It can be an expensive mistake to receive an oil or gas royalty and throw away the check stub. Every piece of paper about that mineral estate and royalty interest is valuable, and should be saved.
Mineral Interests 101
Savvy Texans keep the minerals. When the family farm sells, the deed reserves “oil, gas, and other minerals” or “all minerals in and under the land.” This so-called mineral estate includes five rights: to explore and develop, to lease, to receive bonus payments, to receive delay rentals, and to receive royalty.
Few owners develop their own minerals. Most lease all the right to explore and develop and part of the royalty right to an operating company. The owner retains bonus payments, delay rentals, and a fraction of the royalty, e.g., one-eighth of the oil and gas, conveying a seven-eighths working interest to the operating company. Division orders record each owner’s fraction on the books of the operating company.
Bonus payments are made on signing. Royalties start and stop with production. Leases terminate if production stops or doesn’t start within a year (sometimes longer). Delay rentals extend the term of the lease when production fails.
Two steps to transfer the mineral estate and royalties
Production and delay rentals can continue an oil and gas lease for generations. Transferring the royalties from one owner to the next is a two-step process. First, a deed is recorded in the county where the mineral estate is located, to convey the right to receive royalty. Second, the recorded deed is delivered to the operator, who prepares amended division orders.
When an owner dies without deeding the mineral estate, probate is required, and certified copies of the proceedings must be recorded before the executor or administrator can sign a distribution deed.
To avoid probate, the owner may transfer the mineral estate to a revocable trust, using a contribution deed. On death, the trustee gives a distribution deed to the new owner, and without any court order, enabling updated division orders quickly and cheaply.
Developing information and retaining records
Identifying the land and the lease to prepare the deed and update division orders is haphazard and expensive. Some families have complete records. Others vaguely recall a bonus payment, but little else. Public records are notoriously difficult to search for mineral interests. This is not just unfortunate, it is intentional. Operating companies invest millions in each well, profitable or not, and have little incentive to illuminate the way for competitors. Some operating companies have robust owner relations programs that are fast and helpful. Others offer only a fax line that’s ignored.
Every family with mineral interests should keep a file with all deeds, wills, muniments of title, leases and amendments, division orders, and check stubs. The information helps to audit, administer, and transfer mineral interests, whether for a thoughtful estate plan or an unexpected probate. A professional landman can develop the same information, but the expense is significant and avoidable.
The Texas Railroad Commission answers royalty questions at https://www.rrc.state.tx.us/about-us/resource-center/faqs/royalties-faq/. Lawyers representing owners will appreciate these articles published by TexasBarCLE (subscription or individual purchase required): Craig S. Adams, Planning for Owners of Oil and Gas Interests, in 29 Estate Planning and Probate Course (2006), George A. Snell III, Basic Conveyancing Rules for Mineral Deeds and Assignments of Oil and Gas Leases, in 6 Oil, Gas & Energy Resources 101 (2017), and Dustin G. Willey, What Every Estate Planner Needs to Know About Mineral Interests, in 2 Intermediate Estate Planning & Probate (2017).