Know Your Rights - Texas Mineral Law
Place to discuss and learn about oil and gas legal issues in Texas.
Carried Working Interest in Texas
Here’s a hypothetical situation. Suppose there is a 90-acre undivided tract which is 2/3 leased ... with 1/3 holding out (30 net mineral acres).
One operator has all the surrounding property leased ... and pools the 90 acres into a 360-acre pool ... then begins drilling wells ... NOT on the 90-acre tract with the holdout. If I understand the Texas law correctly, the 90-acre leased mineral owners will receive their proportionate share of royalties from all the pool wells ... while the 1/3 holdout will receive nothing.
But suppose this turns out to be a very good play ... and eventually the operator decides that the 90 acres is too valuable not to put a well on ... so they go ahead and drill a well on it ... and the 1/3 holdout becomes a carried working interest.
What percentage of that well would the 1/3-holdout carried working interest own?
(a) .3333 (30 net mineral acres divided by the 90 undivided acres), or
(b) .0833 (30 net mineral acres divided by the 360-acre pool), or
(c) none of the above ... I don’t have a clue what I’m talking about.
And how likely is the operator to pool, or drill on, the 90-acre undivided interest with the burden of 1/3 of it being unleased?
Thanks for your insight!
Ben Elmore
The holdout is entitled to 1/3rd of all production from the well without dilution from the unit under pre-2008 law. After the Texas Supreme Court's opinion in Wagner & Brown v. Sheppard, however, there is an argument the lessee can make that the holdout's 1/3rd is diluted by the unit. In other words, the holdout would receive 30/360ths of production. This is based on language in the opinion that a lessee's unit designation that describes the pooling of "lands" and not just "leases" would include the holdout's share in the unit. This of course ignores the law that a holdout would have to ratify the unit in order to be bound by it, but the court did not address that issue. I believe the holdout has the better argument that he gets 1/3rd of production without unit dilution.
As to your last question, that depends on a lot of factors, such as cost to drill the well, expected recoverable reserves, the lessee's net working interest, among other things. A lessee is taking a risk drilling on the tract with the unleased interest in this respect, because it would have to create new law that is an extension of the Wagner & Brown decision.
Dec 21, 2011