Must a production payment out of four oil and gas leases be proportionately reduced if two of the leases expire because production ceased?
In Apache Deepwater, LLC v. McDaniel Partners , Ltd., the Texas Supreme
Court says yes. Absent express language in the assignment to the
contrary, this general rule applies: When an assigned lease
terminates, a production payment (like an override) created in that
lease is extinguished.
The instrument
A 1953 assignment of a production payment to McDaniel’s
predecessor covering four leases in Upton County was a 1/16th of
35/64ths of 7/8ths in all four leases. Apache Deepwater acquired
the four leases (after a wrong turn at Sabine Pass?). By the time of
the acquisition two leases were of a 35/64ths mineral interest and
two others were 3/64ths.
Tracts on two leases had expired for lack of production. Apache
reduced the payment proportionately.
McDaniel’s losing proposition
The equation, 1/16th of 35/64ths of 7/8ths, states the production
payment as a percentage of the cumulative working interests. This
indicates the parties’ intent to burden the individual leases jointly
with a production payment based upon the original cumulative
working interest conveyed. The production payment was reserved
from the conveyance as a whole, binding all of the leases jointly.
The result, and why
The production payment must be reduced when a lease expires.
Neither the inclusion of four leases in a single instrument nor the
instrument’s statement of the cumulative interest as a single
fraction demonstrates that the parties intended the production
payment to be carved from other than each lease. To the contrary,
the phrase following the fraction ties the reservation to the
assigning party’s interest in the “respective” leases. The court
referred to Webster’s for the meaning of “respective’ and
concluded it means “particular” or “separate”. This indicates that
the interest pertains to each lease separately. The assignment
neither states, implies, nor suggests the production payment
would be unaffected by the termination of the leaseholds from
which it was carved. The assignment fixed the dollars in volume
of oil to be delivered but that does not necessarily inform the rate
at which it was to be delivered.
Takeaways
If the remaining leases hold up McDaniel will get his money,
just not as quickly;
The parties could have written the assignment differently to
achieve a different result;
Title examiners: Study the language carefully but keep the
general rule in mind;
Everybody else: Hand off an instrument like this one to your
title examiner.
