Royalties are a share of the product or profit of the mining of oil or gas reserved by a landowner or mineral owner for permitting another to use his/her property. When a landowner leases the land to another person for development of oil and natural gas, s/he may demand in return a royalty, which is an agreed upon share of the minerals being developed[i].
Usually, a royalty reserved by a deed is free of the costs of production. It may be treated as a continuing right of participation in production. A landowner or mineral owner may reserve rights for a fractional royalty in the oil and gas produced from the land. It entitles him/her to a fixed rate of profit from the gross production of oil and gas from his/her property.
A royalty and mineral interest can be distinguished in the following way: in a sale of royalty interest, a purchaser receives something only if profitable production of oil and gas takes place. But in a sale of a mineral interest, a purchaser receives his/her proportionate share in the rental amounts under the lease and the subsequent leases. A mineral interest is a property interest created in oil and gas lease. It may include development and executive rights like the right to drill or execute an oil and gas lease.
A deed which transferred an undivided interest in all oil, gas, and minerals in and under the land with reservations to leasing rights, rentals and the like may not be treated as a royalty interest. It is more of a mineral interest or a real property right. Royalty is more of an expense-free interest.
The intention of a land owner as to whether royalty interest or mineral interest is transferred can be construed from the terms or words used in the mineral deed. A deed executed by the owners of land intended to transfer an interest in the royalties, where it had specifically referred to royalties and the deed repeatedly mentioned oil and gas produced and saved from the land.
The lessor has to pay a small percentage of royalties in addition to a fraction of oil that may be produced from the land to a lessee if there is an existing lease when the lessor executes a mineral deed. A conveyance of royalty payments to a particular lease does not include ownership of the oil or gas or the mineral rights in the land. When there is an ambiguity in the provisions of a deed which results in conflict between clauses, the granting clause prevails. If a granting clause clearly states that one half of the royalty will be provided then, the grantees will be entitled to one half royalties irrespective of what is provided in a future lease.
In deciding what’s included the subject matter of a conveyance, courts must consider the deed as a whole, viewing its language in light of the facts and circumstances of the transaction at issue and the governing law at the time[ii].
If at the time of conveyance of land by a deed, no oil or gas lease existed, a reservation of a portion of all the oil and gas royalties does not entitle a grantor any share in the oil and gas. A specific explanation of the royalties must be made in the document instead of making a general statement.
An instrument executed by a landowner of a leased land granting a portion of royalties will be treated as a conveyance of perpetual royalty in oil and gas. It will not expire with the expiration of the period of the lease.
Generally, royalties do not include delay rentals or bonuses given for the execution of a lease for mining oil and gas. But certain documents may be construed to include rentals and bonuses also in the light of evidence. Right to rentals, bonuses, right to lease are all characteristic to the ownership of the land. When it is granted by an instrument the grantors are entitled to a royalty interest. All mineral rights owned by the grantor are considered transferred when an instrument is executed.
In the case of premises not leased, the term royalty in a document will be construed as meaning mineral rights in the property. It is because royalty is connected with the lease of a property and if there is no lease, no royalty is to be paid or received.
[i] Badger v. King, 331 S.W.2d 955 (Tex. Civ. App. El Paso 1959).
[ii] Calvert Joint Venture # 140 v. Snider, 373 Md. 18 (Md. 2003).