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Energy Industry (Oil & Gas)/Leases that were not Included in Unit Designation

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Question
I have come across a scenario where a unit was formed and a company filed a unit declaration.  There were multiple unleased interests inside the unit boundary.  The company later leased these interests with standard producers 88 leases, but never filed an amendment to the unit declaration to include these leases.  The company has been paying royalties to these lessors on the production from the unit, but the leases are now past their primary term.  My question is since the company failed to amend the unit declaration to include these leases, have they expired or would they be considered HBP?

Answer
Hello Bryan.  One's natural inclination is to assume that the leases would have expired if they were not added to the Unit Designation prior to the expiration of their primary terms.  This is probably not the case.  The acceptance of royalty from unit production by these previously un-leased mineral interest owners would probably lead a court to the conclusion that the unit designation had been ratified by these lessors and that they would be estopped from  claiming ease terminations.   That's my opinion on what the result would be.  Of course, there may be other factual issues of which I am not aware that could vary the result.  One should be very careful here if the desire is to take new leases on these interests.

For example, even if these leases had expired and one were to take a lease on them now, the new owner would not be entitled to receive any unit production if the leases were not on a drill site tract.  And, the exisitng production would not perpetuate the new lease on the non drill site tract. If the new leases were on a drill site tract, then the  new lease owner would not be entitled to revenue until the well paid out, with payout probably being determined on a project basis and not a well by well basis.  Pending payout of the well the new lease owner would be required to pay royalty from production on the drill site tract even though it is receiving no revenue. Not a good result.  If there is a horizontal well it becomes even more complicated.

Good luck and let me know if you have any other questions.  

Energy Industry (Oil & Gas)

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David 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 37 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.

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