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Royalty Owners Get Some Tips on the Art of the Deal

For landowners and mineral owners in Texas’ hottest drilling plays, the state’s boom means long-lasting windfalls — if those lessors know what to look for in negotiating contracts. With new educational efforts, advocates for royalty owners hope to bolster their position.

Pipes used for fracking are shown in front of a Fasken OIl and Ranch drilling rig outside of Midland on Oct. 8, 2013.

LIVE OAK — At the front of a cramped classroom at the Alamo University Center, George Wilson, in a singsong voice, lectured about two dozen students on the finer points of the state’s laws on oil and gas royalties, spouting terms like “Mother Hubbard clause,” “habendum clause“ and “force majeure.”

When an energy company representative inquires about leasing and throws one of these clauses out, you need to know how to respond, Wilson said. He then followed with one of his “No. 1” rules for royalty owners learning about their rights: “Everything in an oil and gas lease is negotiable.”

Wilson, a Dallas-based consultant and instructor for the Texas Christian University Energy Institute’s Royalty Owner Program, had no trouble keeping the class’ attention. The students — some in their 30s, others twice that age and each with a different level of experience with drilling matters — knew they would eventually be tested, and their monthly royalty checks would serve as report cards. “Make the best deal you can, since you’re going to have to live with it,” Wilson said, “hopefully for up to 80 years.”

For landowners and mineral owners in Texas’ hottest drilling plays, the state’s surge of oil and gas production means long-lasting windfalls — if those lessors know how to deal with companies looking to protect their bottom lines. That is not always simple in a state whose laws can seem to protect energy producers at the expense of property owners.

Advocates for royalty owners hope to bolster their position with the help of new educational programs and easier access to information online. That includes the three-day Energy Institute program offered near drilling communities across Texas. Since January last year, more than 300 people have taken the program, including a few out-of-staters.

“What we realized was that there are many programs offered out there for oil and gas professionals,” said John Baum, a principal at the CER Energy Institute, which developed the TCU curriculum. “But there were no programs for royalty owners, and we wanted to see if we could help level the playing field.”

Representatives for oil companies and landmen, who negotiate mineral leases, said they encourage such efforts, and added that they are not out to fleece royalty owners.

“Everybody’s got to learn to work together on this type of stuff,” said Martin Schardt, the executive vice president of the American Association of Professional Landmen, based in Fort Worth. Spurred by hydraulic fracturing, Texas has produced record amounts of oil this year. The state’s production has more than doubled in three years, and it accounts for more than a third of all domestic production, netting billions of dollars for Texas landowners and mineral owners. Plenty of Texans, however, struggle to navigate the state’s complex oil and gas laws.

“I wish I would have known some of this before,” said Rob Bowers, who enrolled in the TCU program after taking over South Texas oil leases passed down by his grandfather. “I’m realizing I made some good decisions, and some bad decisions.”

A royalty owner might get a poor deal for a variety of reasons. For instance, one might sign the first lease a company presents without investigating whether neighbors have agreed to higher bonuses, larger royalty percentages or other perks. Hidden in a poorly scrutinized lease could be clauses unfavorable to royalty owners. A “Mother Hubbard” clause, for example, gives an operator rights to later drill on “adjacent or contiguous property” not itemized in the agreement. In those cases, royalty owners cannot negotiate new leases for that land, ditching the possibility of earning another signing bonus.

Texas mineral owners often do some homework before signing a lease, but they have traditionally studied privately — shuddering at the idea of sharing such information with neighbors, said John McFarland, an Austin lawyer who represents mineral owners. “Even relatives who hold interest in the same tract won’t be able to get together to negotiate,” he said.

In the TCU class, Wilson, punctuating his sentences with fist pumps and “hallelujahs,” told his students that they should use the growing number of online message boards for mineral owners to exchange information. Some Texans do not mind sharing information. Mary Jane Young, a West Texas rancher, mentioned the names of two companies with whom she refuses to do business. But Young said most of her experiences have proved positive, with few deals falling through. “In West Texas, we shake on a deal, and that’s a deal,” she said.

Signing a lease, however, is just part of the equation for royalty owners. The lessors are responsible for ensuring that energy companies honor leases and pay what they owe. It is not uncommon for an audit of production data and royalty checks to discover shorted payments — whether because of faulty equipment at a well site or a company’s miscalculations.

In a typical example, an operator shaves off fractions of royalty payments — in some cases 25 percent or more — to cover the cost of marketing oil and gas once it is out of the ground. That includes gathering, treating and transporting the fuel. That practice is legal, but a well-drawn lease (from a royalty owner’s perspective) would forbid it. One alumnus of the TCU program recouped tens of thousands of dollars in unpaid royalties after realizing his lease barred postproduction deductions. But some shorted royalty owners encounter more resistance.

Dozens of mineral owners across North Texas have recently sued operators over such claims. In 1996, the Texas Supreme Court ruled that leases contained implied deductions even when certain language appears to forbid the practice. Courts have cited that ruling, Heritage Resources v. NationsBank, in recent decisions favoring drillers. That was far from the only time the high court sided with energy producers in disputes with royalty owners, oftentimes overturning a lower court’s decision, McFarland said. Other examples include allowing companies to enforce statutes of limitations (usually four years, but sometimes two) on challenges over shorted payments — even if the royalty owner did not discover the discrepancy until years later.

In May, the Texas Supreme Court accepted a new case on the issue. Terry Retzloff, the president of the Texas chapter of the National Association of Royalty Owners and a former oil company worker, said such hurdles should only motivate Texans to more closely scrutinize their leases.

“It’s our own personal responsibility to take care of our own lives, own documents,” he said.

As for Wilson, he said his view of the relationship between lessee and lessor had shifted over the decades — from adversarial roles to a wary partnership.

“The operator can’t get along without the royalty owner,” he said, “and the royalty owner can’t get along without the operator.”

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