Question on Selling Royalties vs. Selling Mineral Rights

Let's say I have a property and it is producing gas, and I have a lease with the operator.   Now I sell the royalties.  Fast forward to the future, and let's say the well has dried up.  It is plugged and abandoned, and the lease ends.

 

Is my agreement with the royalty purchased over with at the time the lease ends?  Does that royalty purchaser have any claim to any future royalties that might result from a future lease?

 

I think the answer is no, but someone tried to tell me that the royalty purchaser has a 10-year period, after the lease ends, where he still has rights to future royalties.  I think this person is confusing the purchase of mineral rights with the purchase of royalties.  But I thought I'd ask here, just to see if anyone has any thoughts.

 

Thanks in advance.

Tags: mineral, prescription, rights, royalties

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I think the code says it does commence anew from cessation of production. Somewhere around Article 80 and thereafter.  Also though, royalty conveyance rights are determined by contract.  You can't contract around the 10 years to make it longer but I have seen royalty conveyances that make it shorter or that peg it to one certain lease's effectiveness.

HBP,

 

I don't think I understand your answer, but I did go to the part of the code you mentioned.  It seems to say that there is a 10-year prescription applied to royalties, and not just mineral rights.  Is this right?

 

I guess the person who talked to me knew what he was talking about.

Broadly - yes.  10 yrs is in the code for royalties too and that area of the code has some specific language re: royalty, but you are allowed to contract for a lesser period  with the  actual language in a royalty conveyance lessening the 10 yr itself or pegging it to a specific lease's term.  If it is not adjusted in the language then you may fall under the broad 10 yrs.   Also, many royalty deeds will have some language that state it is in effect for the current lease, or future leases during its effective period. 

 

Sometimes an owner may assume a royalty deed is pegged to their lease because they hear "royalty" and think just the royalty in the active lease.  But you have to watch the language.

HBP.  Thanks for your help.  Yes, my initial reaction was that royalties are simply pegged to a lease, and when the lease ends, so must the royalties.  That's why it always pays to read the law, and not just assume that the law is what one thinks it must be.  Your help and insight are greatly appreciated.
I am an oil and gas landman and an attorney and HBP is right on; roughly speaking, if the language is not tied to a specific lease term, the landowner may well have sold "mineral code" royalty, a real right, and subject to the 10 year liberative prescription which would not start to run until production ends.  The owner and holder of such a right would then own the right for 10 years absent production; if production were established within such time period the prescription would be interrupted and would commence anew for an additional 10 years once that production had ceased.

Ben,

My Mother sold property to myself and my Sister. She retained 1/2 of the minerals. During the 10 year period a well was drilled on the property and was a dry hole. I was told that the prescription re-started for another 10 years at the date of the abandonment. Was that correct?

prescription for minerals and royalty are different. read my blog.

 

fro minerals, the well itself was sufficint to interupt prescription. For royalty you have to have production OR a succesfull well test. a dry hol will interupt the mineral prescription, but not the royalty prescription.

Baron,

Thank YOU!!!!!!! In our case it really does not matter. That was back in 85 and there has been no activity since other than a couple of leases. But that clears a question I've had for a very long time. Thanks again for the answer.

Yes, the activities that interrupt prescription are different for mineral rights vs. royalty rights.  Thanks, Baron, for filling in some gaps.
what state are you guys in?
Louisiana.

Henry,

Your question touches upon a commonly misunderstood issue: What do you get if you own a "royalty?"

The confusion arises from the use of the word "royalty" to refer to a variety of different kinds mineral right. I will omit to rare breeds, but the three major types of royalty are:

"Mineral Royalty"/"NPRI" - This type of right is a burden on the land, rather than being dependent upon a lease or other contract. The Louisiana Mineral Code calls this kind of interest a "Mineral Royalty" (as opposed to a Louisiana "Mineral Servitude"). The other 49 commonly refer to this kind of interest as a "Non-participating royalty interest" or NPRI. This kind of interest may only be created by the owner of the full mineral rights, who carves out a portion of his revenue rights in the property. In Louisiana, the Mineral Royalty will be extinguished by prescription of non-use if production in paying quantities is not achieved for a 10 year period (or a shorter period if the parties so agreed). 

"Lessor's Royalty" - This type of royalty is a right to a portion of the proceeds due a mineral owner under the terms of his lease. A lessor's royalty may only be created by the Lessor (mineral owner) in favor of another. For example a simple conveyance might say "I agree to sell 50% of my rights in XYZ lease to Ray." If the lease expires, so do Ray's rights. NOTE: Mere mention of a lease of the property, whether in general or by reference to a specific lease, does NOT necessarily make the royalty dependent on the lease. When the lease expires, the Lessor's royalty is extinguished. 

"Overriding Royalty" - The mirror image of the Lessor's Royalty, "overrides" are created out of the Lesses's (oil company) right to revenues under a particular lease. There is NO PRESCRIPTION for this kind of royalty in Louisiana - it will continue to exist for as long as the underlying lease is in force. Overrides may only be created by the owner of the "Working Interest" in the property. 

A Basic Example To Bring Them All Together:

Assume Mo owns the mineral rights to a tract of land, which gives him the right to pay 100% of the costs of a well in exchange for 100% of the revenue. Mo leases his minerals to Speculator for a 20% royalty. Mo then sells to Roy "half of my royalty under XYZ lease to Speculator." Speculator's working interest gives them the rights to pay 100% of the costs of the well in exchange for 80% of the revenue. Now assume Speculator sells their rights to that lease to Operator, and Speculator reserves for himself a 1% overriding royalty. 

Operator now owns the rights to pay 100% percent of the costs of the lease in exchange for 79% of the revenue. (Working Interest)

Mo is now entitled to 10% of the revenue (1/2 of his 20%) from the lease with limited deductions for post-production costs. (Fee Mineral subject to lease)

Ray owns is now entitled to 10% of the revenue (1/2 of his 20%) from the lease with limited deductions for post-production costs. (Lessor's royalty).

Speculator now owns 1% of the revenue from the lease, with no obligation to pay costs. (Overriding royalty).

Sorry if this was overly simplified. The amount of confusion regarding this subject is great enough that I erred on the side of over-explaining.

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