AboutDavid B. McCall Expertise Questions regarding oil and gas exploration and production, the operation and management of oil and gas producing properties, and questions related to mineral ownership, title problems, and oil and gas leases.
Experience I am Board Certified in Oil, Gas and Mineral Law in the state of Texas. I have more than 34 years of experience in the industry as both an in house attorney for major oil companies and as a partner in oil and gas firms. I am also a mineral owner and receive royalties from oil and gas production. I have extensive title examination experience, and have represented clients in many administrative and court proceedings.
Organizations State Bar of Texas, Texas Bar Foundation, and Austin Bar Foundation.
Publications Various state bar seminars on Oil and Gas matters.
Education/Credentials I have a business degree in marketing from McMurry University, 1971, and a JD degree from Texas Tech University in 1974, where I graduated 17th in my class. Board Certified in Oil, Gas and Mineral Law in 1986.
Expert: David B. McCall Date: 7/14/2008 Subject: Royalties of a NPR owner
Question QUESTION: Hello David,
I was reading your question from Bill about royalties without a lease dated 11/15/07 and found it very interesting. My husband and his sister inherited non participating royalty interest from their father on a 75 acre farm he owned in Alvarado,TX. When he sold the farm in 1951 he owned 100% of the mineral rights and the deed stated “Grantors,their heirs or assigns shall be entitled, free of cost, to one-half of the usual one-eighth royalty on oil,gas,casinghead gas and gasoline”. About 32 ½ acres of this land are in a lease totaling 60.37 acres. In May of this year the oil co. called and said they lost the first ratification we signed which referred to the terms and conditions stated in the original deed and asked if we would sign another which this reference was omitted. We didn’t sign.
We have since received 2 royalty checks and both had “other charges” deducted from the total and the decimal percentage is .01691134 (1/4 X 1/8 X .54116283). The well was drilled on our 32 ½ acre tract and if they really don’t have a ratification, is this right?
Have you ever seen a deed that states, “free of cost” and what does that mean?
Any help and advice you can give us will be greatly appreciated
ANSWER: Hello Patricia. I assume that the 60.37 acre lease covers more than one tract. Am I correct? The reason I ask is that if the only property leased is the 75 acre farm, your ratification of the lease is not necessary because the royalty fraction is spread throughout the entire acreage. The only reason an oil company should want your ratification in this instance is if they wanted to pool the property with other lands. Some companies, however, want a ratification from non participating royalty interest owners as a matter of routine regardless of what thay plan to do with the property. Remember, under Texas law the pooling provisions of an oil and gas lease are not binding on the non participating royalty interest without their ratification.
Often,the executive owner (the person with the leasing rights)
will include multiple tracts over which he has leasing rights in one lease. It is very common that there will be a non participating royalty interest owner in one but not all of the tracts. If the non participating royalty owner has not executed a ratification, and a well is drilled on his land, the non participating royalty interest owner would receive his full share of royalty, which in your case would be a 1/16th royalty, or .0625. If there is no ratification, and the well is drilled on another tract in which the non participating owner does not own an interest, the royalty owner would receive nothing from production, even though his tract has been leased.
If the non participating royalty interest owner executes a ratification of a lease covering his tract and other lands, the effect of the ratification is to create what we call a "community lease", which is in all practical respects, at least for royalty allocation purposes, a pooled unit. In this instance, your royalty share would be determined by a formula like this----32.5/60.37 x 1/16 =.033646678. This latter number would be divided by 2 to reflect your husband's and sister in law's shares, and each would be entitled to .016823339. These figures are not exact but illustrate how royalty is being calculated on your tract.
At this point, you cannot tell if the oil company really lost the ratification or if one was really ever executed. Often, an oil company will overlook the need for a ratification, figure it out after the fact, and then ask for one later. My suspicion is that there is not a prior ratification. If there is not a ratification, and the well is drilled on your acreage under a lease covering lands other than yours, then you are being underpaid by the oil company. Now, you are being paid as if there were a ratification.
You are correct in not signing the ratification until you figue out if there was a prior ratification that has now been lost.
If there is no ratification, the company may well take the position that your acceptance of royalty and signing of a division order authorizing payment as if the lease was ratified creates an actual ratification or "estoppel" (lawyer term) on your part to deny that the lease was not ratified. This would be an uphill argument for them and the courts are not very receptive to these kinds of arguments.
If you have signed a division order, however, this could insulate the company from a claim for back royalties owed to you under some circumstances. Things start to get complicated here so I suggest that you contact an attorney to review your rights if you are going to assert that the lease has not been ratified.
I have seen many deeds and assignments that contain the words "free of costs". This reference means that you will not be charged with any costs of production. This does not mean, however, that you will not be charged with costs of marketing, transportation, etc. Royalty owners generally bear there share of reasonable post production expenses.
I hope this helps. Let me know if you have any further questions.
---------- FOLLOW-UP ----------
QUESTION: Dear David,
THANK YOU VERY MUCH for the information, I just want to say:
We have not signed any papers (other than the 1st ratification) and have not cashed either check. The 75 acre farm is now split between 2 different owners and only 1 of these owners has leased with this oil co. We are trying to find out from the oil co. how they came up with this particular acreage amount, but they will not give us a survey or proof of any kind. Any suggestions on that subject? You mention, “execute a ratification” is this filed somewhere or how can we know for sure they really have the 1st one we signed and just don’t want to use it because of the references to “free of cost” etc. in the original deed?
I’ve been told that the production site of a horizontal gas well has to be on our NPRI acreage and not just the drill site, to receive a full non-diluted royalty interest(not sure I’m saying this right)??? If we didn’t mention this before it is a gas well. I feel we will have to go to a lawyer to get any answers from the oil co., they are becoming less and less friendly each time they see me, do you know of one in the Fort Worth area that would be familiar with our situation?
Thank you again for all your help
Patricia
Answer Hello Patricia. Because your situation is so involved, I recommend that you contact Mack Ed Swindle's law firm in Fort Worth. They will do a good job for you. Their number is 817-878-0500.
Good luck and let me know if you have further questions.
