Royalty Dispute Litigation

Experienced Royalty Dispute Lawyers in Houston

The oil and gas industry is a driving force of the Texas economy, but contracts between landowners and oil and gas companies are complicated, and royalty disputes often arise that require a skilled and experienced royalty dispute lawyer. Both the landowner’s royalties and the oil and gas company’s production can become jeopardized when disputes are not handled with care. The attorneys at Burford Perry LLP have the experience to resolve royalty disputes for royalty and mineral owners, lessors and lessees, and producers. Whether you are a producer facing allegations of unpaid royalties or a royalty owner who believes that you are owed additional royalty payments, you should speak with a skilled oil and gas litigator at Burford Perry LLP to protect your interests.

What Is Legally Considered A Royalty?

Real property includes both surface rights and mineral rights.[1] Most landowners are only interested in using the surface of the land, while oil and gas companies are primarily interested in what lies underneath it. This has led to a type of agreement between landowners and oil and gas companies where landowners continue to own, operate, and inhabit the surface of the property while an oil and gas company works to extract the resources underneath it.

A royalty is a share of oil and gas production, either in kind or its equivalent in money, reserved by the owner of the mineral estate for permitting an oil and gas company to extract minerals under a mineral lease.[2] The amount of a royalty payment is usually based on several factors including market value and the amount of resources extracted, among others. The formula used is incredibly complex, but also negotiable. When entering into a royalty agreement, it is incredibly important to have an attorney by your side to ensure you are getting a fair deal. Royalty agreements contain a plethora of industry-specific terminology requiring specialized knowledge to understand, and it is unwise to assume an oil and gas company is offering you a fair deal. If you agree to a royalty contract that grossly underpays you, you may have very little recourse. Further, while royalty owners are guaranteed certain rights, such as the fair payment of royalties, the underpayment of royalties and other lease violations have become common across Texas because there is no government authority enforcing the rights of landowners.

The “Producers 88” Mineral Lease

The “Standard Producers 88 Oil, Gas, and Mineral Lease,” is the most widely used form lease in the U.S. oil and gas industry. However, there are countless variations of the Producers 88.[3] When the Producers 88 was first created over one-hundred years ago, the variations were mostly a matter of a handful of boilerplate clauses that were or were not included in a particular form. As time went on, however, court began to interpret the boilerplate clauses and developed unwritten, “implied covenants” that applied to these leases to protect landowners, such as the implied covenant to develop, to produce and market oil and gas, and to operate as a reasonable and prudent operator. Today, leases titled as a “Producers 88” are far from standard, as oil and gas companies routinely include language specifically crafted to avoid the court-implied covenants. While landowners have always been at a disadvantage when negotiating and understanding oil and gas leases, today the large body of law interpreting oil and gas leases, court-implied terms, and the provisions designed to exclude implied covenants put landowners in a seemingly untenable position. Whether you are negotiating a new mineral lease, have been asked to sign an amended lease, or are considering whether the oil and gas company has violated the terms of your lease, you need an experienced oil and gas attorney to navigate the complex terrain and protect your interests.

Underpayment of Royalties

One of the most common royalty disputes is the underpayment of royalties. Because the formula dictating the amount of royalties can be incredibly complex, oil and gas companies often miscalculate payments. Additionally, some oil and gas companies look to limit the amount they pay landowners through fraudulent practices. Further, these mistakes or fraudulent practices may go unnoticed for several months or even years. Some ways oil and gas companies underpay landowners include:

• Using an incorrect market price to calculate payments of royalties
• Misrepresenting the volume of resources extracted from the ground
• Deducting post-production costs, unsold fuel, and other hefty fees

Royalty owners who have been underpaid, as well as producers who overpaid, can face significant challenges resolving these incorrect payments. For example, a producer who mistakenly overpays royalties may attempt to recoup the overpayment by withholding future royalties until the overpaid amounts are recovered, sometimes without notifying the royalty owner, but Texas law is not entirely clear as to whether such self-help recoupment is permissible. In other cases, royalty owners might have to recover their unpaid royalties from another royalty owner who was overpaid.[4] Given the complexities involved with the calculation and recovery of royalty overpayments and underpayments, both producers and royalty owners should seek knowledgeable and experienced counsel to resolve their royalty disputes.

Non-Compliance with Shut-In Royalty Provisions

Generally, a mineral lease will terminate at the end of the primary term unless the lease is held by production. A shut-in royalty clause, which is found in most oil and gas leases, is a type of savings clause designed to prevent the automatic termination rule through “constructive production.”[5] A shut-in royalty is a payment made by an oil and gas lessee to the lessor to keep a lease for lapsing when a well capable of producing is not being utilized, usually because a well has been drilled but there is no market for oil or gas or no pipeline ready to receive production. Disputes regarding shut-in royalty clauses frequently concern whether the lessee invoked the shut-in royalty clause timely and properly to sustain the lease. Even more, because many shut-in royalty clauses contain no time limitation and arguably allow the lessee to maintain the shut-in status indefinitely, shut-in royalty clauses create tension with the lessee’s implied or express covenant to reasonably market the oil and gas, resulting in litigation.[6]

Renegotiating Royalty Agreements

Because the value of a royalty payment is partially determined by market price, some landowners may receive significantly lower payments. Market price in the oil and gas industry has dramatically increased, so older royalty agreements are based on lower market prices. In instances such as these, landowners may be able terminate their agreement to renegotiate for a better price. However, to properly understand the exact terms of the agreement, landowners will need to hire an experienced royalty dispute lawyer to determine if termination is possible.

Title Ownership

Texas is no stranger to the oil and gas industry. Some royalty agreements are decades old and are passed down to the heirs of the original owner. For some oil and gas companies, the passing of a title to another individual is an opportunity to violate royalty agreements. In some instances, people who have inherited a royalty agreement may not be familiar with the terms or even have a copy of the agreement.

Other Royalty Disputes

Other types of royalty disputes can arise when the oil and gas company damages the environment, damages property on the land, or violates other important landowner rights. Unfortunately for landowners, oil and gas companies often have teams of lawyers whose sole job is to mitigate payout in the event of a dispute.

Successfully Resolving Royalty Disputes

The attorneys at Burford Perry LLP have represented landowners and oil and gas companies in disputes relating to all types of royalty agreements. We’ve won significant verdicts and negotiated large settlements for our clients. With degrees in accounting and economics and backgrounds in finance, accounting, and oil and gas, our attorneys bring a skill set to complex royalty disputes that few lawyers possess. Our attorneys will collect the necessary evidence to understand and evaluate your case at every stage to ensure that you receive the royalty payments you deserve or defend you from allegations of underpayments. Most importantly, our lawyers have the experience and prior success rate needed to try your case and win when negotiations fall short. If you or your company is involved in a royalty dispute, contact Burford Perry to learn about your legal options in a consultation.

[1] Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53, 60 (Tex. 2016).

[2] Lyle v. Jane Guinn Revocable Tr., 365 S.W.3d 341, 351 (Tex. App.—Houston [1st Dist.] 2010, pet. denied).

[3] A. W. Walker, Jr., Defects and Ambiguities in Oil and Gas Leases, 28 Tex. L. Rev. 895 (1950).

[4] Gavenda v. Strata Energy, Inc., 705 S.W.2d 690, 692 (Tex. 1986).

[5] BP Am. Prod. Co. v. Red Deer Res., LLC, 526 S.W.3d 389, 395 (Tex. 2017).

[6] See Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 557 (Tex. 2002).