October 14, 2014 Articles

Allocating Royalties Between Separate Tracts

Lessees should be cognizant of the dangers and uncertainty accompanying allocation wells.

By Christopher L. Halgren – October 14, 2014

The proper manner of allocating production has received increased attention sinceBrowning Oil Co. v. Luecke, 38 S.W.3d 625 (Tex. App.—Austin 2000, pet. denied.) and the more recent challenge to the legality of allocation wells. Many wells have been drilled in Texas that traverse multiple tracts with different ownership, requiring an operator or lessee to determine the proper method of paying royalties to each royalty owner. Sometimes, allocating royalties can be determined by use of pooling authority by obtaining a production-allocation agreement from each royalty owner. But where no prior pooling or sharing agreement exists or can be reasonably obtained, the lessee will have no guidance as to how to properly allocate production between separate tracts.

On December 20, 2013, the San Antonio Court of Appeals delivered an opinion that allocated royalties under the terms of a 1993 royalty-sharing agreement based on the proportion that the length of the productive horizontal lateral underlying each separate tract bears to the entire productive length. See Springer Ranch, Ltd. v. Jones, 421 S.W.3d 273 (Tex. App.—San Antonio 2013, no pet.). Whether this case presents merely the interpretation of a particular contract or has potential industry-wide application depends on whetherSpringer Ranch can answer at least one question posed by the Austin Court of Appeals inBrowning Oil Co. v. Luecke—how is production to be allocated between separate tracts absent pooling or other sharing agreement? If so, then Springer Ranch can be used as a court-approved method of allocation. While some suggested this approach may be appropriate, Springer Ranch appears to be the first Texas case that expressly accepts this methodology.

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