In this case, the Court of Appeals drew a distinction between a royalty owner and a nonparticipating royalty interest (“NPRI”) and
of Tex. Nat. Res. Code § 91.402 and even maintenance of the non-operating party’s leases may come into question. The Texas Supreme Court has declined to address the Court of Appeals decision and these questions will remain unanswered.
distinguished the San Antonio Court of Appeals decision in Prize Energy Res., L.P. v. Cliff Hoskins, Inc., 345 S.W.3d 537 (Tex. App.—San Antonio 2011, no pet.). Prize Energy dealt with a similar situation, but in the context of an unleased mineral interest subject to an NPRI. The Devon court asserted that the Prize Energy case was different than the case at hand because the royalty interest in Prize Energy was an NPRI burdening an unleased interest, and was not a contractual royalty interest reserved in a lease. The Court of Appeals explained that because the NPRI does not relate to a particular lease, unlike a lease royalty interest or an overriding royalty interest, it does not end when the lease ends, rather it is generally “tied to the land.” Thus, in Prize Energy , it didn’t matter that the defendants did not have a lease with the plaintiffs; rather, the plaintiff was a payee as soon as someone drilled a producing well on the land. In Devon Energy Prod. Co., L.P. v. Apache Corp. , the Court of Appeals established that an operator has no statutory duty to pay royalties to a nonparticipating cotenant’s “third-party” lessor. Instead, the third-party lessor must seek payment from its own lessee. However, the court’s decision did not address the nonparticipating cotenant’s obligation to pay a landowner its cost-free royalty prior to payout. Unless the lessees have specifically agreed in an operating agreement or otherwise that the operator will pay the landowner royalty prior to payout, the question of when a nonparticipating working interest owner must pay its lessor remains unanswered. It is now clear that the operator is under no obligation to pay a third-party lessor under the Texas Division Order Statute, and the nonparticipating cotenant lessee is not entitled to any proceeds from production until payout. Thus, a third- party “cost-free” royalty owner could effectively be forced to bear the cost of drilling and operating the well until such time as payout occurs. On the other hand, to avoid dispute, the best practice may be for the nonparticipating cotenant to pay the lessor’s royalty both before and after the well pays out. Otherwise, a number of additional issues, such as a breach Key Takeaways
About the Authors:
Eli Kiefaber Eli Kiefaber is a partner with Kiefaber & Oliva LLP. Eli focuses his practice on oil and gas matters, including acquisition and divestiture of oil and gas assets, title opinions, joint operating agreements, federal leases, pooling and unitization issues. Eli is
licensed to practice law in Texas, Oklahoma, Colorado and Ohio, is a regular speaker on issues relating to the development of unconventional shale plays and has given a variety of presentations regarding legal issues relating to oil and gas development. Eli earned his B.A from Kenyon College and his J.D., with honors, from Marquette University Law School.
Zachary Oliva Zachary Oliva is a partner with
Kiefaber & Oliva LLP. Zack focuses his practice on energy and corporate law. He regularly assists clients in the drafting of oil and gas title opinions, purchase and sale agreements and contract interpretation. Additionally,
he assists clients with the negotiation, drafting and review of business formations, contracts and service agreements. Zack earned his B.A. from The Ohio State University and his J.D. from Capital University Law School. He is licensed to practice in New Mexico, Ohio and Texas.
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G r o w t h T h r o u g h E d u c a t i o n - O c t o b e r / N o v e m b e r / D e c e m b e r 2 0 1 8
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