The Royalty Clause

Question 1

Royalty Clause

Answer 1

Royalties may be paid in kind (porch oil) or paid in money representing the owners fair share of production. In most states, excluding Louisiana, a royalty interest is considered to be an interest in real property, and as such is subject to ad valorem property taxation

Question 2

Majority Rule on Royalty Calculation (Vela Rule)

Answer 2

TX, KS, MT
Market value is considered to mean market value at the time of production and delivery rather than when the sales contract was formed. Considers a gas purchase contract to only be executory until gas is delivered.

Question 3

Minority Rule on Royalty Calculation (Tara Rule)

Answer 3

OK, LA, AR
Market value means the market price set forth in the gas purchase contract, so long as the contract was entered into in good faith

Question 4

Henry v. Ballard

Answer 4

Louisiana

The court followed the tara rule and based calculations on the marker price set forth in the contract

Question 5

Amount Realized

Answer 5

royalty is based upon actual proceeds from the sale of oil or gas. Costs incurred after production, such as transportation or processing can be deducted

Question 6

Market Value

Answer 6

Royalty is based upon the market value of oil or gas

Question 7

Piney Woods v. Shell

Answer 7

Mississippi

The court defined gas sold at the well as gas in its original state as produced from the ground, prior to transportation and processing. Describes both location and quality.

The court followed the vela rule when it came to market value of gas. Used the working back method to determine market price.

Most modern leases include a clause baring a lessee from charging a lessor with any processing, transportation, or other related costs.

Question 8

At the Well

Answer 8

on royalties calculated at the well, the lessors may not be charged with processing costs. As such, the lessees cannot deduct processing costs.

Question 9

Tawney v. Columbia

Answer 9

West Virginia

The defendants were deducting various postproduction costs and not disclosing the details to the royalty owners.

The court ruled that since the deductions began long after some of the leases had been created, it could not have been the original intent of the parties at the time of execution to deduct postproduction costs. It should have been expressly stated.

Question 10

Take-or-pay Clause

Answer 10

requires a buyer of gas to pay for a set percentage of gas produced, whether or not they actually take delivery of it.

Question 11

Majority Rule on Take-or-pay settlements

Answer 11

Texas
Take-or-pay settlements do not constitute any part of price paid for produced gas as payments are made when gas is not produced, and as such, bear no royalty

Question 12

Minority Rule on Take-or-pay settlements

Answer 12

Take-or-pay settlements are an economic benefit of the lease, and as such the lessee has a duty to share them with the lessor.

Question 13

Killam v. Bruni

Answer 13

Texas
Production in Texas requires the actual lifting of the oil and gas from the soil. As the proceeds did not result from gas actually produced, the lessor had no claim to a royalty share of the proceeds of the settlement

Question 14

Frey v. Amoco

Answer 14

Louisiana
The court ruled that the take-or-pay settlements are part of the whole amount realized from the lease, and as such, royalty payments must be made to the lessor

Question 15

Royalties out of take-or-pay settlements

Answer 15

The lessee ought to specify that gas produced for purchaser to recoup costs out of settlement will not be subject to royalty payments, protecting them from double paying the royalty owner on the value of the gas.

Question 16

Overriding Royalty

Answer 16

A share of production that is free from costs of production, and is carved out of the working interest.

Question 17

Followwill v. Merit Energy

Answer 17

Wyoming
The court found no evidence that the parties intended to calculate ORRI by any method other than in the federal leases. The WRPA didnt exist until after they were created.

Question 18

Boldrick v. BTA

Answer 18

Texas
Under a JOA an interest created by a working interest owner who goes non-consent can be charged with a pro rata share of all costs. BTA does not have to disburse any funds not received.

Question 19

Payment of Royalties as a Covenant- Wagoner Rule

Answer 19

Courts will not cancel leases for nonpayment of royalties; rather the lessor ought to sue the lessee for the royalty plus interest

Question 20

Cannon v. Cassidy

Answer 20

Oklahoma
The court followed the wagoner rule a refused to cancel the lease. They should have have sued for damages plus interest to compensate for missing royalty payments.

Question 21

Hitzelberger v. Samedan Oil Corp

Answer 21

Texas
The language of the lease made the payment of royalties a condition rather than a covenant. When pooling occurred it did not change this and the lease cancelled.

Question 22

Division Order

Answer 22

a direction and authorization regarding the distribution of proceeds amongst all parties who claim an interest. Protects the distributor against liability for improper payment. Does not convey royalties or change provisions

Question 23

Transfer Order

Answer 23

a direction and authorization to change the distribution as laid out in the division order. Does not convey royalties or change provisions

Question 24

General Rule on Divison and Transfer Orders

Answer 24

Texas
Division and transfer orders are considered binding to underpaid royalty owners until revoked, unless the operator who drafted it made a mistake resulting in his unjust enrichment.

Question 25

Remedy for an Error in a division or transfer order

Answer 25

As a division or transfer order is binding until revoked, an underpaid royalty owner can sue an overpaid royalty owner to recover the royalties. Based upon detrimental reliance

Question 26

Detrimental Reliance

Answer 26

Provides an operator with promissory estoppel to stop them frombeing doubly charged by overpaying one owner in error and then repaying the underpaid royalty owner in a suit

Question 27

Gavenda v. Strata

Answer 27

Texas
Upon discovery of the royalty payment errors, the plaintiffs revoked the devision and transfer orders and filed suit to recoup underpaid royalties.

The court ruled that the defendant, as operator, erroneously prepared the division and transfer orders and retained benefits from the error, receiving unjust enrichment. They were allowed to recover.