John D. Sloan Commercial Law Blog on Lawyers.com

Mineral estates embody five rights that include the following:

·         Lease

·         Develop

·         Receive bonus payments

·         Receive delay rentals

·         Receive royalty payments

The holder of a mineral estate—the lessor—has the right to capture any minerals on his estate, even if they migrated from another‘s property.  This rule encourages developers to extract resources from an estate as quickly as possible.

The lessor’s royalty equals their share of production, minus production costs.  Production costs may include drilling, seismic imaging, etc.  Post-production costs, such as compression and transportation, may factor in as well.  Oil and gas leases should specify whether to base royalties on market value at the well, the posted price for oil, or the amount actually obtained by the lessee.

Oil and gas leases frequently include clauses that allow multiple leases to be pooled together.  If lessors become part of a unit, their royalties are recalculated to represent their share of the entire pool. 

Generally, there is no explicit law or requirement in a Texas oil lease for the lessee to drill.  The lessee—typically an oil and gas company—may simply acquire the land in order to prevent a competitor from developing nearby.  However, once a well is brought in, the lessee is required to drill and develop the land in a manner consistent with how a “prudent” developer would proceed. 

This covers the duties of the lessee to develop and market, with reasonably modern equipment and practices, and to exercise good faith in the marketing of the extracted gas or oil.

The lessee has an obligation to protect the lease from drainage by competitors.  In case of breach of this covenant, there must be significant drainage before the lessor can take action.

Under Texas Natural Resources Code §91.502, the lessee must provide certain information with each royalty pay stub.  If the lessee fails to report this information, the lessor may file suit.

Texas law finds an implied—when not explicit—reasonable use clause in every oil and gas lease.  The lessee may develop the surface land to a reasonable extent in order to extract minerals, but must act without negligence.

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