Duties of the operator to royalty owners

Duties of the operator to royalty owners

Beatty, J Robert

Of all the relationships affecting the financial well-being of oil and gas royalty owners, perhaps none is more important than the relationship between the royalty owner and the operator of the oil and gas properties. The purpose of this paper is to provide non-lawyer oil and gas professionals with a broad survey of the duties and obligations owed by operators to royalty owners, the sources of those duties, and a very brief discussion of certain recent developments concerning a few of those obligations. This paper is not intended to provide an exhaustive or detailed analysis of the topic. The short bibliography at the end of the paper contains a list of more complete discussions of the duties and obligations mentioned in this paper.

When analyzing a problem concerning the relationship between an operator and a royalty owner, it is usually helpful, if not essential, to start with a review of the various duties, both express and implied, that an operator owes to a royalty owner. To do that, one needs to know who the parties are in terms of their respective legal relationships and what agreements exist between them. This paper will start with a brief discussion of the legal relationships between operators and royalty owners and will continue with a review of the various duties that arise out of those relationships.

Operators-Who Are They and Who They Are Not

What is an “Operator”?

One source defines an “operator” as “a person, natural or artificial (eg., corporate) engaged in the business of drilling wells for oil and gas.”1 That definition is not particularly helpful. Perhaps a useful expansion of that definition might be as follows: that person, natural or artificial, who by agreement with the other owners of working interests in oil and gas lease(s), is designated as the party charged with the duty to conduct, direct, and control operations on behalf of the other co-owners necessary to carry out the owners’ exploration, production, development, and exploitation activities with respect to such lease(s).

1 Williams and Meyers, Oil and Gas Law, Manual of Terms, p.733.

Bibliography

Owen L. Anderson, “Royalty Valuation: Should Royalty Obligations Be Determined Intrinsically, Theoretically or Realistically,” 32 Natural Resources Journal 547 (University of New Mexico 1997).

William B. Burford, “The Operator’s Rights and Responsibilities in Marketing Production,” Institute on Oil and Gas Agreements 10-1 (Rocky Mountain Mineral Law Foundation 1983).

Laura H. Burney, “The Interaction of the Division Order and the Lease Royalty Clause,” 28 St. Mary’s Law Journal 353 (1997).

Gary B. Conine, “The Prudent Operator Standard: Application Beyond the Oil and Gas Lease,” 41 Natural Resources Journal (University of New Mexico) 23 (Winter 2001).

Allen D. Cummings, “The Use of Tort and Statutory Duties to Enlarge Contract Obligations Under the Lease and the Operating Agreement– Texas Law,” 50th Oil & Gas Inst. 10 Southwestern Legal Foundation (1999).

Wm. J. Legg & A. P. Murrah, Jr., “Royalty Payments-Who Owes How Much to Whom and When,” 35th Oil & Gas Institute 159 Southwestern Legal Foundation (1984).

Ernest E. Smith, “Duties and Obligations Owed By An Operator to Nonoperators, Investors, and Other Interest Owners,” 32 Rocky Mountain Mineral Law Institute 12-1 (1986).

Ernest E. Smith, “The Standard of Conduct Owed by Executive Right Holders and Operators to the Owners of Nonparticipating and Nonoperating Interests,” 32nd Oil & Gas Inst. 241 Southwestern Legal Foundation (1981).

Ronald T. Sponberg, “The Use of Tort and Statutory Duties to Enlarge Contract Obligations Under the Lease and the Operating Agreement– Oklahoma Law,” 50th Oil & Gas Inst. 9 Southwestern Legal Foundation (1999).

J. ROBERT BEATTY, PARTNER

LOCKE LIDDELL & SAPP LLP

DALLAS, TEXAS

Copyright University of North Texas Fall 2001

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