Method of royalty payment concern

General Mineral Rights Discussion
1

I have a lease offer that contains the following language regarding royalty payment: “royal shall be 1/5th of such production, to be delivered at lessee’s option to Lessor at the well head or to Lessor’s credit at the oil purchaser’s transportation facilities, provided that Lessee shall have the continuing right to sell such production to itself…” Does this language leave me exposed to having to accept any royal payment in the form of the oil product itself?

2

In the practical sense no, but you could have that option if you were willing to bear the cost and administration. Most royalty owners do not pursue the option.

3

Thanks, James. The last thing I want to do is take physical possession of any product from a well exactly because of the costs, which could exceed the royalty money value, and the logistics. My concern is in the legal sense, does the language “royalty shall be 1/5th of such production, to be delivered at lessee’s option to lessor at the well head…” leave me open to a lessee, for whatever reason, deciding to compel me to take physical possession of “such production”; being oil or. I would want assurance that this could never come to pass. Could this be accomplished by either modifying that language to read “royalty shall be 1/5th of the proceeds of such production…” Or, alternatively, “royalty shall be 1/5th of such production, to be delivered at Lessor’s option to Lessor…” Thanks, again!

4

This is common language in an OGL. The option is available to the Lessor if the Lessor wants to exercise the option, so you are not at risk.

5

You need to consult an oil and gas attorney about the lease terms and the meaning of the language from a legal perspective. Interpretation of contractual language under state statutes and court decisions can be very different than from a layman’s view. It may be that you will want to change the language in some way to accomplish your desire, but you need to be careful that it does not backfire. Review any change in any one paragraph to see if it causes change in another lease paragraph as they are often intertwined to work as a whole. The term proceeds can be problematical, particularly in Texas.

6

Thanks much. Particularly for the heads up about Texas as the property is in Texas.

7

Thanks for your input, James.