Multiple companies leasing in undivided section in Texas

Law & Legal
1

Assume two unrelated companies, A and B, have leased all of the minerals in an undivided section in Texas, with Company A holding approximately 80% of the total acreage and Company B holding 20%.

1.) If Company A drills and establishes a producing horizontal well without Company B’s consent/cooperation/participation, what is the fate of a mineral owner who leased to Company B during the term of the lease and after it expires?

2.) If Company B were to drill a vertical well without the consent/cooperation/participation of Company A, what would be the fate of the mineral owner who leased to Company B with regard to production from Company A’s well?

3.) Would it be necessary to craft special language to protect a mineral owner like one who leased to Company B from having his leased mineral interest contribute more than a 1/5 of the size of a standard drilling unit, i.e., preventing his minerals from being dedicated to a vertical well to the exclusion of benefiting from production from Company A’s horizontal well after payout?

“Leasing to Different Oil Companies” Suppose George decides to lease his undivided interest to a different oil company. In other words, Harriet leases to the ABC oil company, and George leases to the XYZ oil company. If ABC enters and drills a producing well, does the XYZ company owe George a royalty from production even though XYZ did not participate in the well? In Texas, the answer is unclear. No appellate cases have address the issue. If the oil company taking the lease from George (XYZ) does not join with the ABC in drilling and operating the well, the case law indicates that the nonconsenting oil company’s interest (XYZ in this case) will be viewed as that of a nonconsenting cotenant who refuses to lease his or her land. Here is how Texas Jurisprudence III describes the situation. As a general rule, a cotenant may develop oil and gas property without the consent of his or her cotenants, subject to the rule of accounting. Likewise, the same cotenant may lease his or her interest without joinder of other cotenants. The lessee becomes a cotenant with the other cotenants and has the right to develop and produce the property subject to the rule of accounting. The effect of this rule on George’s and Harriett’s royalty is unclear if XYZ or ABC enters and drills without the others consent.

2

First, the economics of the scenarios would make it very unlikely for either company to drill without some sort of partnership/JOA (especially scenario #2 - very unlikely). The risk is often too high to carry that big of an interest while drilling. Nonetheless, in scenario #1 my understanding is that the drilling company “A” would be responsible for 100% of the drilling costs, and would get 100% of the well revenues until the well pays out. After payout, the non-drilling company “B” would become a 20% working interest owner, with the applicable royalty percentage going to mineral owners leased by “B”.

3

Peakoil, Thank you very much for your analysis. It seems prudent to include language which would discourage Company B from trying to wait for payout, etc.

4

Your royalty would not be affected by Company B electing to non-consent the well. Company A would still have to pay all royalties, even during the Payout period.

5

Thank you, Steve Durrett! Does your analysis apply to Texas?

6

The basic premise of Consent vs Non-Consent applies only to Working Interests, not to Royalty Interests. If your minerals are included in the spacing unit, you will be entitled to your royalty no matter who drills the well. If the Company you leased to elects not to participate in the well, then the other Company will assume the royalty burdens for the entire spacing unit. That holds true wherever you are.

7

Thanks, Steve Durrett! The minerals are in an undivided section. I wonder what would happen in the very unlikely event both A & B were to drill wells?

8

The State regulatory agency (in your case, the Texas Rail Road Commission) sets spacing rules that govern how many wells may be drilled. Companies can’t just drill wherever they want. If the agency allows multiple wells in the same spacing unit, you would be paid from all of them.

3 Likes
9

That is very reassuring. Thank you for sharing your expert level knowledge.

10

Thank you, Steve.

Have you ever heard of an operator treating one mineral interest owner as a non consenting co-tenant even though that mineral owner actually consented to the same terms as all the other mineral owners? I signed the same lease as the rest of my family, but the operator refuses to pay me the same bonus money and is treating me as non-consenting mineral owner. (Texas)

thank you,

Paula Kothmann

11

PaulaKolthmann, Be sure to click on the linked paragraph in the original post which will open to Texas A&M publication “Rights and Responsibilities of Mineral Cotenants”.
Do you have any emails or printed documents from the lessee agreeing to pay you the same bonus as your relatives? Has your lease actually been recorded at the county clerk’s office? Did the company offer to pay you a reduced bonus because of the oil crash? Did you initially refuse the bonus offered to your relatives?

12

Paula,

Did you get your lease back to them within the allowed timeline? Other than that, I can’t think of any reason why you should be treated any differently if you truly signed the same lease as everyone else.

There may well be more to the story and you should definitely follow through on AJ11’s suggestions.