Two issues relating to overriding royalty interests in Oklahoma

General Mineral Rights Discussion
1

I’m in the process of understanding what my family interests are in a series of overriding royalty interests in several different Oklahoma counties.

The first issue concerns how a decimal interest, such as that contained on a division order, is calculated. I understand how a royalty interest is calculated (net mineral acres/unit spacing in acres X fractional royalty interest = decimal interest). My question: is this same formula used in the case of an overriding royalty interest where the interest is expressed as a percentage of production?

The second issue is an actual matter. My family has an overriding royalty interest in the production from a Canadian County gas well. The well was completed in 1980 and has been operated continuously as far as I can tell since then, although at least eight different operators have been involved. I have traced this series of operator transfers through the OCC online database without finding any indication that the well in question had become inactive. I have been told by the current operator that the well had been terminated and that he had a new mineral lease on the land where the well is located and had reworked the well so I had lost my ORRI for this well since the original lease had terminated.

The original lease was from two parties. One for 160 acres less a 30 acre parcel, and another for that 30 acre parcel. The lessor for the 160 acre parcel was a trust company acting as a trustee for the mineral owners. That trust company has recently quitclaimed the trust to the mineral owners who have leased this parcel to the present well operator. As far as I know, however, the 30 acre parcel is still tied to the original lease, and the production from this parcel is what my family’s ORRI is tied to.

My questions:

  1. When production from a well has ceased to the point where the secondary lease term is triggered, is there some form of official notification or procedure that is required to be filed? If so, where would I find it?

  2. If production from the well had not ceased enough to terminate an existing lease, and the original lease is still held by the same mineral owners, can those owners release that same interest? How would this work when a well had already been put in and had operated for nearly 30 years?

2

I’m only going to comment on part of this. It’s fairly unusual for an old lease to be terminated like this, mainly because many of them were leased at VERY favorable terms to the lessee, usually 1/8 royalty. Usually the problem is the polar opposite - getting an oil company to RELEASE an old lease. If they do release the lease, they typically would have to pay BONUS money all over again, and deal with higher royalty demands. However, I can envision situations, on leases with lots of ORRI, where they are trying to clear the slate. In general, there has been a lot of leasing going on in Canadian County, and especially in the western part of the county, there has been a lot of success in the core of the Woodford Shale.

No one is required to notify you about anything like this. Technically, they can release a lease anytime they want to, no matter what the production is. In your case, I would very much suggest that you check the land records and see what has happened with regard to the leasing and the release of the old lease. For Canadian County, this is easily done online: Canadian County Clerk

You will have to register, and this may involve a phone call, but it does not cost anything to use.

You can search all records in a specific Section/Township/Range, or filter your search for a specific name.

You should be able to trace the recent history very well.

3

Thanks for your reply JW.

I have copies of the original leases, and I am waiting to receive a copy of the quit claim and new lease.

The language in the original lease states: “Subject to the other provisions herein contained, this lease shall be for a term of three (3) years from this date [Feb. 17, 1978] (hereinafter called the primary term) and as long thereafter as oil, gas, or other related hydrocarbons are produced from said land thereunder.”

Given these stated terms, how can this lease be terminated, and ORRI interests extinguished, if the well continues to produce?

JW Anderson said:

I’m only going to comment on part of this. It’s fairly unusual for an old lease to be terminated like this, mainly because many of them were leased at VERY favorable terms to the lessee, usually 1/8 royalty. Usually the problem is the polar opposite - getting an oil company to RELEASE an old lease. If they do release the lease, they typically would have to pay BONUS money all over again, and deal with higher royalty demands. However, I can envision situations, on leases with lots of ORRI, where they are trying to clear the slate. In general, there has been a lot of leasing going on in Canadian County, and especially in the western part of the county, there has been a lot of success in the core of the Woodford Shale.

No one is required to notify you about anything like this. Technically, they can release a lease anytime they want to, no matter what the production is. In your case, I would very much suggest that you check the land records and see what has happened with regard to the leasing and the release of the old lease. For Canadian County, this is easily done online: Canadian County Clerk

You will have to register, and this may involve a phone call, but it does not cost anything to use.

You can search all records in a specific Section/Township/Range, or filter your search for a specific name.

You should be able to trace the recent history very well.

4

According to the court’s interpretation of this language, the question is not whether the well is producing, but whether it is producing in paying quantities. The lifting costs, overhead, operating costs, etc. can exceed the value of the oil/gas/liquids, and it can be shut down.

5

Charles,

If I understand your situation, an overriding royalty interest USUALLY burdens only a portion of the working interest and is in excess of the royalty interest. If production AND the lease have terminated, the working interest and the ORRI burdening that interest no longer exist.

There are no forms of notification to ORRI or RI owners unless they are required by the original lease terms.

If the working interest burdened with your ORRI has lost their lease, the ORRI ceases.

6

Thanks for your reply Nick. The particular situation I question is a bit complicated but I’ll try to explain:

My family received an ORRI from the production of a gas well located in Canadian County, Oklahoma that was completed in 1980 pursuant to two mineral leases that totaled 160 acres of which one half (80 acres) represented the well spacing. My family received ORRI payments from this well’s production for more than twenty years. During this period, the well operator changed several times. The last record of production from this well I can locate was in 2008. In 2009 the operator changed, and changed again in 2010 to the current operator. The current operator told me that the well had ceased production prior to his acquiring operatorship of the well, and that he had entered into a new lease with the mineral rights owner, had reworked the well, and that my family’s ORRI interest terminated when the well had ceased production.

Concerning the original mineral leases, the lease for the 160 acre parcel excepted a 30 acre parcel. The second lease was for that 30 acre parcel which is contained within the 80 acre spacing for the well. My family’s ORRI interest is connected to a working interest from the 30 acre parcel, not the greater 160 acre parcel.

Concerning the new lease, the current operator leased an 80 acre parcel, matching the well spacing, from the same interest that had previously leased 160 acres for this same mineral interest to the original operator who completed the well. However, as far as I can tell, the new operator has not acquired a mineral interest in the 30 acre parcel my family’s ORRI is associated with. This parcel is within the 80 acre well spacing. I understand that force pooling has taken place, but even if that 30 acre parcel were force pooled, wouldn’t the interest rights under the original lease still apply?

I have talked with the Corporation Commission about this situation. Apart from the 30 acre parcel issue, the question is whether well production ceased to the extent to justify a termination of the original leases. Reading between the lines, I sensed skepticism from the OCC that there was enough evidence of a cessation of production to justify lease termination. But, of course, the OCC were quick to make it clear that they cannot provide a legal opinion. As I understand the situation, my sole remedy is to bring suit and let the court figure it out. However, I would like to know if there’s any justification for pursuing this remedy, given the situation.

Any feedback would be greatly appreciated.

Nick said:

Charles,

If I understand your situation, an overriding royalty interest USUALLY burdens only a portion of the working interest and is in excess of the royalty interest. If production AND the lease have terminated, the working interest and the ORRI burdening that interest no longer exist.

There are no forms of notification to ORRI or RI owners unless they are required by the original lease terms.

If the working interest burdened with your ORRI has lost their lease, the ORRI ceases.

7

If the ORRI is associated with a WI and the WI no longer owns an interest in the lease, that ORRI is lost. If your interest is actually a RI from mineral ownership THEN, you may have something to pursue.