In a past life, this author was a “pipeline lawyer” who represented the crude oil purchaser (the company that typically owns the pipeline where the oil is delivered).  As a pipeline lawyer, I was called upon to interpret deeds, wills, assignments, and other documents whereby a grantor purported to convey or reserve some interest in oil and gas. My job was to ascertain legal title to the oil delivered to the pipeline  and prepare a “Division Order Title Opinion.” The Division Order Title Opinion was the foundation for a Division Order that , specified how the payments for the oil and gas were apportioned. It can be more difficult than it sounds, especially when people who don’t know what they are doing have drafted the instrument.

More Money, More Problems  

There is real estate in Ohio that is now much more valuable than it was before the advent of horizontal drilling and fracking. Owners of that real estate, like the owners of other kinds of wealth, will want to provide for subsequent generations, for charities, etc. As ownership interests pass through the generations by death, divorce, and deed, imprecise language of conveyance and reservation can  create confusion and possibly result in a loss of a property interest.

A recent case in Texas, Moore v. Noble Energy, Inc., 374 S.W.3d 644 (Tex.App. 2012), provides an example.  In 1955, J.C. Moore conveyed 160 acres using a deed with the following reservation:

THERE IS RESERVED unto the Grantor herein, his heirs and assigns a one-half non-participating royalty interest (one-half of one-eighth of production). It being understood that the grantor herein, his heirs and assigns, shall not be required to join in any lease, bonus money or delay rentals, but shall only participate in production.

Successors to the grantee of the property subsequently entered into a lease in 2003, which provided for a 3/16 royalty. Four gas wells were drilled and completed under the lease. A dispute later arose over the division of the 3/16 royalty, and the Moore heirs filed suit in 2010, seeking relief including a declaration that the 1955 deed reserved a non-participating royalty of one-half the royalty contained in any future lease.

The court said that there are three possible interpretations of the quantum of royalty reserved in the 1955 deed:

  1. a one-half non-participating royalty;
  2. a royalty of one-half that retained in any future lease; or
  3. a royalty of one-half of one-eighth, or one-sixteenth.

The Moore heirs argued that the reservation was ambiguous and that they should have half of 3/16 (i.e., 3/32). The grantee’s successors argued that Moore reserved only 1/16 (i.e., 2/32). While the court’s opinion has no discussion of its value, one can surmise that the 1/32 royalty interest at stake is worth a lot.

The trial court’s order granting summary judgment to the grantee’s successors stated that the royalty reservation was not ambiguous. To reach that conclusion, the trial court found that the deed is reasonably read to reserve a fixed royalty of one-half of one-eighth of production, or one-sixteenth, and cannot reasonably be read to reserve a one-half royalty or a royalty of one-half that retained in a future lease.

The appellate court agreed with the trial court’s finding, reasoning as follows:  

A grantor of land may reserve an interest consisting of a fraction of the royalty retained by the lessor under an existing mineral lease, or that retained under a lease made in the future. Such an interest is commonly referred to as a “fraction of royalty.” The court cited an earlier Texas case contrasting “fraction of royalty” with “fractional royalty.”

Fraction-of-Royalty

The owner of a “fraction-of-royalty” is entitled to a share of mineral production equal to the stated fraction times the royalty retained in the lease. The earlier case noted that the share of production attributable to fraction of royalty is not fixed but “floats” with the quantum of royalty contained in the lease. “The owner of 1/16 fraction-of-royalty takes 1/16 of whatever royalty the lessor reserves.” 2 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers Oil and Gas Law, § 327.2 (LexisNexis Matthew Bender 2009).

Fractional Royalty

The owner of a “fractional royalty,” by contrast, is entitled to the stated fraction of gross production, unaffected by the royalty reserved in the lease. “Thus the owner of 1/16 royalty takes 1/16 of gross production whether the lease provides for a lessor’s royalty of 1/16, 1/8 or 1/4.” Williams and Meyers, Id.

The court indicated that the parenthetical language of the 1955 reservation also is indicative of a fractional royalty, spelling out the reserved interest as one-half of one-eighth of production.

By contrast, none of the language of the 1955 deed reservation is typical of a fraction-of-royalty reservation. See Williams & Meyers, § 327.2 (listing, among examples of language creating a fraction of royalty, “an undivided one-half interest in and to all of the royalty,” and “one-half of one-eighth of the oil, gas and other mineral royalty that may be produced.”

The appellate court concluded:

Because of the absence of any language indicating the parties intended a reservation of a fraction of royalty, we must conclude the reservation can reasonably be read only to reserve a fractional royalty. … Of the three possible interpretations of the language the parties used, it is the only interpretation we find reasonable. By that reading, the parenthetical phrase explains and defines the “one-half non-participating royalty interest” as equal to one-half of one-eighth of production.

By this reasoning, the court determined that the Moore reservation was best described by option (c) above.  But, because of the imprecise language he used to describe his reservation, old man Moore’s true intentions may never be known.

Learn From Old Man Moore: Choose Your Words Carefully.

Would it have been better for Mr. Moore to have simply reserved one-half of the minerals and to have acknowledged that they were subject to a lease at the time? What if he were still alive and had reserved one-half of the minerals for his lifetime? Could he still collect half of the 3/16 royalty? Absent an indication one way or the other, would he have a right to a signing bonus or any other non-royalty lease payments?

Even if it weren’t so complicated, given the large amounts of money at stake, disputes are inevitable. Guaranteed. Whether you are the grantor or the grantee, use an attorney who  understands the subtle, and critical, nuances of oil and gas conveyance language. There is one certainty in all this — the pipeline lawyer in charge of interpreting conveyance documents will not pay out a disputed share and likely won’t pay interest on any amount withheld while a dispute is being resolved. Ask me how I know.