Overriding Royalty Interest - My novice is showing. : )

Oil and Gas Leasing Help
#1

I have a note my Grandfather wrote to himself and it reads like this:

1-31-1966 I sold to Midwest Oil Corporation my undivided 1/2 interest in a 40 acre

oil and gas lease covering the following described land to-wit: The NW4 of NW4 of section 16, T-7S-R32E, Roosevelt County, New Mexico for $750.00 cash plus 1/32nd of 7/8th overriding royalty. 9-16-1957 I purchased my interest for $9.20.

Can someone please translate that for me, keeping in mind the title of this discussion? : )

I looked up overriding royalty in the glossary and it didn't seem to make sense to me either.

My Grandfather was a full time oil and gas lessor and purchaser. I sure wish I had spent time with him learning about it before he passed in 1967.

Wes

#2

Dear Wes,

An overriding royalty interest is a cost free share of production, like the royalty created in the oil and gas lease itself. The overriding royalty interest is created from the leasehold estate - not the mineral estate, so when the leasehold estate terminates (the underlying lease expires) the overriding royalty expires.

If the 1957 lease is still in effect, the overriding royalty should still be in effect. More leases from 1957 are expired rather than active, so your chances are not good that the override is still in effect.

#3

An overriding royalty interest is a cost free (from whom?) (why is it cost free?) share of production, like the royalty created in the oil and gas lease itself. The overriding royalty interest is created from the leasehold estate (I haven't a clue what a leasehold estate is)- not the mineral estate, so when the leasehold estate terminates (the underlying lease expires) the overriding royalty expires.

I feel very ignorant here, but I guess everyone had to learn somehow.

If the 1957 lease is still in effect, the overriding royalty should still be in effect. More leases from 1957 are expired rather than active, so your chances are not good that the override is still in effect.

#4

The owner of the overriding royalty pays none of the costs of exploration or development. His share of production does not have any operating expenses taken out. It is cost free because it is by definition.

Leasehold estate. What the owner of the lease owns. When the leasehold estate (lease) expires, so does the overriding royalty.

#5

That clarifies it for me. Sorry to be so much trouble, but I did say "novice" in my title. : )

Thank you very much for all you do on this forum. Do any of the other personnel answer messages? I haven't seen any, and you stay plenty busy.

Wes

#6

Wes,

Mr. Cotten is probably correct that the leasehold right has expired. However, one of my clients whose father and grandfather did the same thing your grandfather did and in the same area at the same time, still enjoy overriding royalty payments from wells in Lea, Eddy, and Roosevelt Counties, NM. They even dealt with Midwest Oil on many occasions. This area of New Mexico enjoys multiple pay zones so the operators keep drilling deeper and deeper thereby holding old leases and particularly Federal leases. Hopefully you have some county recording information associated with the note your grandfather wrote to himself. If so, public records and perhaps BLM records may show what Midwest did with the lease that may have kept it alive all these years.

#7


Gary L. Hutchinson said:

Wes,

Mr. Cotten is probably correct that the leasehold right has expired. However, one of my clients whose father and grandfather did the same thing your grandfather did and in the same area at the same time, still enjoy overriding royalty payments from wells in Lea, Eddy, and Roosevelt Counties, NM. They even dealt with Midwest Oil on many occasions. This area of New Mexico enjoys multiple pay zones so the operators keep drilling deeper and deeper thereby holding old leases and particularly Federal leases. Hopefully you have some county recording information associated with the note your grandfather wrote to himself. If so, public records and perhaps BLM records may show what Midwest did with the lease that may have kept it alive all these years.

#8

Gary,
If we had overriding royalties in NM, wouldn't we be receiving money from them? I probably have leases he leased in the '40's that are expired. I just haven't gotten to NM yet. I started with ND where the most leasing was being done. We have minerals in ND, MT, NM, and CO. A great number in CO. 54 I think. I can only do so much. I'm a little disheartened by the length of sight drafts now, 90 days in some cases, and also by the fact that we have 8 leases signed and not one hole. Could the leases in NM, if they still have overriding royalties owe us money from previous years? Maybe NM is what I should focus on instead of new leases? Gotta stopfor now, my neck is killing me.

Wes

#9

Looks like your grandfather and my clients' father and grandfather worked in the same areas. Although I manage a lot of mineral acreage for them in Texas and Oklahoma as well. I will bet they knew each other.

The business has changed dramatically since the 1980's and if you are signing leases with 90 day sight drafts, more than your neck will be hurting in a few years. I suggest you call me. 303-279-4113 and perhaps I can give you some guidelines to follow that I use after over 30 years experience. Gary Hutchinson

Wes Luke said:

Gary,
If we had overriding royalties in NM, wouldn't we be receiving money from them? I probably have leases he leased in the '40's that are expired. I just haven't gotten to NM yet. I started with ND where the most leasing was being done. We have minerals in ND, MT, NM, and CO. A great number in CO. 54 I think. I can only do so much. I'm a little disheartened by the length of sight drafts now, 90 days in some cases, and also by the fact that we have 8 leases signed and not one hole. Could the leases in NM, if they still have overriding royalties owe us money from previous years? Maybe NM is what I should focus on instead of new leases? Gotta stopfor now, my neck is killing me.

Wes

#10

An overriding royalty interest is a royalty that is carved out of the working interest.

For example, if the oil and lease promises the lessor (mineral owner) a royalty of 1/8th of the production, then the remaining 7/8ths is the working interest acquired by the lessee (i.e., working interest owner).

It is common for an independent landman/lease broker/speculator like your grandfather to sell (assign) leases to a third party and retain a percentage of the working interest as an overriding royalty.

The overriding royalty ceases to exist when the lease contract is terminated.

#11

Thanks, DG. Every bit of info is helpful. I appreciate you taking time to reply to my blight.

Wes

#12


Gary,

Give me his name and I can tell you if my g'father did business with him. He was the most meticulous man I've ever seen when it came to keeping letters back and forth and legal documents. These folders are thick with letters that say things like; "Enclosed please find my check made out to you in the amount of $3.75 to cover your half of the lease at (description).

It's very interesting reading these letters. He has sent checks for less than a dollar. Of course postage was a penny back then. : )



Gary L. Hutchinson said:


Gary L. Hutchinson said:

Wes,

Mr. Cotten is probably correct that the leasehold right has expired. However, one of my clients whose father and grandfather did the same thing your grandfather did and in the same area at the same time, still enjoy overriding royalty payments from wells in Lea, Eddy, and Roosevelt Counties, NM. They even dealt with Midwest Oil on many occasions. This area of New Mexico enjoys multiple pay zones so the operators keep drilling deeper and deeper thereby holding old leases and particularly Federal leases. Hopefully you have some county recording information associated with the note your grandfather wrote to himself. If so, public records and perhaps BLM records may show what Midwest did with the lease that may have kept it alive all these years.

Gary L. Hutchinson

Minerals Management

gary.hutchinson@comcast.net

#13

Mr. Cotten,

If I understand your answer correctly, should the lease is signed with xyz company in 1957 and xyz company is no longer in business, or during the period of time that xyz company did not produce any mineral in the lease in paying quantities then the lease terminates, even if whoever bought the assets of xyz company say, 25 years later, wants to claim the same terms of the original lease signed in 1957?

Thanks,

Jack Ross

P.S.

I came across something in the Texas Natural Resources Act Section 91.402 (2) which states that an oil and gas company, in the absence of clear language in a lease agreement on the date which , royalty payments must be tendered from the lessee to the lessor is 90 days, unless there is some question as to title. This being the case the law of contract would allow the lessor to hold the lessee in breach and be able to terminate the contract.


Buddy Cotten said:

Dear Wes,

An overriding royalty interest is a cost free share of production, like the royalty created in the oil and gas lease itself. The overriding royalty interest is created from the leasehold estate - not the mineral estate, so when the leasehold estate terminates (the underlying lease expires) the overriding royalty expires.

If the 1957 lease is still in effect, the overriding royalty should still be in effect. More leases from 1957 are expired rather than active, so your chances are not good that the override is still in effect.

Best,

Buddy Cotten

www.cottenoilproperties.com

#14