NON-CONSENTING MINERAL INTERESTS

NON-CONSENTING MINERAL INTERESTS

RELATIONSHIPS Mineral Owner – Mineral Owner Lessee – Lessee – UNLMO Mineral Owner – NPRO – Fiduciary i.e. – Employee Trustee Attorney

Hypo-Siblings Inherit • Hotel • Section of Land

Rights of Mineral Co-Tenants • Produce Jointly – after expenses • Partition – in kind cash

Discuss Two Factual Situations 1. Drill on one tract 2. Drillsite and non-drillsite tracts a. One lease – two or more tracts (community lease) b. Pool

Drill on One TractExpenses Included in the Term “Payout” 1. Acquire oil and gas leases 2. Drill well 3. Test well 4. Complete well 5. Equip well 6. Operate well 7. Market production

General Rule – Payment of Royalty • In Texas, pay royalty to the drillsite owner only, unless there is a contractual or statutory basis for sharing. • In other words, in Texas royalty is paid on a tract basis, not a lease basis and not a unit basis. • In Oklahoma, order creating drilling and spacing unit pools all minerals within the unit.

Important Definitions • Texas – Proration unit – no title consequence; does not effect payment of production. • Texas – Pooled Unit – 2 or more tracts covered by 2 or more leases contractually connected to drilling at least one well. • Oklahoma – drilling and spacing unit – pools all owners as a matter of law. (forced election)

Japhet v. McRaeOne lease – then divided A

Japhet v. McRaeOne lease – then divided A B

Japhet v. McRaeOne lease – then divided A Non-Apportionment B Entirety Clause

Community Lease

Remedy of Non-Drillsite OwnerDensity/Allowable – Form P-12 - PoolingPooling of Tracts Does Not Require All MOs in All Tracts to Participate 560 – leased 80 – unleased 640 RRC concerned with gross acreage, not net acreage.

Remedy of Non-Drillsite Owner – SpacingWell Must Be More Than 467’ From the Property Line – Illegal well One lease from X

Remedy of Non-Drillsite Owner One lease from X No Spacing Problem

Remedy of Non-Drillsite Owner - MIPA • Reasons MIPA is seldom used: • Discovery date of the field – The field must have been discovered after March 8, 1961. • Special Field Rules – Either temporary or permanent special field rules must be in place. • State Lands – The MIPA does not apply to lands owned by the State of Texas. • Common Reservoirs – The MIPA requires the application to cover two or more separately owned tracts that are embraced in a “common reservoir”. • Productive Acreage - The force pooling applicant must prove that the force pooled acreage is productive in the producing “common reservoir”. • Voluntary Offer to Pool – The force pooling applicant must make a “fair and reasonable voluntary offer to pool” to all interest owners within the unit. • Effective date of the MIPA Order – A force pooling order is not effective until it is signed by the Railroad Commissioners. • Complexity and Cost of Proceeding.

Remedy of Non-Drillsite Owner – RatificationSuperior Oil Company v. Roberts • • Altair Unit Altair Unit is a secondary recovery unit • • • • Roberts Tract - Roberts is undivided and unleased.

Unleased Mineral Owner – Options • In drillsite – participate APO. • In non-drillsite tract – ratify before drilling commences. Fletcher v. Ricks Exploration, 905 F.2d 980 (5th Cir. 1990); Neugent v. Freeman, 306 S.W.2nd 167 (Tex. Civ. App. – Eastland 1957, writ ref’dn.r.e.).

Non-Participating Royalty Owners (NPROs) - How Created • 1/16 of the oil and gas produced - 1/16 of 8/8 (of TF) • 1/16 of the royalty – 1/16 of 3/16 (of TF) • ½ of the usual 1/8 royalty • NPRO burdens the MO, not the lessee. • Cannot pool NPRO without its consent, unless the instrument creating the NPRI reserves pooling authority. • Lessee is not the lessor’s agent when contacting NPRO.

Calculating Royalty Where NPRIIn Drillsite Lease – 3/16 R NPRI of 1/16 of O&G in drillsite • No Ratification MO – 3/16 x ¼ (TF) = 3/64 NPRI – 1/16 x 8/8 = 4/64 R paid to MO = 0 Ratification MO – 3/16 of ¼ (TF) = 3/64 NPRI – 1/16 of ¼ (TF) = 1/64 R paid to MO 2/64

Calculating Royalty Where NPRIin Drillsite Lease – 3/16 R NRPI of 1/16 of the R in drillsite• No Ratification MO – 3/16 x ¼ (TF) = 3/64 NPRI – 1/16 x 3/16 = 3/256 R paid to MO – 3/64 (-) 9/256 12/256 (3/64) Ratification MO – 3/16 of ¼ (TF) = 3/64 NPRI – 1/16 of 3/64 = 3/1024 R paid to MO – 15/16 of 3/64 = 45/1024 48/1024 (3/64)

NPRI Not in DrillsiteStandard Oil v. McDonald Tracts 1-3 were covered by a single lease with an entirety clause. The Court held the community lease was an offer to pool which the NPRO accepted by ratifying the lease.

NPRI Not in DrillsiteMontgomery v. Rittersbacher • Tracts 1 and 2 were covered by a single community lease, containing pooling and entirety clauses. This lease was pooled with the adjacent tract, which was the drillsite. 1 2 • NPRI • The NPRO had the option to ratify his lease, which he exercised by filing suit claiming entitlement to royalty.

NPRI Not in DrillsiteRuiz v. Martin Tracts 1-3 were covered by one community lease, that did not contain an entirety clause. The Court allowed the NPRO to ratify the lease after a producing well was completed. BEWARE – a NPRO can defer his ratification decision until after a well has been completed.

Verble v. CoffmanLondon v. Merriman Tracts 1 and 2 were covered by one lease with a pooling clause and an “anti-entirety/dilution clause”, whereby the lessor refuted the possibility that pooling would be the result “merely of the inclusion of … separate tracts within this lease”. Verble London 1 2 1 2 • • NPRO (A) NPRO (B) NPRI The Court ignored the anti-dilution clause and held that the MO could not prevent the NPRO from ratifying.

Duty of MO to NPRO • In the case of DeBenavides v. Warren, the Court held that the lessor has the duty to notify the NPRO burdening the lessor that there is a lease in existence and that the NPRO has the right to ratify the lease. • DANGER – The lessee has no implied authority from the lessor to contact the NPRO. • SEE SLIDE – Calculating Royalty where NPRI in Drillsite

NPRI RejoicesMCZ, Inc. v. Triolo NPRO in single lease containing pooling clause. NPRI Unit 2 Unit 1 • • NRPO can selectively ratify. Here, the NPRO ratified only the designation of unit for Unit 1, and did not ratify anything concerning Unit 2.

CONCLUSION • Non-Drillsite MO must lease or ratify before drilling commences. • NPRO has flexibility to patiently await best circumstances.

NON-CONSENTING MINERAL INTERESTS