Signing an Oil & Gas Lease in Texas - What Happens if I Don't Sign?

Did you know that Texas mineral owners can lose their interest in production from their unit tract if a lease remains unsigned?

When a unit is pooled, the lease lines between tracts in a unit are erased. In some cases, a mineral owner in the unit is either unreachable or refuses to lease, and therefore the unit cannot be pooled. This scenario presents a problem for the operator and other mineral owners in the unit, because drilling operations cannot begin until the un-leased mineral owner is addressed.

What Happens When a Texas Mineral Owner Refuses to Sign a Lease?

Let’s assume you decide not to sign your lease because you want to negotiate better terms. In Texas, you risk being cut out of the unit altogether. Generally, an operator will file for a Rule 37* exception with the Texas Railroad Commission (RRC) when a mineral owner refuses to lease. If the Rule 37 exception is granted, an un-leased non-drill site tract mineral owner won’t receive any interest in production from the unit. Un-leased drill-site tract mineral owners do receive their share of production, but only after the well costs are paid out.

Mineral owners facing a Rule 37 exception receive notice from the operator, and are informed when the RRC hearing for the application will take place. Many of these applications are uncontested, and the operator is granted the application. If you find yourself in this position, hire a lawyer familiar with the commission rules and administrative process. Many mineral owners lack the resources to contest the Rule 37 exception, and that is why these applications are often granted.

Rule 37 - A RRC density regulation prohibiting the location of a well 1,200 feet from any completed well in the same horizon on the same tract. The rule also stipulates a well mustn’t be placed nearer than 467 feet from any property line, lease line or subdivision line.

I am an unsigned tenant and decided to go the allocation agreement route vs pooling. What are your thoughts on pooling vs allocation?

It is not that you are being cut out of the unit if you are not leased. In Texas, 99% of the rights to pool are contained in the lease itself. Therefore, no lease, no rights to pool.

Rarely will a company drill a well with a partially unleased drillsite tract. When they come back in as a participating co-tenant, their interest is not diluted by unit size. If they have a 4% mineral interest in the drillsite tract, then after payout, they own 4% of the well. They also owe no royalty burden to other owners. Pay 4% of lifting costs, get 4% of production.

Being unleased is not really a viable option in Texas, especially in the landscape of horizontal drilling.

This is a whole theoretical debatable discussion.

Buddy Cotten