Oil and Gas Lawyer Blog
Here is a hypothetical: OilCo A and OilCo B each acquire oil and gas leases from mineral owners holding undivided interests in Blackacre. The two companies are unable to agree on a joint operating agreement. OilCo A drills and completes wells, and OilCo B becomes a non-consenting cotenant, entitled to its share of net profit from the wells after payout. Issue: When does OilCo B owe royalties to its royalty owners?
Those are the facts in Pioneer Natural Resources USA, Inc., v. Elberta M. Royalty, LLC (Tex.App.-El Paso, August 19, 2026). Pioneer and Henry Petroleum each held oil and gas leases covering the same land in Upton County. Pioneer’s lease was from Elberta M. Royalty. Henry drilled wells without a joint operating agreement from Pioneer. Pioneer did not respond to Elberta’s demands for payment of royalty, and Elberta filed suit. While the suit was pending the wells paid out, Henry paid Pioneer its share of revenue, and Pioneer then paid Elberta its share of royalty from the date of first production – two years after production began. (Pioneer and Henry subsequently did enter into a joint operating agreement.) Elberta claimed it was also entitled to statutory interest and attorneys’ fees under Texas Natural Resources Code Chapter 91.
The Court of Appeals held that Pioneer’s obligation to pay royalty under Elberta’s lease accrued when production occurred, not when Pioneer got paid, including statutory interest.
Elberta’s lease provided that
Lessee agrees to pay Lessor as royalty on oil … produced and saved from the leased premises (the “oil”), 22.5% part of the net amount received by Lessee for the sale of the oil …. Lessee shall pay Lessor as royalty on … gas produced from the leased premises 22.5% of the net amount received by Lessee for the gas.
The lease did not state a deadline for when royalty payments were due.
Pioneer argued that it owed royalty on the “net amount received by Lessee.” The court disagreed.
[U]nder Pioneer’s reading, the lessor would receive nothing before the costs of production had been recouped. This is contrary to the established meaning of royalty as an interest in first production, free f the costs of production. … We decline to read the isolated phrase “net amount received by Lessee” in a way that would defeat the evident purpose of the royalty clause as a whole. In short, nothing in the text of the royalty clause delays Elberta’s royalty until Pioneer itself is paid.
Having concluded that Pioneer owed the royalty when produced, it then held that, under the Natural Resources Code, Section 91.402(a), the royalty was due within 120 days from date of first production. “The statutory payment obligation is triggered by the sale of production, not by the payor’s receipt of proceeds.”
As far as I know this is a case of first impression in Texas. Petition for review is expected.
It used to be rare for joint owners of different leases to not sign a joint operating agreement before drilling, but it appears this is now more common. Under a typical joint operating agreement provision is made for royalty owners to get paid when one joint interest owner elects not to participate in a well. Because of uncertainty in this area I have addressed this issue in my form oil and gas lease:
If this Lease covers less than all of the mineral estate in the Leased Premises, and if a well or wells are drilled by the lessee of other undivided mineral interests in the Leased Premises, Lessee shall be obligated to pay royalties on production from such wells whether or not Lessee participates in the drilling of such wells. Royalties shall be paid in the same manner and in the same amounts as if Lessee had participated in the drilling of such wells and had sold its share of production at the same price and for the same terms as the party who drilled such wells and sold such production, whether or not Lessee receives any portion of the revenues from sale of such production.
A second ruling that may be of interest to attorneys: Pioneer also objected to the jury’s award of $338,990.63 in attorneys’ fees. Elberta’s lawyer testified in support of his claim for fees that he charged $995 an hour. Pioneer complained that the case was not that complex, and its attorneys charged only $450 an hour. The court of appeals held there was sufficient evidence to support the award.