Energy Industry (Oil & Gas)/Minimum Royalty Clause
I entered into a lease last year on property that is to be included in a fieldwide unit for CO2 EOR. The Unit Agreement should be mailed any day. My lease contains a Minimum Royalty Clause that I would like to get an opinion on. The Clause is as follows:
Lease Addendum: ¶C. MINIMUM ROYALTY: Notwithstanding any provisions contained herein to the contrary, it is specifically agreed that the minimum production payment or income to Lessor herein by reason of production under this lease shall never be less than the amount of Fifty And No/100 Dollars ($50.00) per acre on an annual basis, accruing to the credit of Lessor under the terms of this lease for the acreage held by this lease, on a per-well basis. Nothing in this paragraph shall be construed so as to affect Lessee’s right to release as provided for under this lease.
Lease ¶4: Any operations conducted on any part of such unitized land shall be considered, for all purposes, except the payment of royalty, operations conducted upon said land under this lease.
Lease ¶6: Whenever used in this lease the word "operations" shall mean operations for and any of the following: drilling, testing, completing, reworking, recompleting, deepening, plugging back or repairing of a well in search for or in an endeavor to obtain production of oil, gas, sulphur or other minerals, excavating a mine, production of oil, gas, sulphur or other mineral, whether or not in paying quantities.
Texas Natural Resources Code: Sec. 102.053. EFFECT OF OPERATIONS. (a) The operations on and production from any portion of a unit for which a pooling order has been entered shall be considered for all purposes the conduct of the operations on and production from each separately owned tract in the pooled unit. If a gas well on a pooled unit is shut-in, it shall be considered that the shut-in gas well is on each separately owned tract in the pooled unit. Acts 1977, 65th Leg., p. 2573, ch. 871, art. I, Sec. 1, eff. Sept. 1, 1977.
Note that the Minimum Royalty Clause states payment is to be made on "a per-well basis". The operator plans to use over 100 CO2 injection wells and over 100 production wells concurrently for several years.
What is a reasonable interpretation of the Minimum Royalty Clause? My interpretation is that the minimum royalty would include all production wells within the unit, since production anywhere within a unit is considered production on my tract. Is this reasonable?
Howard, take a look at paragraph 4 of the oil and gas lease. Operations within the boundaries of the unit will be considered as operations on your property for lease perpetuation purposes, but not for royalty payment purposes. Of course, your property will be allocated its share of unit royalty proceeds (however that share is to be determined) based on unit production from all of the wells. It's my opinion, however, that unit wells that are not located on your tract will not fall within the parameters of the minimum royalty provisions of your lease.
I hope this answers your question. Good luck and let me know if you have any other questions.