Face Challenges Confidently

071 Mineral Rights

Tuesday, September 1st, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Recently there have been some mailouts to landowners, enclosing a bank draft, for the purchase of term royalty interest. This is very different from an oil and gas lease. In lieu of my usual case note, I was asked to write a few words about the different interest that may be carved out of the mineral estate, so that our landowner members will be careful about what they are selling. If you have any doubts or questions, talk to your lawyer, not the guy who is trying to buy something from you.
The mineral estate in land may be viewed as a bundle of property rights, like a bundle of sticks. You can sell or lease those rights one stick at a time, sell the whole bundle, or make any other combination you can imagine. Texas property law is wonderfully flexible to permit the parties to structure each deal to fit their needs. The flip side to this flexibility is that you may make a mistake about exactly which “sticks” you intend to sell.
A deed, or a mineral deed, conveys away the entire mineral estate for a term of forever (or for a specified term) for whatever price you get up front. Typical language would convey “all my right title and interest in the oil, gas and other minerals in, under and that may be produced from Blackacre for $X and other good and valuable consideration.” Kiss your minerals goodbye forever.
A royalty deed conveys away an interest in royalty payable out of production with respect to certain land. Typical language would convey “an undivided ½ of royalty in oil, gas and other minerals that may be produced from Blackacre.” Under a 3/16 royalty lease, the royalty conveyed under this royalty deed would be ½ of 3/16, or 3/32 of production. If the conveyance read “an undivided ½ royalty on oil, gas and other minerals in Blackacre,” the interest conveyed would be ½ of 8/8, or ½ of production. Each of these examples conveys away a portion of the future production forever.
An oil and gas lease in Texas typically conveys the minerals away to the oil company lessee for a term measured by the “primary term” plus the time during which the lease is held by production in paying quantities. During that time, the lessee owns the minerals and pays the landowner the royalty specified in the lease. When the lease is over, ownership reverts to the landowner. Typical language would “lease” the oil, gas and other minerals for “three years for so long thereafter as oil, gas or other minerals are produced in paying quantities.” It is in effect a conveyance away of all the minerals for a term of uncertain duration, after which the minerals revert to the landowner.
This is a very simple explanation of a very complex area. Ownership rights can be forever, limited as to time, limited as to products, limited as to depths, limited as to leasing rights, limited as to surface rights, etc. Know what you are signing. Property rights in minerals are determined by pieces of paper. If your paper doesn’t do exactly what you intended, you are frequently out of luck in getting it changed. Be careful out there.