The Missing Link in Royalty Analysis: An Essay on Resolving Value-Based Royalty Disputes

The oil and gas lease is intended to document a business transaction between the landowner and oil and gas developer. The developer obtains the right to enter the landowner's property to search for, develop, produce, and take title to oil and gas. The landowner is compensated with a royalty on oil and gas produced from the land. The royalty may be an actual share of the oil and gas produced, or it may be a payment of money. A combination of the two occurs frequently: a share of oil production for oil royalty and a payment of money for gas royalty. In most cases, if production is obtained from the leased land, the royalty will become the primary source of landowner compensation under the leasing transaction. Once the oil and gas lease is entered into, and production has been obtained, there are only two ways a lessor can maximize his royalty income: (1) increase the volume of production; (2) increase the value of production. The situs of the lessor's volume- and value-enhancing efforts is often a courthouse. This article focuses on the value-enhancing issues associated with the oil and gas lease and offers what the author believes is a frequently applied, but previously unarticulated analysis for resolving value-based royalty disputes. This "missing link" analysis focuses on a fundamental issue courts must address to properly resolve lessor/lessee value disputes. When does the lease relationship come to an end? The analysis is neutral as to which party should prevail. The analysis merely asks the critical question that should assist in resolving many collateral royalty value disputes when answered.