CHAPTER 12 PANEL DISCUSSION: HYPOTHETICAL ROYALTY CASE

• Jurisdiction: United States

Oil and Gas Royalties on Non-Federal Lands
(Apr 1993)
CHAPTER 12
PANEL DISCUSSION: HYPOTHETICAL ROYALTY CASE
Dante L. Zarlengo
Law Offices of Dante Zarlengo
Denver, Colorado

Assume the following facts:

1. Grandpa Fudd owned the mineral estate underlying Black Acre, the family farm in Fuddrucker County, Oklahoma. On September 1, 1970, Grandpa Fudd executed an oil and gas lease on Black Acre in favor of Jones, a local lease broker. This lease provides for a 1/8 royalty based upon proceeds received from the sale of oil and gas produced from the lease premises, or if not sold at the wellhead, 1/8 of the value of the production from the leasehold.

2. Grandpa Fudd passes away in 1979, leaving title to Black Acre mineral estate to his son, Elmer, and to his close personal friend, Trixie. Elmer is a resident of Fuddrucker County. Trixie is currently a resident of Las Vegas, Nevada but would like to move to the south of France.

3. At about the same time, Grandpa Fudd's neighbors signed oil and gas leases on an identical lease form.

4. The leases from Grandpa Fudd and those from his neighbors are now owned by Major Oil X ("MOX"). MOX is incorporated in Delaware and maintains its primary office in Houston, Texas. MOX has drilled and successfully completed a number of oil and gas wells on Black Acre and the surrounding farms. In 1980, MOX unitized the entire neighborhood ("B-Unit"). Landman Jones secured ratification of the unit from all the mineral owners at the time, except Trixie who refused to sign it. Eighty percent of the production in B-Unit is from wells on Black Acre.

5. On June 1, 1979, MOX entered into an agreement to sell natural gas from Black Acre and B-Unit to Mega Pipeline Company of Iowa, Iowa ("Mega") under a 20-year contract for the maximum lawful price permitted by the FERC, ranging from $1.25 to $6.25 per mcf. The contract is typical in the area at the time. This contract also requires Mega to take and/or pay for a minimum quantity of natural gas subject to certain makeup rights. Then, in 1986 Mega ceased to take gas, did not pay the contract price for the gas it did take, and did not honor its take or pay obligations. Mega claimed that all of its obligations under the gas purchase agreement of June 1, 1979 were excused pursuant to the doctrine of force majeure. MOX immediately threatened to sue Mega for much

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money. However, the chairman of MOX, "CM," and the president of Mega, "PM," happened to belong to the same...