terms, note 3 supra at 648. The Manual of Terms does note that there are other meanings that have
been ascribed to the term "net revenue interest." In the case of a purchase and sale agreement, the parties may
agree that the grantor is warranting a specified net revenue interest in each of the leases and/or wells that are
being conveyed. If the net revenue interest falls below the specified percentage the PSA may likely have a title
defect provision allowing for a re-calculation of the purchase price and a re-conveyance back to the grantor of the
asset.
In Texas the Supreme Court has identified the five "essential attributes" of the severed
mineral estate.38 They are:
(1) the right to develop (the right of ingress and egress), (2) the right to lease (the
executive right), (3) the right to receive bonus payments, (4) the right to receive delay
rentals, (5) the right to receive royalty payments.39
It is somewhat misleading to call these five attributes or "sticks" to use the first-year Property
professor's aphorism that property ownership is made up of a "bundle of sticks," essential,
because of the mineral owner's power to convey or reserve each of these "sticks" individually.
Texas courts have struggled mightily to deal with mineral deeds that allot some but not all of the
five "sticks" in order to determine whether or not a "mineral" or "royalty" interest was conveyed
or reserved.40 The conceptual conundrum caused by the treatment of these five "sticks" as
essential is that with the ability to transfer any of them you may have the situation where the
grantor conveys the bonus to the grantee reserving the other four "sticks."41 I would think that
the grantor would still be treated as the owner of the mineral estate notwithstanding the
conveyance of an "essential" attribute of the mineral estate.
In breaking down these five "sticks" the first stick gives to the owner the right to develop
the mineral estate for its own benefit. It is, in Texas, that which gives the mineral estate owner a
possessory or corporeal interest in real property. One would also think that the development
right carries with it the implied easement of surface use so that the mineral estate can be fully
enjoyed by its holder.42 The development right, however, is not the "stick" or right that serves as
the basis for mineral development in Texas. The "stick" that is the basis for most mineral
development in Texas and throughout the United States is the "right to lease."
38
See French v. Chevron U.S.A., Inc., 896 S.W.2d 795, 134 O.&G.R. 111 (Tex. 1995); Altman v. Blake, 712 S.W.2d
117, 91 O.&G.R. 346 (Tex. 1986). 39
Altman v. Blake, note 38 supra, 712 S.W.2d at 118. This listing came from the first edition of Richard
Hemingway, The Law of Oil and Gas § 2.1 (1st ed. 1971). When Professor Hemingway produced the second edition
he replaced the development attribute with the right to receive shut-in gas royalty payments. Richard Hemingway,
The Law of Oil and Gas § 2.1 at 34 (2d ed. 1983). As Dean Smith and Professor Weaver have pointed out during the
period prior to the 1980's oil and gas leasing transactions were quite uniform in nature, forms may have been
different but largely contained the same types of provisions from lease form to lease form and there was little self-
development of oil and gas resources. Smith & Weaver, note 7 supra at § 2.1[A][1][b]. The source of Professor
Hemingway's original list may have been an article by Professor Masterson. Wilmer Masterson, A Survey of Basic
Oil and Gas Law, 4 Inst. on Oil & Gas L. & Tax'n 219, 237 (1953). 40
Many of these mineral/royalty dichotomy cases are analyzed in Bruce M. Kramer, Conveying Mineral Interests,
note 32 supra, 26 Tulsa L.Rev. at 187-192. 41
While there were some early cases such as Klein v. Humble Oil & Refining Co., 126 Tex. 450, 86 S.W.2d 1077
(1935) that resisted the notion of individually conveying all of the component parts of a mineral estate, by the time
Schlittler v. Smith, 128 Tex. 628, 101 S.W.2d 543 (Tex. Comm'n App. 1937, opinion adopted) was decided the
individual conveyancing doctrine became the prevailing rule. 42
See e.g., Harris v. Currie, 142 Tex. 93, 99, 176 S.W.2d 302, 305 (1943).
The "right to lease" is often called the "executive right" and it entails the right, or more
accurately, the power to execute oil and gas leases which transfer the development right "stick"
to the lessee.43 As described earlier, one can be the owner of a nonexecutive mineral interest,
meaning that another party owns the executive power over your interest and when that power is
exercised your fee simple absolute estate would have been transformed into a possibility of
reverter. Even if the executive power is considered a part of the mineral estate, it was not until
1990 that the Texas Supreme Court overruled prior rulings and found that the executive power
was indeed a property interest.44 In that case, the court also made it clear that where the
conveyancing document was silent as to the development right but either expressly reserved or
granted the executive power, the development right would be owned by the owner of the
executive power.45 While it is beyond the scope of this presentation, there are substantial legal
issues raised by the scope of the duty owed by the executive to non-executive interests
including freestanding royalty interest owners.46
The third "stick" in the bundle is the right to receive bonus payments. The bonus is
defined as:
. . . the cash consideration paid by the lessee for the execution of an oil and gas lease
by a landowner. . . Bonus is usually figured on a per acre basis.47
At the time that Professor Hemingway included bonus and delay rentals in the list of the
elements of a mineral estate, bonus payments were included in most form leases and were
typically on the nominal side as compared to the size of bonus payments being made in the 21st
century. It is perhaps unfortunate that the right to receive bonus is consider a "stick" in the
ownership bundle for mineral interests because it is one of several ways by which the lessee
may compensate the lessor for executing the oil and gas lease. But by classifying it as a "stick"
or element, you are enshrining bonus with special treatment that may cause issues where the
parties seek to create economic benefits that do not fit within the classic definition of a bonus.48
For example, should payments that come out of production, be they classified as royalty
43
I call it a power and not a right since it meets the definition of a power contained in the Restatement of Property
§ 3 (1936) since it gives to the owner the ability to change the legal relation of another party in respect to a
property interest. 44
Day & Co. v. Texland Petroleum, Inc., 786 S.W.2d 667, 105 O.&G.R. 590 (Tex. 1990), overruling Pan American
Petroleum Corp., 163 Tex. 323, 355 S.W.2d 506 (1962). 45
Day & Co., note 44 supra; Bradshaw v. Steadfast Financial LLC, --- S.W.3d ---, 2013 WL 530969 (Tex. App.--Ft.
Worth). 46
See Williams & Meyers, note 10 supra at § 339. An excellent review of that long and somewhat tortured history
of defining the scope of the duty owed by the executive is provided by the court in Bradshaw, note 45 supra. 47
Manual of Terms, note 3 supra at 96. 48
See e.g., State National Bank of Corpus Christi v. Morgan, 135 Tex. 509, 143 S.W.2d 757 (1940); Lane v. Elkins,
441 S.W.2d 871, 33 O.&G.R. 344 (Tex. Civ. App.--Eastland 1969, writ ref'd n.r.e.).
payments or production payments be considered part of the bonus? Confusion may abound
because these payments may be labeled as a royalty bonus.49 These types of questions are
hard to answer in the absence of express leasehold language but may spawn litigation where
the owner of the bonus is not given its share of these payments.50 Parties to an oil and gas
lease should not be hamstrung or restricted to shoehorning their negotiated deal into the historic
notion of what a bonus is. But given the fact that the owner of the mineral estate is free to
convey to others the right to a bonus, the definitional issues will continue to arise as to whether
the leasehold economic benefits constitute a bonus that may have to be shared with the owner
of the bonus "stick."51
In today's world where "paid-up" leases are more commonly used is the up-front
payment made by the lessee a "bonus" payment or is it a blend of bonus and delay rentals.
Good lease drafting would define whether or not the payment is solely bonus or merely the
advanced payment of delay rentals, but in the oil and gas leases I have reviewed in the past 10
years, most of the leases are silent as to how the advanced payments are to be classified.
The fourth "stick" is the right to receive delay rental payments. As with the bonus "stick"
the inclusion of this "stick" by Professor Hemingway was undoubtedly influenced by the
ubiquitous inclusion of drilling and delay rental clauses in oil and gas leases for at least a
generation starting in the 1920's or so. A delay rental may be defined as:
A sum of money payable to the lessor by the lessee for the privilege of deferring the
commencement of drilling operations or the commencement of production during the
primary term of the lease.52
For "unless" delay rental clauses there is no payment obligation or covenant. The lessee may
either typically commence a well or make an accurate and timely delay rental payment prior to
the anniversary date to avoid the lease's automatic termination.53 Delay rentals have historically
involved nominal sums, although with larger acreage leases sizable delay rental payments may
be due. As noted above, because of the harsh consequences of the automatic termination rule
49
Williams & Meyers, note 10 supra at § 603; Sheppard v. Stanolind Oil & Gas Co., 125 S.W.2d 643 (Tex. Civ. App.--
Austin 1939). The Sheppard case is also notorious for suggesting that any royalty in excess of the usual 1/8th is
considered to be bonus. Fortunately, that misnomer has not caught on in the nomenclature. 50
See e.g., State National Bank, note 48 supra; Sheppard v. Stanolind Oil & Gas Co., 125 S.W.2d 643 (Tex. Civ. App.-
-Austin 1939). 51
See e.g., Griffith v. Taylor, 156 Tex. 1, 291 S.W.2d 673, 5 O.&G.R. 1371 (1956); Morriss v. First National Bank, 249
S.W.2d 269, 1 O.&G.R. 1371 (Tex. Civ. App.--San Antonio 1952, error ref'd n.r.e.). 52
Manual of Terms, note 3 supra at 248. 53
Williams & Meyers, note 10 supra at §§ 605-607.
for failing to commence a well or make an accurate and timely delay rental payment, lessees
have begun to utilize the "paid-up" lease. A "paid-up" lease is:
A lease effective during the primary term without further payment of delay rentals, the
aggregate of rentals for the entire primary term having been paid in advance. The delay
rental clause may be deleted from the lease if rentals are paid up, but it appears
generally preferable to leave the delay rental clause in the lease since striking the clause
may give rise to a covenant to drill an exploratory well. . . during the primary term.54
Are the cash payments made pursuant to a "paid-up" lease bonus or delay rentals or a
combination thereof? Where there are separate owners of the bonus and delay rentals which is
at least theoretically possible, would the lease's characterization of such payments be binding
on the bonus and/or delay rental owners who were not parties to the lease? Likewise where
there are non-executive mineral interest owners who own the right to a delay rental, can the
executive execute an oil and gas lease providing for no delay rental payments but merely a
bonus payment?55
The fifth "stick" is the right to receive royalty payments. I would have said it is the right
to reserve a royalty interest, since a royalty interest is an interest in real property that until
reserved or granted by the owner of the mineral estate is a "stick." But again there are some
conceptual difficulties treating the right to receive royalty payments as a constituent element of a
mineral estate. If the owner of the mineral estate exercises its development power, and has not
previously created a freestanding royalty interest, there are no royalty payments to be made.
The self-developing mineral estate owner will receive the profits, if any, of its entrepreneurial
spirits but in the absence of lease to itself there will be no royalty payment obligation.
The owner of the mineral estate is free to create a freestanding royalty interest prior to
the execution of a lease or reserve a royalty interest in the oil and gas lease itself. The owner is
also free to negotiate any other type of economic benefit during the lease negotiation process.
Because a royalty is payable upon initial production with no consideration of the costs of drilling
and operations it is clearly the preferred means by which the lessor receives payments.
Nonetheless, a lessor may seek a share of the profits of a particular lease development
program rather than just a share of the royalty from production. This may be accomplished by
the reservation of a "back-in working interest" whereby the owner of the interest will begin to
receive its share of the net profits of the drilling and production operations after the cost-bearing
working interest owners have achieved payout. In many circumstances, the lessor may own a
54
Manual of Terms, note 3 supra at 737. 55
See e.g., Gardner v. Boagni, 252 La. 30, 209 So.2d 11, 29 O.&G.R. 228 (1968).
royalty interest prior to payout which will be converted to a working interest ownership share
after payout. While originally used mostly in assignments and farmout agreements, back-in
interests are now appearing in oil and gas leases, albeit reasonably infrequently since lessees
are loath to give the lessor a risk-free share of the net profits.
III THE FEE SIMPLE DETERMINABLE/AUTOMATIC TERMINATION RULE
Because Texas follows the "absolute ownership" or "ownership in place" rule relating to
the mineral estate, interests carved out of the mineral estate including the leasehold estate are
also possessory estates.56 The treatment of both the mineral estate and the leasehold estate as
possessory was settled by the Texas Supreme Court in 1923. In a case dealing with whether a
leasehold estate was a separate taxable estate under the real property ad valorem tax the court
stated:
We do not regard it as an open question in this state that gas and oil in place are
minerals and realty, subject to ownership, severance, and sale while embedded in the
sands or rocks beneath the earth's surface, in like manner and to the same extent as is
coal or another other solid mineral.
The objection lacks substantial foundation that gas or oil in a certain tract of land cannot
be owned in place, because subject to appropriation, without the consent of the owner of
the tract, through drainage from wells on adjacent tracts. If the owners of adjacent lands
have the right to appropriate, without liability, the gas and oil underlying their neighbor's
land, then their neighbor has the correlative right to appropriate, through like methods of
drainage, the gas and oil underlying the tracts adjacent to their own. . . We do not think
that any distinction in principle lies between the title acquired under a grant of solid
minerals and the title acquired under a grant in the same form of gas and oil.57
The Texas Supreme Court went on to say in Stephens County that an oil and gas lease
conveyed to the lessee a base fee or what is commonly called a fee simple determinable estate
in all of the minerals then owned by the lessor.58 The lessor retains a possibility of reverter that
will become possessory upon the automatic termination of the oil and gas lease.59 The
automatic termination doctrine applies not only to the secondary term of the lease but as well to
the drilling and delay rental clause during the primary term of the lease. The commencement of
56
Not all states that treat the mineral estate as possessory in character treat the oil and gas lease as a possessory
estate. Williams & Meyers, note 10 supra at § 209. If a state treats the mineral estate as incorporeal or non-
possessory, no interest created out of that can be possessory in nature. Id. 57
Stephens County v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W. 290, 292 (1923). 58
254 S.W. at 295. 59
Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188, 168 O.&G.R. 199 (Tex. 2003).
drilling operations, the payment of delay rentals, or the achievement of production in paying
quantities are all "limitations" on the duration of the estate and are not covenants. Thus failure
to comply with any limitation will automatically cause the lessee's fee simple determinable
estate to terminate and the lessor will become the owner of the fee simple absolute estate in the
minerals.
There are a number of important legal ramifications from treating the leasehold estate as
a fee simple determinable. The first is that the leasehold estate is not subject to being
abandoned by the lessee. Abandonment is a common law doctrine that applies to non-
possessory estates. While some early Texas cases suggested that leasehold estates could be
abandoned, once Texas adopted the fee simple determinable rule in Stephens County, those
cases were rightfully treated as no longer being applicable.60 As definitely stated in Rogers v.
Ricane Enterprises,:
Abandonment of title to real property is not recognized in Texas. . . . Thus title to real
property acquired under an oil and gas lease may not be abandoned.61
There is, however, the devotional limitation doctrine which suggests that an oil and gas lease
may be abandoned notwithstanding the 1000-year old common law rule that possessory estates
could not be abandoned. In Texas Co. v. Davis,62 an oil and gas lease was executed in 1901
that provided for a twenty-five year primary term with the typical secondary term language
allowing the lease to continue should minerals be produced in paying quantities. A single well is
drilled shortly after the lease is executed but after a few years the well is essentially shut down.
There is no mention of continued delay rental payments being re-instituted under the terms of
the lease. Prior to the end of the primary term, the lessor executes a top lease that leads to the
drilling of a successful oil well on the premises. In determining that the first lessee did not own
the fee simple determinable estate in the minerals even though the twenty-five year primary
term had not expired, the court used language suggesting that a leseee by not devoting itself to
mineral exploration, development and production activities basically causes the lease to
terminate since those are the purposes for which the lease was executed.63 When given an
60
The cases are collected in A.W. Walker, The Nature of the Property Interests Created by an Oil and Gas Lease in
Texas, 7 Tex. L.Rev. 359, 591 (1929). 61
Rogers v. Ricane Enterprises, Inc., 772 S.W.2d 76, 80, 108 O.&G.R. 331 (Tex. 1989). 62
Texas Co. v. Davis, 113 Tex. 321, 254 S.W. 304 (1923) 63
Texas Co. was one of six opinions decided by the Texas Supreme Court relating to basic oil and gas principles on
the same day in 1923. Stephens County, note 57 supra was one of those cases as was Humphreys-Mexia Co. v.
Gammon, 113 Tex. 247, 254 S.W. 296 (1923) which recognized the power of the owner of the unified estate to
reserve the mineral estate as a separate corporeal estate. In Robinson v. Jacobs, 113 Tex. 231, 254 S.W. 309
(1923), Munsey v. Marnet Oil & Gas Co., 113 Tex. 212, 254 S.W. 311 (1923) and Thomason v. Ham, 113 Tex. 239,
opportunity to reverse that decision the Texas Supreme Court merely distinguished it on the
facts clearly suggesting that in Texas a lease may be abandoned under the devotional limitation
doctrine.64
Another major ramification of the adoption of the fee simple determinable/automatic
termination rule is that equitable defenses are normally not available to preventing the leasehold
estate from terminating. This can apply to termination during the primary term through failure to
commence drilling operations or by timely and accurate payment of the delay rental or through a
lack of, or cessation of, production in the secondary term.65 There are a lot of cases finding that
being "a day late or a dollar short" in a delay rental payment could not be excused and the
leasehold estate would automatically terminate.66 Yet notwithstanding the inapplicability of
equitable defenses, Texas courts have come up with a number of exceptions to find that a lease
has not automatically terminated even though there has been a failure to either commence a
well or make a delay rental payment by the anniversary date.67 A number of rationales have
been proffered by the courts to avoid overruling the fee simple determinable rule. One is that
once the funds are transferred into the depository bank, the delay rental payments have been
made because the bank is the agent of the lessor.68 A second rationale is triggered by the
lessor's acceptance of a late or erroneous payment under the doctrine of "revivor" whereby the
old lease, having expired by the failure to make a timely and accurate delay rental payment is
revived and rendered effective again.69 A third rationale does not allow the lessor to engage in
actions that mislead the lessee causing a late or erroneous payment.70 This rationale has been
applied where the lessor sells a portion of her possibility of reverter, along with the economic
benefits under the lease, including the right to receive delay rental payments, but does so
through an ambiguous instrument throwing into doubt the fractional shares owned by the
grantor and grantee respectively.71 Finally, the courts have adopted the "mailbox" rule whereby
254 S.W. 316 (Tex. 1923), Justice Greenwood followed his holding in Texas Co. by allowing leases to be terminated
through an abandonment-type analysis. 64
Rogers v. Ricane Enterprises, Inc., 884 S.W.2d 763, 130 O.&G.R 415 (Tex. 1994). 65
Williams & Meyers, note 10 supra at § 606. 66
See e.g., Gillespie v. Bobo, 271 F. 641 (5th Cir. 1921); Humble Oil & Refining Co. v. Mullican, 144 Tex. 609, 192
S..2d 770 (1946); Young v. Jones, 222 S.W. 691 (Tex. Civ. App.--El Paso 1920). 67
See e.g., Hamilton v. Baker, 147 Tex. 240, 214 S.W.2d 460 (1948); Humble Oil & Refining Co. v. Harrison, 146 Tex.
216, 205 S.W.2d 355 (1947); Mitchell v. Simms, 63 S.W.2d 371 (Tex. Comm'n App. 1933). 68
Carroll v. Roger Lacy, Inc., 204 S.W.2d 307, 25 O.&G.R. 225 (Tex. Civ. App.--Tyler 1966, error ref'd n.r.e.). 69
Brannon v. Gulf States Energy Corp., 562 S.W.2d 219, 59 O.&G.R. 320 (Tex. 1977); Mitchell v. Simms, 63 S.W.2d
371 (Tex. Comm'n App. 1933). 70
Humble Oil & Refining Co. v. Harrison, note 67 supra. 71
Id.. The court did not explore the possibility that the lessee could have filed an interpleader action prior to the
anniversary date by placing the delay rental payments into the registry of the court to distribute after the
the placement of the delay rental check into the mail prior to the anniversary date will be
presumed to have been received by the lessor even if the letter is lost or delayed in delivery.72
Another judicial exception to the fee simple determinable/automatic termination rule was
the creation of the temporary cessation of production (TCOP) doctrine.73 If a lease is in the
secondary term, production in paying quantities is required in order to avoid the automatic
termination of the fee simple determinable estate. Since oil or gas wells do not produce 365
days/year lessee would assert that upon a cessation of production in the secondary term there
would be an automatic termination of the leasehold estate.74 As originally developed, the TCOP
doctrine was somewhat limited because it would be triggered only where the cessation of
production was "necessarily unforeseen and unavoidable"75 or "due to sudden stoppage of the
well or some mechanical breakdown of the equipment used in connection therewith, or the
like."76 These conditions precedent to the application of the TCOP doctrine necessarily limited
its application and only provided a reasonably limited exception to the fee simple
determinable/automatic termination rule. The Texas Supreme Court, however, in Ridge Oil Co.,
Inc. v. Guinn Investments, Inc.,77 appeared to eliminate both of those conditions in applying the
TCOP doctrine to avoid lease termination although the court never comes out and says that the
cause of the cessation is irrelevant. Regardless of the cause of the cessation, a party asserting
the TCOP doctrine will still have to show that the lessee attempted to remedy the problem
causing the cessation and successfully re-attained production within a reasonable time.78 If the
lease contains savings provisions that are triggered by the cessation of production, the lessee
must comply with the requirements of those provisions and may not rely on the common law
TCOP doctrine to avoid lease termination.79
respective fractional shares were decided. Some earlier court decisions clearly suggested that using the
interpleader mechanism is required to avoid lease termination. Perkins v. Magnolia Petroleum Co., 148 S.W.2d
266 (Tex. Civ. App.--Galveston 1941, error dism'd j.c.). 72
Corley v. Olympic Petroleum Corp., 403 S.W.2d 537, 25 O.&G.R. 73 (Tex. Civ. App.--Texarkana 1966, error ref'd). 73
Lessees responded to the fee simple determinable/automatic termination rule by drafting "savings" provisions
for oil and gas leases that would prevent a lease from terminating in the absence of production in paying
quantities. Bruce M. Kramer, Keeping Leases Alive in the Era of Horizontal Drilling and Hydraulic Fracturing: Are
the Old Workhorses (Shut-in, Continuous Operations, and Pooling Provisions) Up to the Task? 49 Washburn L.J.
283 (2010). 74
The same issues arise when it comes to defeasible term interests which have similar language in their habendum
clauses as do leases. See Bruce M. Kramer, The Temporary Cessation of Production Doctrine: A Practical Response
to an Idelological Dilemma, 43 Baylor L.Rev. 519 (1991). 75
Scarborough v. New Domain Oil & Gas Co., 276 S.W. 331 (Tex. Civ. App.--El Paso 1925, writ dism'd w.o.j.). 76
Watson v. Rochmill, 155 S.W.2d 783 (Tex. 1941). 77
148 S.W.3d 143, 161 O.&G.R. 1135 (Tex. 2004). 78
Id. 79
Samano v. Sun Oil Co., 621 S.W.2d 580, 70 O.&G.R. 64 (Tex. 1981).
IV SOME, BUT CLEARLY NOT ALL, PROBLEM AREAS
There are many title and conveyancing issues that arise in part due to the way that
Texas treats a mineral estate and its five constituent elements. Many of them will be discussed
by other speakers at this conference. The following two problem areas are likely to continue to
create headaches for those trying to ascertaining title in the oil and gas arena. There aren't any
easy solutions to these problems but a title examiner needs to be aware of them.
A FRACTION OF VERSUS FRACTIONAL ROYALTY80
If a party owns a fraction of a royalty that party is entitled to that fraction times whatever
the leasehold royalty may be. Thus if I own a 1/8 of the royalty and the leasehold royalty is 1/4,
I am entitled to 1/32nd royalty payment. That is a fraction of royalty. If I own a fractional royalty,
my ownership fraction is fixed. If I own a 1/8 royalty I am entitled to 1/8th of the production or
1/8th of the payment from the sale of the hydrocarbons. That is a fractional royalty. Besides the
obvious difference in the fraction to be paid or delivered, there is another important ramification
in determining whether a freestanding royalty interest is a fraction of or a fractional royalty. That
ramification is that the owner of a fraction of royalty will be owed a fiduciary duty by the
executive since the amount of leasehold royalty will have a direct impact on the economic
benefits to be received by the freestanding royalty interest owner.81 Where a party owns a
fractional royalty interest, the amount of lease royalty will be irrelevant to determining the
fractional royalty interest owner's economic benefits.
Obviously good drafting of the deed creating the freestanding royalty will avoid
subsequent issues but the volume of cases reaching the appellate court level in Texas and
other states suggests that careful drafting is not universally followed. An obvious way to avoid
subsequent issues is merely to grant or reserve a 1% royalty on all the oil and gas produced
and saved. There would be no doubt that such a royalty is a fractional royalty. The following
examples, however, come from Texas cases which found the royalty to be a fractional royalty:
a fee royalty of 1/32 of the oil and gas82;
an undivided one-sixteenth royalty interest of any oil, gas or minerals that may hereafter
be produced83;
one-quarter of the one-eighth royalty interest84
80
These issues and all of the cases are discussed at length in Williams & Meyers, note 10 supra at § 327. 81
Range Resources, Inc. v. Bradshaw, 266 S.W.3d 490, 171 O.&G.R. 194 (Tex. App.--Ft. Worth, pet denied), on
subsequent appeal, Bradshaw v. Steadfast Financial LLC, --- S.W.3d ---, 2013 WL 530969 (Tex. App.--Ft. Worth). 82
Arnold v. Ashbel Smith Land Co., 307 S.W.2d 818, 8 O.&G.R. 646 (Tex. Civ. App.--Houston 1957, error ref'd n.r.e.). 83
Caraway v. Owens, 254 S.W.2d 425, 2 O.&G.R. 364 (Tex. Civ. App.--Texarkana 1953, error ref'd).
an undivided 1/24 of all the oil, gas and other minerals produced, saved, and made
available for market85
While examples 1, 2 and 4 above would not raise any questions as to the interest being a
fractional royalty, the same cannot be said for example 3.
As with all written instruments one must first look to the language used by the parties to
create the freestanding royalty interest to determine whether or it is a fraction of or a fractional
royalty. There is a marked difference between the phrase: "an undivided 1/16th royalty interest"
and the phrase: "an undivided 1/16th interest in and to all of the royalty." The former creates a
fractional royalty while the latter creates a fraction of the royalty.86
The jurisprudential confusion as to whether a deed creates a fraction of or a fractional
royalty stems from Brown v. Havard.87 The deed reserved: "an undivided one-half
nonparticipating royalty (Being equal to, not less than an undivided 1/16th) of all the oil, gas and
other minerals, in, to and under or that may be produced from said land."88 The simple question
was whether the reservation was a fraction of (1/2 of the leasehold royalty) or a fractional (1/16)
royalty. A divided court found that the reservation was ambiguous and concluded that the
reference of the fractional royalty of 1/16th reflected the intent of the parties. Because the vast
majority of deed interpretation cases do not find the language ambiguous, the Brown v. Havard
opinion should not be determinative although it is a case that suggests a constructional
preference for a fractional royalty where there are two different and irreconcilable descriptions
contained in the granting or reservation clause.
A number of decisions prior to Luckel v. White,89 tended to follow the granting clause
prevails rule so that where you had two inconsistent descriptions, the description contained in
the granting language would prevail.90 Luckel involved a royalty deed that contained
inconsistent instructions as to whether the royalty interest being conveyed was to be a fractional
1/32nd royalty or a 1/4th of the leasehold royalty. Luckel applies the harmonizing canon of
construction to conclude that the future lease clause reference to a 1/4 of the royalty reflected
84
Hawkins v. Texas Oil & Gas Corp., 724 S.W.2d 878, 889, 97 O.&G.R. 399 (Tex. App.--Waco 1987, error ref'd
n.r.e.). 85
Miller v. Speed, 259 S.W.2d 235, 1 O.&G.R. 951 (Tex. Civ. App.--Eastland 1952). 86
Williams & Meyers, note 10 supra at § 327.2 87
593 S.W.2d 939, 65 O.&G.R. 249 (Tex. 1980). 88
Id. at 940. 89
819 S.W.2d 459, 115 O.&G.R. 121 (Tex. 1991). 90
These pre-Luckel cases, Stag Sales Co. v. Flores, 697 S.W.2d 493, 89 O.&G.R. 174 (Tex. App.--San Antonio 1985,
writ ref'd n.r.e.); Farmers Canal Co. v. Potthast, 587 S.W.2d 805, 64 O.&G.R. 180 (Tex. Civ. App.--Corpus Christi
1979, writ ref'd n.r.e.) relied on Alford v. Krum, 671 S.W.2d 870, 81 O.&G.R. 189 (Tex. 1984) for the application of
the granting clause prevails canon. Alford was overruled in Luckel and replaced with the harmonizing and four
corners canons.
the parties' intent to give a fraction of the royalty and not a fractional royalty.91 The post-Luckel
cases reflect the uncertainty that the harmonizing and four corners canons place upon deed
interpretational issues. Courts may focus on grammar, syntax, the inclusion or omission of
commas to determine whether or not the parties intended to grant or reserve a fraction of royalty
or a fractional royalty. This is especially evident where the royalty deeds use the double or triple
fraction approach taken by older form mineral deeds and which was used in Luckel.
In Hausser v. Cuellar,92 the disputed royalty deed provided in the granting clause that
the Grantees are to share "an undivided (1/2) interest in and to all of the oil royalty, gas royalty. .
. that may be produced and mined from the following described land. . . "93 The subject-to
clause described the conveyed interest as: "one-half (1/2) of all the oil royalty, gas royalty . . ."94
The future lease clause described the interest the Grantees were to receive as "one-sixteenth
(1/16) part of all oil, gas and other minerals taken and saved. . . ."95 Thus there are two
instructions that a fraction of royalty was intended to be conveyed and one instruction that it was
a fractional royalty. The en banc San Antonio Court of Appeals had to deal with an earlier
decision, Neel v. Killam Oil Co., Ltd.,96 which contained nearly identical multiple fraction
language. The Neel granting clause conveyed "an undivided one-half (1/2) interest in and to all
of the . . . royalty," the subject to, cover and includes clause said "one-half (1/2) of all the . . .
royalty . . . to be paid under the terms of said lease. . . " and the future lease clause referred to
the grant of a 1/16 royalty.97 The Neel opinion found that the parties intended to grant a
fractional 1/16th royalty. Hausser overrules Neel to the extent that the Neel court did not use
the harmonizing and four corners canons of construction. It then simply states: "In the instant
case, after harmonizing all the parts of the Escamilla deed, we conclude the Escamilla deed
conveys an undivided one-half royalty interest to the Haussers."98 Besides misstating what was
granted as a 1/2 royalty instead of a 1/2 of royalty, the San Antonio Court provides no guidance
as to why it finds that the granting clause language prevails over the inconsistent and, in my
opinion, irreconcilable instructions in the future lease clause. When it comes to royalty, as
opposed to mineral deeds, one cannot reconcile the differences between the granting and
91
Luckel is analyzed in Bruce M. Kramer, The Sisyphean Task of Interpreting Mineral Deeds and Leases: An
Encyclopedia of Canons of Construction, 24 Tex. Tech L.Rev. 1, 65-72 (1993). 92
345 S.W.3d 462 (Tex. App--San Antonio 2011). 93
Id. at 467. 94
Id. at 467-68. 95
Id. 96
88 S.W.3d 334, 156 O.&G.R. 85 (Tex. App.--San Antonio 20012, pet. denied). 97
Id. at 336. 98
345 S.W.3d at 468-69.
subject to clauses since they describe the same present nonpossessory estate in the royalty. It
would be highly unlikely that the grantor intended to convey two separate royalty interests, one
during the life of any existing royalty and a second that would arise should the first lease expire
and a second lease be executed.
There have been several recent cases that have attempted to resolve the
interpretational issue raised by either having multiple fractions or by having mixed signals within
the granting clause. In Moore v. Noble Energy, Inc.,99 the court reaches, in my opinion, a
defensible result but does so in a less than satisfying manner. In 1955, Moore conveys 160
acres to the Veterans Land Board and reserves "a one-half non-participating royalty interest
(one-half of one-eighth of production). Noble executes a lease with the owner of the mineral
interest with a 3/16th royalty. Moore files this action asserting that he is entitled to 1/2 of the
3/16th and not a 1/16th royalty. Moore claims that the deed is ambiguous while Noble argues
that the language is unambiguous and reserves a fixed 1/16th royalty. The trial court grants
Noble's motion for summary judgment.
Whether an instrument is ambiguous is a question of law for the court.100 Ambiguity is
determined after applying the pertinent rules or canons of construction to see if there are two or
more reasonable interpretations of the relevant language.101 The court then notes various
canons of construction and says there are three possible interpretations: 1. 1/2 NPRI, 2. 1/2 of
lease royalty or 3. 1/16th fixed royalty. The reservation does not identify the substances for
which the royalty is being created, although Noble concedes that its natural gas production is
subject to the Moore's royalty interest.
The court concludes without much analysis that the language of the deed
unambiguously means that the Moores reserved a fixed 1/16th royalty interest.102 The court
emphasizes that the language of the 1955 deed suggests that a single fractional royalty was
reserved. The court distinguishes Brown v. Havard,103 which contained the additional language
"being equal to, not less than an undivided 1/16th)" because of the lack of that language
showing that the reserved royalty could be greater than the fixed fraction. Brown v. Havard is
the leading Texas Supreme Court opinion on this issue and reached its conclusion only after
99
372 S.W.3d 644 (Tex. App.--Amarillo 2012). 100
See Friendswood Development Co. v. McDade & Co., 926 S.W.2d 280, 282 (Tex. 1996). 101
See Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589, 135 O.&G.R. 307 (Tex. 1996). 102
For other recent cases dealing with the fractional versus fraction of royalty see Range Resources Corp. v.
Bradshaw, 266 S.W.3d 490, 171 O.&G.R. 194 (Tex. App.--Ft. Worth 2008, pet. denied); Coghill v. Griffith, 358
S.W.3d 834 (Tex. App.--Tyler 2012, pet. denied); Sundance Minerals, L.P. v. Moore, 354 S.W.3d 507 (Tex. App.--Ft.
Worth 2011, pet. denied). 103
593 S.W.2d 939, 65 O.&G.R. 249 (Tex. 1980).
finding that its deed language was ambiguous. The court adds that while some deeds can
create ambiguities relating to whether a fractional or fraction of royalty has been reserved,104 no
such ambiguity exists in this case. As for the alternative interpretation that the deed reserved a
1/2 freestanding royalty, the court suggests that such a large royalty reservation would clearly
discourage future leasing of the premises which was clearly contemplated by the parties to the
1955 deed.105
In Hernandez v. El Paso Production Co.,106 the court applied the Luckel harmonization
and four corners canons to interpret three-grant royalty deed where the granting clause refers to
a 1/16th royalty, the subject to clause 1/2 of royalty and the future lease clause 1/2 of 1/8 or
1/16th royalty. The court treats the multiple fractions as a product of the mistaken assumption
that leasehold royalty will always be 1/8th. It thus reconciles all of the different signals as
evincing an intent to grant a 1/2 of royalty notwithstanding the granting clause's clear signal that
a fractional 1/16th royalty was to be conveyed.
In Coghill v. Griffith,107 the deed contains not three, but five, different signals as to
whether the grantor intended to reserve a fractional 1/64th royalty or a 1/8th of royalty. Only
one of the five signals, albeit the one in the future lease clause which had been triggered by the
execution of a new lease on the premises, showed an intent to give a fractional 1/64th royalty.
Applying the Luckel approach the court concludes that a fraction of royalty was intended to be
reserved because even where the fractional royalty language appears, the clause shows that
the fractional royalty was intended to be a minimum royalty and not the maximum royalty in the
event of a future lease.108
There is little consistency in the results of these fractional versus fraction of royalty
cases. The language of the instruments do not always follow the same template in that in some
deeds the fraction of language appears in the granting clause while the fractional language
appears in the future lease clause while in other deeds the language is reversed. Likewise,
where there is a single clause but multiple signals, sometimes set off in parenthetical phrases, it
104
Nugent v. Freeman, 306 S.W.3d 167, 8 O.&G.R. 40 (Tex. Civ. App.--Eastland 1957, writ ref'd n.r.e.). The court's
analysis relies heavily on Patrick H. Martin & Bruce M. Kramer, Williams & Meyers Oil and Gas Law § 327.2 (2012). 105
While the court is correct in its common sense view that a 1/2 freestanding royalty would be a large
disincentive for those seeking to produce hydrocarbons from the tract, courts have found such large royalty
fractions where the language was clear. See Gavenda v. Strata Energy Inc., 705 S.W.2d 690, 88 O.&G.R. 568 (Tex.
1986). 106
2011 Tex. App. LEXIS 2841 (Tex. App.--Corpus Christi April 14, 2011, rev. denied). 107
358 S.W.3d 834 (Tex. App.--Tyler 2012, pet. denied). 108
For other cases dealing with this same issue see Sundance Minerals, L.P. v. Moore, 354 S.W.3d 507 (Tex. App.--
Ft. Worth 2011, pet. denied); Hudspeth v. Berry, 2010 Tex. App. LEXIS 5641 (Tex. App.--Ft. Worth July 15, 2010);
Range Resources Corp. v. Bradshaw, 266 S.W.3d 490, 171 O.&G.R. 194 (Tex. App.-- Ft. Worth 2008, rev. denied).
is hard to predict whether a court will find that a fractional or fraction of royalty has been granted
or reserved. That is one of the ramifications of following the Luckel interpretational methodology
to resolve inconsistent language contained within the four corners of a single deed.
B THE MINERAL/ROYALTY DICHOTOMY
Altman v. Blake, the case that set forth the five essential attributes of the mineral estate
did so in the context of a dispute as to whether the interest reserved was a mineral interest or a
royalty interest. The reason for such disputes is obvious, an owner of a fractional or fraction of
royalty interest is entitled to its share of total production. The owner of a mineral interest is
entitled to its share of the leasehold royalty. Mineral/royalty dicohtomy issues arise almost
exclusively due to poor draftsmanship. The parties to a deed should know whether they intend
to grant a mineral or royalty interest and there are simple ways to describe one or the other.109
For example, if one intends to convey a mineral estate using the language "in, on, and under
the described land" is a very strong signal that a mineral estate is being conveyed.110 But there
are many cases dealing with the language "in and under and that may be produced from" which
combines mineral signals, in and under, with royalty signals, that may be produced from.111
Likewise, if one includes specific rights of ingress and egress, including a description of the
easement of surface access, it is more likely to be treated as a mineral interest conveyance.112
The difficult cases arise where the deed purports to grant or reserve a fractional interest
in some, but not all of, the five Altman attributes.113 Typically, the introductory language to these
types of deeds will indicate that a mineral interest is being granted or reserved, but the following
deed language raises questions as to whether the interest is really a mineral or a royalty
interest. There are seemingly two competing approaches to resolving the mineral/royalty
dichotomy that co-exist in Texas. The first is represented by Watkins v. Slaughter.114 The
granting clause provided in part:
109
Williams & Meyers, note 10 supra at § 304 describes in more detail the various ways in which the parties can
clearly grant either a mineral interest or a royalty interest. 110
See Altman v. Blake, 712 S.W.2d 117, 91 O.&G.R. 346 (Tex. 1986); Richardson v. Hart, 143 Tex. 392, 185 S.W.2d
563 (1945). 111
Williams & Meyers, note 10 supra at § 304.5. 112
Richardson v. Hart, note 111 supra; Prairie Producing Co. v. Schlachter, 786 S.W.2d 409, 112 O.&G.R. 522- (Tex.
App.--Texarkana 1990, writ denied). It is, however, not unusual for royalty deeds to give the owner a more limited
right of access to the wellsite. 113
Williams & Meyers, note 10 supra at § 304.10. 114
144 Tex. 179, 189 S.W.2d 699 (1945). For an earlier case dealing with a similar type of reservation that reaches
a different result see Klein v. Humble Oil & Refining Co., 126 Tex. 450, 86 S.W.2d 1077 (1935). Between Klein and
Watkins, the Texas Supreme Court made it clear that what we now refer to as the five constituent elements of a
mineral estate could be individually granted or reserved in Schlittler v. Smith, 128 Tex. 628, 101 S.W.2d 543 (Tex.
Comm'n App. 1937, opinion adopted).
[T]he grantor retains title to a 1/16 interest in and to all of the oil, gas and other minerals
in and under and that may be produced from said land; . . . the grantor . . . shall not
receive any part of the money rental paid on any future lease; and the grantee . . . shall
have authority to lease said land and receive the cash bonus and rental; and the grantor
. . . shall receive the royalty retained herein only from actual production of oil, gas or
other minerals. . . 115
The issue is whether the grantor was the owner of a 1/16th non-executive mineral interest or a
1/16th royalty. The court does not find the deed to be ambiguous although there is some
conflicting language as to whether a mineral or royalty interest was to be reserved. Instead it
applies a four corners/harmonizing canon in resolving the conflicting language. Having given
away the executive power, the right to receive delay rentals and the right to receive bonus, the
court concludes that a royalty interest was reserved. The court does not emphasize the
language "only from actual production" but later cases treat that as determinative regarding the
court's conclusion that a royalty interest was reserved. Subsequent courts of appeals decisions,
however, did not go along with the Watkins approach that where the executive power and the
right to receive bonus and delay rentals were removed the interest was a royalty and not a
mineral interest.116
In Altman v. Blake,117 the court's approach to resolving the mineral/royalty dichotomy
where you have a general description of a mineral interest followed by the removal of some, if
not all of the other constituent element, is different than the Watkins four corners/harmonizing
approach. The Altman granting clause provided in part:
[Grantor] . . . does hereby grant . . . unto [Grantee] . . . an undivided one-sixteenth (1/16)
interest in and to all of the oil, gas and other minerals in and under and that may be
produced . . . But does not participate in any rentals or leases . . . with the rights of
ingress and egress at all times for the purpose of mining, drilling, exploring, operating
and developing. . . "118
Instead of applying the Watkins approach and looking especially at the language providing a
means of ingress and egress to support its ultimate conclusion that a mineral interest was being
conveyed, the court went to its five constituent element approach and said that even where the
owner has only the right to receive royalty it still has a mineral estate.
115
144 Tex. at 181, 189 S.W.2d at 699. 116
See e.g., Grissom v. Guertersloh, 391 S.W.2d 167, 23 O.&G.R. 446 (Tex. Civ. App.--Amarillo 1965, writ ref'd
n.r.e.); Miller v. Speed, 259 S.W.2d 235, 1 O.&G.R. 951 (Tex. Civ. App.--Eastland 1952, n.w.h.). 117
712 S.W.2d 117, 91 O.&G.R. 346 (Tex. 1986). 118
712 S.W.2d at 117-18.
As Dean Smith has commented:
Although the Altman deed, unlike the deed in Watkins, created a fractional interest with
traditional mineral fee attributes in addition to the right to receive royalty, subsequent
decisions have not distinguished the cases on this basis. They have generally taken the
Altman mode of analysis in construing deeds that use language indicative of a fractional
mineral fee, followed by provisions stripping various rights from the fee and leaving the
owner with only the right to receive royalty. The royalty is characterized as the one
remaining attribute of the original fractional mineral fee.119
The subsequent case that Dean Smith refers to is French v. Chevron U.S.A., Inc..120
Again the granting clause used the phrase "in, under and that may be produced from" to
describe the interest being conveyed. But unlike Altman, the granting clause in addition to
removing from that fractional interest the executive power and the rights to receive bonus and
delay rental, also stated: "this conveyance is a royalty interest only. . . "121 Notwithstanding the
seemingly clear signal that a royalty interest has been conveyed, the court cited to Altman for
the proposition that by expressly removing three of the five elements, and by implication the
fourth, namely that the development right follows the executive power because it is correlative to
it, the parties still intended the transfer to be a mineral estate transfer and not a royalty transfer.
The French court does not overrule Watkins although it appears to reach a contradictory
opinion.
The Texas Supreme Court added to the somewhat confused jurisprudence regarding the
mineral/royalty dichotomy when it decided Temple-Inland Forest Products Corp. v. Henderson
Family Partnership, Ltd..122 Temple-Inland involved two deeds that conveyed a 15/16th interest
"in, to and of all oil, gas and other minerals . . on, in, under and that may be produced from"
several described tracts and then stated: "[i]n respect to the undivided one-sixteenth [1/16] part
of and interest in the oil, gas and other minerals retained and reserved by the Grantor . . . it is
understood and agreed that said one-sixteenth [1/16th] interest is and shall always be a royalty
interest . . . "123 There was additional language making it clear that the grantor's interest would
not have the executive power nor the right to share in the bonus and delay rental payments.
Specially noting that French had not overruled Watkins, the court using a four
corners/harmonizing approach concluded that a royalty interest had been reserved. The court
119
Smith & Weaver, note 7 supra at 3-24. 120
896 S.W.2d 795, 134 O.&G.R. 111 (Tex. 1995). 121
896 S.W.2d at 796. 122
958 S.W.2d 183, 137 O.&G.R. 589 (Tex. 1997). 123
958 S.W.2d at 184.
does not account for the missing 1/16th mineral interest which is presumptively still owned by
the grantor in addition to its 1/16th royalty interest. The court could have followed French and
Altman and found that notwithstanding the references to a royalty interest being reserved it was
really a mineral interest. But keeping alive Watkins, however, the court is maintaining two
approaches to resolving mineral/royalty dichotomy cases.124
124
The Court of Appeals have tried to apply the mixed signals from Temple-Inland and French. See e.g., In re Estate
of Slaughter, 305 S.W.3d 804 (Tex. App.--Texarkana 2010); Hamilton v. Morris Resources, Ltd., 225 S.W.3d 336, 168
O.&G.R. 189 (Tex. App.--San Antonio 2007); Garza v. Prolithic Energy Co., L.P. 195 S.W.3d 137, 165 O.&G.R. 332
(Tex. App.--San Antonio 2006, rev. denied); Bank One, Texas, National Association v. Alexander, 910 S.W.2d 530,
132 O.&G.R. 402 (Tex. App--Austin 1995, writ denied).