“You Never Give Me Your Money”—Some Common Oil & Gas Royalty Disputes

Natural gas and oil development, especially in shale plays that require a lot of wells and a lot of activity, can be inconvenient and noisy.  There are also, of course, various criticisms and protests around some of the processes used, such as hydraulic fracturing, and around the overall level of activity, such as truck traffic.  The gas and oil producing industry values strong relationships with the communities where it needs to work, and can use all the friends it can get as it takes the lead in developing the nation’s vast energy resource.  Bringing big economic benefits to those communities, which are often rural or industrial areas hard-hit by economic downturns, is clearly really important in the efforts to build those relationships and friendships.  There are a lot of different kinds of economic benefits deriving from supply development, but by far the most important to the affected landowners are the royalties resulting from private mineral rights.  Today we continue our examination of the inner workings of oil and mineral rights issues, this time considering some common oil and gas royalty disputes.

Background

Private mineral rights, the ownership by a landowner of the natural gas and oil under that landowner’s property, represent one of the most important aspects (maybe the most important) of the U.S. oil and gas shale revolution.  Because, unlike many other countries, the people directly affected by the inconvenience of development can have a direct economic stake in the outcome, there is frequently an atmosphere of common effort toward safe and responsible (and rapid!) development very difficult to achieve anywhere else (Note:  Having indicated earlier that private mineral rights were unique to the U.S., we were reminded that there are a degree of residual private rights in countries such as Canada, Australia, and Trinidad/Tobago, and that the Supreme Court in India has recently changed the law to allow such rights).  

In the first installment of this series,You Never Give Me Your Money”—Royalties are Critical but Complicated, we explored the royalty--the payment by a producer to the owner of the mineral rights, for the right to drill and produce.  This direct infusion of money (frequently big money) into the pockets of individuals in the local economy can make for a wonderful courtship.

Then, after the courtship and wedding, the royalty owner, working-interest owner, and operator settle in for a long marriage.  And this is a marriage where some of the underlying assumptions have changed a great deal—particularly the value and attractiveness of some of the natural gas development, at least in the short term.  Thus, there are a number of areas where disputes have come up between royalty owners and producers, often leading to litigation and always requiring a lot of administrative vigilance on the part of the producer (as in, be sure you follow all the requirements of all the leases to keep from losing them).  To be sure, the operators, who are the primary face of the producing industry seen by the community, work very hard to be valued members of that community, and between such efforts and the economic benefits they represent, it’s reasonable to expect that especially in revitalized rural and industrial areas, the operators remain very popular.  As we’ll point out a bit later, the actual volume of serious disputes is not huge, but an understanding of the types and the issues is important on both sides of the table.  We’ll explore four of these issues below in more detail. They have all been exacerbated by the economic pressure placed on producers as gas prices went way down right after competitive leasing frenzies had pushed the up-front cost of leases way up:

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