Presentation:
Oil & Gas Law
Chapter 8: Obligations of Executive Rights Owners
Professors Wells
November 9, 2015
Royalty Clauses:
Schlittler v. Smith
Schlittler v. Smith, 101 S.W.2d 543:
1.  Facts
“Grantor H. F. Smith hereby reserves unto himself, his heirs and assigns for aperiod of ten years
and as much longer thereafter as oil and gas or other minerals are being produced an undivided
one-half interest in and to the royalty rights on all of oil and gas and other minerals in, on and
under or that may be produced from the land herein conveyed and described above. In the event
oil or gas or other minerals are not being produced in paying quantities from said land at the
expiration of said ten year period then this reservation shall become null and voic and of no further
force and effect.”
2.  Court reasoning
“We think that self-interest on the part of the grantee may be trusted to protect the grantor as to the
amount of royalty reserved. Of course, there should be the utmost fair dealing on the part of the
grantee in this regard.”
2 Royalty Clauses:
State National Bank of Corpus Christi v. Morgan
State National Bank of Corpus Christi v. Morgan, 143 S.W.2d 757:
1/8 royalty
7/64 up to $48k
1.  Issue: Does State Bank share in 7/64 payment?
Lessee
½ of Royalty
State Bank
Morgan
O&G
Lease
F.S.
1.  Court reasoning
“It is no doubt apparent from what has been said that if we were compelled to determine from the
leases, without the aid of extrinsic evidence, whether the oil payments are royalty within the
meaning of the deed from the bank to Morgan, we would hold they are not royalty, but bonus. . ...”
3 Royalty Clauses:
Lane v. Elkins
Lane v. Elkins, 441 S.W.2d 871:
1.  Facts:
In addition to the case consideration above set out and as part of the consideration for the
execution of this lease, and not as part of the royalty hereinabove reserved, the lessors reserve unto
themselves, their heirs and assigns, the following overriding royalty, to-wit: 1/16 of 7/8 of all oil,
gas and other minerals, including casinghead gas or other gaseous substances which may be
produced and saved, sold and used off from the lands above described under this lease, as, if and
when produced and saved, free and clear of all costs of development or operation, except that such
interest shall bear its own Ad valorem and Gross production tax, and provided Lessee, his assigns
and successors, may, from time to time purchase any overriding royalty oil, gas minerals or
gaseous substances in its possession, paying the market price therefore prevailing for the field
where produced on the date of purchase; it being understood and agreed that this reservation shall
be 1/16 of 7/8 of the total amount of oil, gas and other minerals produced on the entire above
mentioned tracts without regard to whether or not the undersigned owns all or less than all of the
oil, gas and other minerals under said tracts of land, there heretofore set out reduction clause for
ownership of less than fee simple NOT being applicable to this case.
2.  Court reasoning
“A reservation or production of a part or percentage of production under a lease which is to
continue throughout the life of the lease is regarded as ‘royalty,’ and a sum certain to be paid in
cash or out of production is regarded as ‘bonus.’
4 Royalty Clauses:
Morriss v. First National Bank of Mission
Morriss v. First National Bank of Mission, 249 S.W.2d 269:
1.  Facts
(b) On gas, one-eighth of the proceeds from the sale of the gas, as such at the well for gas from
wells where gas only is found, and where not sold shall pay Fifty ($50) Dollars per annum as
royalty from each such well, and while such royalty is so paid, such well shall be held to be
producing
During the primary term of the lease if the royalty paid under the provisions of Paragraph 3 hereof
for any given year, commencing on the 15th day of March and ending on the 14th day of March of
the succeeding year, does not amount to as much as $15,942, then the difference between the
amount so paid and the said sum of $15,942 shall be paid to Lessor. After the expiration of the
primary term of this lease if the royalties paid underht e provisions of Paragraph 3 hereof for any
given year, commencing on the 15th day of March and ending on the 14th day of March of the
succeeding year, do not amount to as much as $7,817 then the difference between the amount so
paid and the said sum of $7,971 shall be paid to Lessor.
2.  Court reasoning
“Payment of the minimum amounts does not delay any operations, and a minimum amount is
required to be paid for the life of the lease, once production is obtained, even though it be a
substitute production. Since substitute production has been achieved, the usual situation is for
royalty thereafter to be paid, and for rentals to cease.”
5 Royalty Clauses:
Bullard v. Broadwell
Bullard v. Broadwell, 588 S.W.2d 398:
1.  Facts
2.  Court reasoning
“The Texas rule is that a cotenant who produces minerals from common property without having
secured the consent of his cotenants is accountable to them on the basis of the value of the
minerals taken less the necessary and reasonable cost of producing and marketing.”
6 Term Royalty Interests:
Archer County v. Webb
Archer County v. Webb, 338 S.W.2d 435:
1.  Term Royalty Clause
“an undivided one-half interest in and to all oil and gas royalty that may be produced under oil and
gas leases outstanding or to be hereinafter outstanding on the aforesaid lands, or any part thereof,
for the full term of fifteen (15) years from this date, or so long as oil or gas shall be produced from
said premises, or any part thereof in commercially paying quantities .
If no commercially paying oil or gas be produced from aforesaid lands within fifteen years, this
conveyance to become null and void.”
2.  Court reasoning
“Paragraph 2 of the lease prescribes its own duration, and the effect of the provision quoted is
merely to extend the term of the lease and not the term of the royalty deed. There is no provision
in the royalty deed which extends its terms by the payment of shut-in gas well royalty. It is the
mineral deed, not the lease which should have contained the provision securing to the term mineral
owners the benefits of the shut-in gas well provision.”
7 Term Royalty Interests:
Problem Set on Page 8-17
Minnie owns all of Blackacre and conveys to Memorial Hospital on December 21, 1961 a deed to the
following:
“an undivided half mineral interest in Blackacre for 20 years and as long thereafter as oil and gas
are producing from said land.”
Scenario One: Minnie subsequently leased Blackacre and the lessee drilled a single well on the tract in 1975.
The well produced in paying quantities until 1984, and then ceased production. Under the 60-day savings
clause in the lease, the lessee commenced a second well within 50 days of cessation of production and the
new well successfully produced from the lease.
1.  Is the lease in effect?
2.  Is the Hospital’s interest in effect?
Scenario Two: Assume that the lease did not have a 60-day savings clause and that the well broke down as in
Scenario One. However, assume that this time the lessee acted diligently to restore production from the well
and production from this same well was resumed after 72 days.
1.  Is the lease in effect?
2.  Is the Hospital’s interest in effect?
8 Term Royalty Interests:
Problem Set on Page 8-18
Grantor conveyed to Grantee the following NPRI deed on February 14, 1977:
This conveyance shall be for a preiod of five years from this date and as long thereafter as oil or
gas are produced from said lands or from lands with which said lands or on lands pooled or
unitized therewith, without more than 90 days cessation of operations, and if said operations result
in the production of oil or gas, then for as long thereafter as oil or gas are produced from said
lands or from lands pooled or unitized therewith. A shut-in gas well shall be considered as a
producing well and shall perpetuate the term of this conveyance.
Grantor leased the land to Bigg Oil and a producing well was drilled on the lease in late 1977. Production
from this well ceased in November 1993 and no production or reworking operations occurred until May 1994.
However, Big Oil continued to inspect the well, kept some equipment on the well site, swabbed the well, and
filed monthly production reports (of zero production). In May 1994, reworking operations began and
production resumed from the tract in June. Assume that the lessee properly paid shut-in royalties under the
lease.
1.  Is the lease kept alive after seven months of no production?
2.  Is the NPRI deed kept alive?
Now assume no shut-in royalties were paid
1.  Is the lease kept alive?
2.  Is the NPRI deed in effect?
9 Royalty Interests: Duty of Utmost Good Faith
Manges v. Guerra
Manges v. Guerra, 673 S.W.2d 180:
1.  Facts
46.6% NPMI
Guerra
Manges
O&G
Lease
Farm-Out
Manges
(affiliate)
1/8 royalty
$2 per acre delay rental
$5 bonus
Schero
1/8 Royalty
50% cost free w.i.
2.  Court reasoning
“Based upon the actual damages and the jury findings, the Guerras are entitled to recover
exemplary damages. The jury found that Manages had willfully disregarded the rights of the
Guerras in several specific ways, including his failure to negotiate for mineral leases with third
persons, that Manages’ actions were in willful and unconscionable disregard of the interests of the
Guerras, that the conduct was malicious or wanton, and that the Geurras should receive as punitive
damages the sum of $500,000. Manges did not breach a contract; rather, as the jury found, he
willfully, wantonly, maliciously and unconscionably breached his fiduciary duty. We affirm the
judgment on the verdict for punitive damages.”
10 Royalty Interests: Duty of Utmost Good Faith
Review Problem at 8-22
Oscar owns a tract of 100 acres in South Central Texas upon which he operates a small horse farm. Bigg oil
has offered to lease with a $500 an acre bonus and a 1/8 royalty. Little Oil has offerred a lease with a 1/6
royalty but only a $20 an acre bonus.
a)  Suppose an NPRI has a right to ½ of all royalties. Is Oscar free to lease the land to Bigg Oil for the large
bonus money?
b)  If Oscar sells a 1/16 nonparticipating royalty to Jane, would this make a difference?
11 Royalty Interests: Duty of Utmost Good Faith
Lesley v. Veterans Land Board
Lesley v. Veterans Land Board, 352 S.W.3d 479:
1.  Facts: Hedrick and Lesley each owned an undivided ½ NPMI in the acreage underlying a 4100 acre
tract . They had reserved these NPMI interests in the deeds that sold the 4100 acre tract to Developer.
The Developer owned the Executive Right over all minerals in addition to owning the surface. Developer
inserted restrictive covenants in the deeds to the Lot Owners prohibiting oil and gas development. The
covenants could be amended by a 2/3 vote of the Lot Owners.
2.  Court reasoning
“But we need not decide here whether as a general rule an executive is liable to a non-executive
for refusing to lease minerals, if indeed a general rule can be stated, given the widely differing
circumstances in which the issue arises. . . . . Following Manges, we hold that Bluegreen breached
its duty to Hedrick and Lesley by filing the restrictive covenants. The remedy, we think, should be
the same as Manges; cancellation of the restrictive covenants.”
12 Royalty Interests: Duty of Utmost Good Faith
KCM Financial LLC v. Bradshaw
KCM Financial LLC v. Bradshaw, 457 S.W.3d 70:
1.  Facts: Bradshaw owned NPRI in ½ of any royalties. Early offer was for 1/4th royalty and $200,000
bonus. ER holder agreed to 1/8th royalty and $13 million bonus. Bradshaw filed suit alleging the ER
holder breached its duty to the NPRI.
2.  Court reasoning
“An executive owes a non-executive a duty that prohibits self-dealing but does not require the
executive to subjugate its interests to those of the non-executive. Thus, in ascertaining whether the
executive breached its duty to the non-executive, the controlling inquiry is whether the executive
engaged in acts of self-dealing that unfairly diminished the value of the non-executive interest. ”
“There is thus some evidence that a one-quarter rate was at least attainable, if not ubiquitous, and
that the deal may have been deliberately structured to reduce the royalty in favor of benefits that
would not be shared with Bradshaw. To be fair, there is also evidence supporting contrary
conclusions and inferences, but none that we are permitted to consider in light of the applicable
standard of review. Because some evidence supports Bradshaw's allegation that the mineral lease
was the product of self-dealing on Steadfast’s part, Steadfast was not entitled to summary
judgment.”
13 Royalty Interests: Duty of Utmost Good Faith
Review Problem at 8-26
Weavers owned 100 acres of land and executed a lease on it to Bigg Oil dated September 4, 1992. The lease
was for 10 years and provided for a 1/8 royalty. A year later, the Weavers sold a “¼ of roylaty” NPRI interest
to Able.
Big Oil also leased adjacent lands and produced on the adjacent lands. Weavers alleged that Big Oil should
have drilled an offset well to prevent drainage. Big Oil settled with the Weavers by giving them 1/8 of
proceeds from well on adjoining tract. Big Oil promptly paid $370,000 in settlement of this dispute.
Able wants to know whether to sue to recover ¼ of the amount of the settlement.
Question: What advice would you give Able?
14 Royalty Interests: NPRIs and Pooling
Brown v. Smith
Brown v. Smith, 174 S.W.2d 43:
1.  Facts
2.  Court reasoning
“The royalty interest reserved by Mrs. Lee is an interest in land. The language used, by which
Mrs. Lee reserved to herself the one-thirty-second royalty interest in all of the 20 acres conveyed,
with provision that the royalty be delivered to her as is usual where oil, gas, or other minerals are
produced and saved, negatives the existence of an intention to confer upon her grantee the power
or authority to convey or in any way dispose of any part of the royalty interest which she
reserved.”
th
([1/8
NPRI
Lee
(1/4th of 1/8 NPRI)
Floyd Smith
nd ]
– 1/32
2.
x 20/6
75)
th
(1/8
Ector Smith
20 Acres .75)
/62
x 40
Lessee: Brown & Wheeler
42.75 Acres Where is the Well?
15 Review Problem: Based on Brown v. Smith
th
([1/8
NPRI
Lee
(1/4th of 1/8 NPRI)
Floyd Smith
nd ]
– 1/32
2.
x 20/6
75)
h
t
(1/8
75)
/62.
0
4
x
Ector Smith
20 Acres Lessee: Brown & Wheeler
42.75 Acres Where is the Well?
Well on 20 Acres
Floyd Smith:
Ector Smith:
[1/8th – 1/32nd] x 20/60 = 3/96
1/8th x 40/60th
= 8/96
Ms. Lee: Ratify
1/4th x 1/8th x 20/60 = 1/96th
Don’t ratify 1/4th x 1/8th
= 3/96th
Well on 40 Acres
[1/8th – 1/32nd] x 20/60 = 3/96
1/8th x 40/60
= 8/96
1/4th x 1/8th x 20/60
= 1/96th
-016 Royalty Interests: NPRIs and Pooling
Montgomery v. Rittersbacher
Montgomery v. Rittersbacher, 424 S.W.2d 210:
1.  Facts
Montogmery
(½ of Royalty)
NPRI
First Tract
80 Acres Dry Hole
Second Tract
124.19 Acres 80 Acres Well
320 Acres Crutchfield Pooled Unit
2.  Court reasoning
“We think that the non-participating royalty owner, so far as the existence of an option is
concerned, occupies a comparable position to that of a cotenant under a lease made by his cotenant
or a non-participating royalty owner under a pooling agreement made by the holder of the
executive rights. As to the cotenant, it has been held that he has the right to ratify or repudiate a
lease made by his cotenant which covers his interest. Likewise, in the pooling area, if a nonparticipating royalty owner ratifies a pooling agreement, either by joining in the execution of the
agreement or by accepting royalties from the pool, his interest is bound by the pooling agreement.
Therefore, we hold that the non-participating royalty owner has the option to ratify or repudiate a
lease containing provisions which as to his interest the holder of the executive rights had no
authority to insert in the lease.”
17 Royalty Interests: NPRIs and Pooling
DeBenavides v. Warren
DeBenavides v. Warren, 674 S.W.2d 353:
1.  Facts
NPRI
First Tract
DeBenavides
Well
Beneavides Unit #1
(Pooled Unit)
2.  Court reasoning
“Defendants’ royalty interests conferred upon Defendants an election to ratify and accept the
benefits of all such acts. Such election remained open to Defendants [the NPRI owners] until such
time as Defendants actually learned of the unauthorized acts of Plaintiffs and their lessees and
thereafter unless and until Defendants took some action or made some claim inconsistent with
ratification.”
18 Royalty Interests: NPRIs and Pooling
London v. Merriman
London v. Merriman, 756 S.W.2d 736:
1.  Facts
2.  Court reasoning
“The Merrimans accepted the offer by ratifying the lease, which the trial court found occurred
when suit was filed in 1983. Bring suit constitutes an implied ratification of an unauthorized act.
By ratifying the lease, the Merrimans became a party to it, and the rule that the execution of an oil
and gas lease by more than one mineral interest owner effects a pooling of their interests applied.”
19