Are Your Overrides Really Pooled? REALLY?

The answer may depend on whether they were created by assignment or by reservation.

An uncommitted overriding royalty interest in a unitized tract can gum the works.  Its owner can claim her full undiluted percentage of production from a drillsite tract, forcing the operator to pay excess royalties.

Royalty interests are interests in real property.  They cannot be transferred without the consent of their owner.  Because pooling effects a cross-conveyance of interests, royalties cannot be pooled without their owner’s consent.  Veal v. Thomason, 138 Tex. 341, 159 S.W.2d 472 (1942).

We often assume that the working interest owner’s power to pool the lessor’s royalty granted in an oil and gas lease extends to the power to pool overriding royalty interests that are subject to the lease.  See eg. Pyr Energy Corp. v. Samson Resources, 456 F. Supp. 2d 786, 793 (E.D.Tex. 2006).    That assumption is based mostly on the holding in Union Pacific Resources Company v. Hutchinson, 990 S.W.2d 368 (Tex. App.-Austin 1999).

A close examination of Hutchinson, however, reveals that its holding is much more narrow.  In that case, Ms. Hutchinson assigned an oil and gas lease containing a pooling clause to Union Pacific’s predecessor, reserving an overriding royalty interest of three percent.  The assignment assigned “all right, title and interest” to the lease, “together with the rights incident thereto or used or obtained in connection therewith.”

Union Pacific pooled 65 acres of the lease acreage with other lands to create a 336-acre unit.  It did not obtain Ms. Hutchinson’s joinder.  Ms. Hutchinson sued Union Pacific, alleging that the lands were wrongfully pooled without her consent.

Ms. Hutchinson lost.  The court held that Ms. Hutchinson originally had the power to pool the lease by virtue of its pooling clause.  Ms. Hutchinson assigned all lease rights, including the power to pool, to Union Pacific’s predecessor, reserving only her overriding royalty interest.  Finding it unlikely that the parties intended that Union Pacific’s predecessor acquire the right to pool the lease royalty but not the overriding royalty, the court held that no further consent to pooling was required.

The court did not hold that the lessee’s pooling authority somehow bled into the overriding royalty interest.  Although the federal district court in Pyr Energy Corp. v. Samson Resources, applying Texas law, stated that a royalty carved from a lease containing a pooling clause is subject to being pooled by the working interest owner, that confusing declaration was an overbroad interpretation of the holding in Hutchinson.  Because the royalty in Samson was created by reservation, the court’s declaration was dicta.

If Ms. Hutchinson had acquired her overriding royalty interest by grant from a working interest owner, the result may well have been different.  The doctrine that a conveyance is to be construed to convey the greatest estate that can fairly be gleaned from the conveyance document is covered at length in Bruce Kramer’s, The Sisyphean Task of Interpreting Mineral Deeds and Leases: An Encyclopedia of Canons of Construction, 24 Tex. Tech. L. Rev. 1, 117 et seq. (1993).  If Ms. Hutchinson had been granted her overriding royalty interest, then the court may well have held that the power to pool that interest had also been granted to her as an incident of ownership.  Had that happened, the court would necessarily have held that Ms. Hutchinson’s overriding royalty interest could not be pooled without her joinder.

It is risky to assume that a working interest owner may pool an overriding royalty interest just because the lease to which it is subject contains a pooling clause.  Without examining the circumstances of the overriding royalty’s creation, you risk liability for payment of the royalty on an undiluted basis.









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