If a mineral owner were to lease to an energy company, that energy company to lease to another, and that company elects to forego well participation and is subject to unitizing by the corporation commission; then are the terms of the mineral owner’s lease respected throughout the process?
Is there a case history or statute for this situation?
Maxine
Short answer is yes. A lease is a legal contract. Whether that lease is assigned to another company or not, the terms of the contract do not change. Now, whether or not those terms are RESPECTED is ultimately up to the owner/operator of the lease.
Maxine Jenkins said:
Jordan,
Thank you for your reply to my question. Your comments are most helpful. Again, are you aware of any statutes for this situation?
From reviewing the forum comments, apparently honoring a contract may be an issue with some energy companies. And I see that you capitalized “RESPECTED” which leads me to think I best be prepared were I to be dealing with one of those energy companies. From your experiences, could you please suggest a strategy that one might utilize to best encourage the honoring of that contract? Best and worst case scenarios, please.
Maxine
There are literally thousands of examples of breach of contract cases, but as far as any particular case that established statutes or laws, it would depend on which particular provision of your lease you feel is in, or currently in danger of being violated.
Is there any particular concern you are having, or is this just a general concern?
Jordan,
Does the "operator" of the well have to abide by the terms of my lease in the event "my lease holder" elects not to participate in drilling of the well, does not assign the lease to any other interested party, and the corporation commission is compelled to allow for forced pooling?
I’m seeking the legal statutes that set the precedence for what compels the drilling oil company to make specific performance of the lease when the current mineral leasing energy company decides to forego participation for whatever reason?
Maxine
The operator who pools your leases into the unit must abide by the terms of your lease, yes. Even if your lessor does elect to participate, they are not the appointed operator, so depending on the provision of the lease which may or may not be violated, they wouldn't really have anything to do with honoring that provision.
Here are a couple of light reading links for you:
http://www.law.ou.edu/sites/default/files/files/FACULTY/05%20secrist%20note%20blu4.pdf
http://digitalcommons.law.utulsa.edu/cgi/viewcontent.cgi?article=1737&context=tlr
Jorday,
Thank you for providing the links. This type of information was what I was seeking.
A similar discussion (versus our discussion of an energy LLC) arose this Saturday during the Oklahoma Mineral Owners Association meeting concerning "arms length" leases where an example was given as a brother and brother-in-law paying and providing a lease that would be pooled by the Oklahoma Corporation Commission. The analysis was that the OCC was more atune to royalty apportionment and bonus and the apportionment would be assigned the least amount with the highest bonus unless the lease owner specified otherwise. When asked about how the OCC may view the terms of the lease, the consensus was this was a gray area and might be interpreted by the OCC similarly (or not at all since their duties lay more toward apportionment and bonus payments) to the royalty apportionment and bonus.
Would you please elaborate on your opinion as to how the OCC may respond to the pooling order of an energy LLC who chooses not to participate and the terms of the lease. Would these two case examples be comparable and treated comparable by the OCC?
Maxine
I don't see how the operator could legally assign you a royalty amount less than that on your lease form, but I certainly can see the "gray area" created by the scenario. At the very least, I would assume that the owner of your lease would be liable for negligence by failing to act properly in the pooling hearings/orders.
This could be an instance of the lease owner hoping the pooling terms offer a higher royalty amount than the royalty on your lease. The lessee could assign the lease to the operator for an overriding royalty on top of your lease royalty.
There is no statute that requires the operator to abide by the terms of a pre-existing lease in a pooling. 52 OS 87.1 holds that the burdens become the burden of the operator. The case of O'Neill v. American Quasar holds that in certain circumstances the operator takes on those burdens in a pooling.
This result is made clear by the court's statement in O'Neill, 617 P.2d at 185:
The statute provides the excess royalty is to be paid by the lessee out of his working interest. Under the last quoted statutory provision (52 O.S.1971 § 87.1(d)) when an owner of a working interest elects not to participate in a unit well, electing rather to accept a bonus or royalty in lieu thereof, that working interest becomes the property of a person authorized to drill the well, and that unit operator is required to pay the bonus. Youngblood v. Seewald, 299 F.2d 680 (Okl. 10 Cir.1961)....”