Assignment Of Overriding Royalty Interest

Assignment Of Overriding Royalty Interest-34
I’d love to hear your thoughts in the comments below! However, many states look to Texas law for guidance in oil and gas issues, simply due to the vast number of reported oil and gas cases in Texas over the last 100 years. In Texas, the general rule is that a lessee has no power to pool any type of royalty interest without consent of the owner.

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Subsequently, the lessee (“Predecessor”) assigned the lease to a company (“Successor”), with the reservation of an overriding royalty interest.

The assignment did not address pooling, but instead simply assigned “all right, title and interest in and to the [lease] together with the rights incident thereto or used or obtained in connection therewith.” The court concluded the overriding royalty was subject to the unilateral ability to pool by the Successor, even though consent was not directly and expressly given in the assignment.

There is one exception to this general rule that is so common, many in the industry go so far as to consider it the general rule. Where an oil and gas lease expressly grants a lessee the power to pool his interest, overriding royalty interests created out of that leasehold interest are also presumptively subject to the lessee’s pooling authority.

The rationale underlying this rule is that, because overriding royalty interests are carved out of the lessee’s interest, they are subject to the lessee’s exercise of its authority under the lease, including pooling authority.

(Remember, in Texas, ORIs are subject to the lessee’s pooling authority as contained within the lease).

The court cited a well-known Texas case which held that an assignor who retains an overriding royalty interest is entitled to the same protections afforded to the lessee under the express or implied covenants of the lease.

Samson, in that case, had proposed a second exception which would empower courts to declare that pooling authority could exist when (a) the relevant transaction is between oil companies or persons active in the industry, and (b) surrounding circumstances reflect an underlying intent of the parties to allow pooling.

However, the court rejected this argument, and declined to recognize a new “Industry Custom and Surrounding Circumstances” exception to the general rule.

It is extremely rare for oil and gas leases to state the lessor expressly reserves the power and authority to pool the lease.

Therefore, I believe the reserves the power and authority to pool, and (2) grants the Lessee the power to consent to the Lessor’s pooling authority.


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