72CREATION OF INTERESTS BY LANDOWNERCh. 2
§2.7Attributes of the Mineral Estate-Interests Created
When Fractional Interests Are Conveyed or Reserved
In most jurisdictions, bonus, delay rentals, and royalty may be severed and sold, in various combinations and variations, apart from the remainder of the mineral estate. Questions constantly arise con-
cerning construction of instruments encountered during an historical
title search and language to be used in instrument preparation. Such constructional problems relate to the nature of the rights involved as well as to the quantum of production to which the holder of a particular interest may be entitled.
Unfortunately, a great lack of uniformity exists in verbiage which has been used to convey or reserve interests in the mineral estate.
Such lack of uniformity may have been caused by uncertainty as to language necessary to create desired interests, or, where certainty of language exists, may be due to inability to use such language, by reason of heedlessness or ignorance. At any rate, the variations in form of
conveyances of interests in the landowner's mineral estate are legion.
It is impossible, within the scope of this book, to attempt to catalogue all of the variations that may exist. To one engaged in an historical title search, any particular instrument encountered will have
to be studied in relation to the law of the jurisdiction involved to determine the course to be taken in interpretation of the interests
created, as well as any steps that may be necessary to cure the title. However, certain broad patterns have emerged, which, when recog-
nized, should aid the draftsman in creating the desired interests, as well as providing an approach to interpretations of an existing instrument.
(A) Interests Created-Mineral or Royalty?
Due to separate alienability of the various rights that compose the
mineral estate, and the fact that conveyances and reservations of such rights are found in varying combinations, difficult problems of construction have arisen as to the nature of fractional interests created. Some broad patterns have emerged.
At the outset, it may be asked which is the more valuable interest: a fractional I/s interest in the minerals, fully participating in all economic benefits, or a fractional 1/8 interest in gross production? The owner of the mineral interest will participate in a number of economic benefits derived from the mineral estate. For instance, if 0 conveys to A an undivided 1/s fully participating interest in the minerals, A will be entitled, upon lease, to the bonus and delay rentals which he may negotiate for the leasing of such interest, as well as 1/8 of the land-
owner's royalty customarily provided. If the customary royalty is 1/8 of gross production, A will receive 1/8 of 1/s, or 1/64, of production, free of costs of development and production. On the other hand, the owner of
§ 2.7IN THE OIL AND GAS MINERAL ESTATE73
a 1/8 interest in gross production only, will receive such fraction of gross production, free of costs, but will not share in other economic benefits
to be derived from the lease or leasing transaction.
Obviously, no categorical answer can be given to the question posed, as the benefits to be derived depend upon the geophysical nature of the area in which such interest may be located. In a highly productive area, the right to 1/8 of gross production would be highly desirable. On the other hand, in an unproved area the fully participat-
ing interest may provide the more valuable economic benefits. Al-
though the right to gross production may be eight times smaller, i.e., 1/64 as compared to 1/8, the further right to a cash bonus for the execution of a lease and entitlement to delay rentals, paid after lease and prior to
production, may well offset decreased royalty income (if any). This, of course, may occur where development is delayed, where the land is leased several times (specially if of large acreage), or where production
is marginal or non-existent.
Apart from the question of the economic value of an interest, the problem to be considered is whether a grant or reservation creates a fully participating mineral interest or a right limited to a fractional
share of gross production.
The cases usually involve the following typical clauses in grants
and reservations:
(1) "an undividedinterest in and to all of the oil, gas
and other minerals in, under, and that may be produced from the described land together with the right of ingress and egress for the
purpose of entering, developing and producing same."
(2) same as (1) above, without the right of ingress and egress.
(3) "an undividedinterest in and to all of the oil, gas
and other minerals that may be produced from the described land."
(4) same as (3), above, with a right of ingress and egress.
(5) "an undividedroyalty interest in and to the oil, gas,
and other minerals in, under, and that may be produced from the land described."
(6) "an undividedroyalty interest in and to all of the
oil, gas and other minerals produced and saved from the land described."
(7) same as (5) and (6), above, with rights of ingress and egress.
(8) "an undividedinterest in and to all of the oil
royalty and gas royalty that may be produced from the described land."
(9) "an undividedinterest in and to all of the oil
royalty and gas royalty, and the rights thereto, that may be produced from the described lands."
74CREATION OF INTERESTS BY LANDOWNERCh. 2
(10) "an undividedinterest in all of the oil, gas and
other minerals, in and under the land, with grantor reserving the right to lease, bonus moneys and delay rentals."
As a background to an understanding of the cases, it will be helpful
to survey the various approaches to interpretation applied by the courts in the oil and gas producing states:
(1) Whether, looking at the instrument as a whole, it expresses an intent that the implied from the presence or omission of statements relating to the right to discover or produce, to lease,
rentals, and bonus.
(2) Whether the language of the instrument indicates an inter-
est in place in the ground (mineral) or only after produced (royal-
ty), a mechanical approach.
(3) That the term "royalty" has a definite meaning, indicating
only an interest in gross production equal to the fraction stated, or
to the percentage of royalty provided for in later leases. This
interest would not share in bonus, delay rentals or the right to
lease.
(4) A lingering construction of the terms "royalty" and "prof-
its" as indicating a mineral interest. This conclusion follows the
common law concept that a conveyance of the profits of the land is
a conveyance of the land itself.
(5) Treat the words as ambiguous and allow parol evidence to determine intent.
(6) Any combination of the above.
(B) Conveyances of "Oil and Gas in, Under, and That May Be
Produced From *** "
It is generally held that a conveyance of the "minerals" or "mineral rights" will designate a fully participating mineral interest, whether or not express rights of ingress and egress are included. Some courts, especially in ownership jurisdictions, have given weight to words indicating that an interest in the ground has been created.
It appears that in all jurisdictions a grant or reservation in the
form of "a fractional undivided interest in and to all of the oil, gas and
other minerals in, under, and that may be produced from the following
described land," will grant or reserve a fractional fully participating mineral interest.15' In reaching this conclusion, ownership-in-place
§ 2.7
156. Little v. Mountain View Dairies,
35 Cal.2d 232, 217 P.2d 416; Simson v.
Langholf, 133 Colo. 208, 293 P.2d 302; Gal-
lin v. Combs, Ky., 341 S.W.2d 778; Horn v.
Skelly Oil Co., 224 La. 709, 70 So.2d 657;
Phillips Petroleum Co. v. Richard, La.App.,
127 So.2d 816; Stokes v. Tutvet, 134 Mont.
0
250, 328 P.2d 1096; Smith v. County of
Musselshell, 155 Mont. 376, 472 P.2d 878;
Manley v. Boling, 186 Okl. 59, 96 P.2d 30;
Coker v. Hudspeth, Okl., 308 P.2d 291;
Murphy v. Dilworth, 137 Tex. 32, 151
S.W.2d 1004. However, see: Extraction
Resources, Inc. v. Freeman, Tex.Civ.App.,
555 S.W.2d 156, refused n.r.e. It was held
§ 2.7IN THE OIL AND GAS MINERAL ESTATE75
jurisdictions have placed emphasis on the presence of language indicat-
ing that the grant or reservation is of minerals "in or under" the ground,15' or similar language, which indicates that the conveyance is of minerals in place. On the other hand, in non-ownership states,158 where it is not possible to own minerals in place, such language is given little weight as a factor to be considered in determining whether a grant or reservation creates less than a fully participating mineral interest. Notwithstanding the absence of such language, in both own-
ership and non-ownership jurisdictions a grant or reservation in de-
scriptive terms of the mineral estate, such as "minerals," "mineral
estate," or "mineral rights," will usually be construed as indicating an intent that a fully participating mineral interest is being dealt with.'59
As a fully participating mineral interest creates rights of occupan-
cy and use of the mineral estate, it is customary to include in the
instrument, in addition to the above language, an express grant of easement rights across the surface for development purposes."' How-
that where the only interest owned by the
grantor was a non-participating royalty in-
terest, conveyances in this form conveyed a
royalty interest. Interestingly, the grantor
here owned a '/16th royalty interest and
executed 366 deeds, each of which purport-
ed to convey a '/64 royalty!
A variation on the "in and under" lan-
guage that has been universally held to
denote a mineral interest is a grant or
reservation of "oil and gas deposits." In
Hinkle v. Gauntt, 201 Okl. 432, 206 P.2d
1001, this was held to indicate an intention
to reserve a mineral interest, and the court
applied "an interest in place in the
ground" rationale.
157. See Stokes v. Tutvet, 134 Mont.
250, 328 P.2d 1096; Smith v. County of
Musselshell, 155 Mont. 376, 472 P.2d 878;
Murphy v. Dilworth, 137 Tex. 32, 151
S.W.2d 1004; but cf. Miller v. Speed, Tex.
Civ.App., 248 S.W.2d 250.
158. Little v. Mountain View Dairies,
35 Cal.2d 232, 217 P.2d 416. But see Jolly
v. Wilson, Okl., 478 P.2d 886; Swearingen
v. Oldham, 195 Okl. 532, 159 P.2d 247
(1945); and Hinkle v. Gauntt, 201 Okl. 432,
206 P.2d 1001 ("oil and gas deposits").
159. Amundson v. Gordon, 134 Mont.
142, 328 P.2d 630; Klein v. Humble Oil &
Refining Co., 126 Tex. 450, 86 S.W.2d 1077.
Also see: Smith v. Anisman, La.App., 85
So.2d 351 ("mineral acres"); Starling v.
Preston, Tex.Civ.App., 144 S.W.2d 1009
("oil and gas rights"); Amundson v. Gor-
don, 134 Mont. 142, 328 P.2d 630, and
Martin v. Snuggs, Tex.Civ.App., 302 S.W.2d
676 ("oil and mineral rights"); but see
Voyta v. Clonts, 134 Mont. 156, 328 P.2d
655 ("mineral rights" held to denote a roy-
alty interest in reservation in deed exe-
cuted when oil and gas lease outstanding).
However, modifying intent may be found
in other parts of the instrument, see Picard
v. Richards, Wyo., 366 P.2d 119. Such
general language is uncertain at best, and
conformity to judicially accepted verbiage is strongly recommended, see Barnett v.
Morris, 207 Ark. 761, 182 S.W.2d 765.
160. Such clause is often found in sim-
ple form following the description of the
property: " * * * , together with the
right of ingress and egress for the purpose
of prospecting, mining, developing and pro-
ducing the same." It may be observed that the scope of this clause is much less than that customarily found in an oil and gas
lease: " * * * for the purpose of testing,
by any method or methods, for formations
or structures investigating, exploring, pros-
pecting, drilling and mining for and pro-
ducing oil, gas, and other minerals, laying
pipe lines, and other structures thereon, to
produce, save, take care of, treat, trans-
port, and own said products, and housing
its employees, and for dredging and main-
taining canals, constructing and maintain-
ing roads and bridges, and, in general, for
all appliances or structures, equipment,
servitudes and privileges which may be
necessary, useful or convenient in connec-
tion with any such operations conducted by
lessee, *** ." See Summers, Oil and
Gas, § 1302. The suggestion has been
made that the prudent person acquiring a
fully participating mineral interest from
the owner of the fee title should include
such grant of rights as may be described in
oil and gas leases to be executed. How-
ever, such clause may cause some initial
76CREATION OF INTERESTS BY LANDOWNERCh.2
ever, the omission of an express grant of easement rights should not cause the interest to be construed as being less than a fully participat-
ing mineral interest, unless specific intent to so limit the grant or reservation otherwise appears in the instrument.'"' As a mineral
interest carries with it rights to possession and development, in the event that express rights of entry are omitted, such rights as are
reasonably necessary for the exploration, development, and production of the petroleum products will be implied by law."'
(C) Conveyances of "Royalty"
In many jurisdictions a grant or reservation of a "royalty" interest
will be interpreted as creating a non-cost bearing interest that will share
only in a fractional portion of gross production, and will not participate
in bonus, delay rentals, or the power to lease.
In a few jurisdictions, notably Oklahoma, the term "royalty" is treated as being uncertain in meaning. Circumstances surrounding the transaction will bear on the supposed intent of the parties. Generally speaking, a grant of a "royalty" interest made at a time when no lease is
in existence will be construed as denoting a fully participating mineral interest. However, if a lease is outstanding at the time intent will be construed in the narrow sense as indicating an interest that will share only in gross production. It is submitted that a treatment of the term "royalty" as uncertain in meaning is unsound.
To reserve or convey an interest limited only to sharing in a fractional part of gross production, an intention to grant or reserve less than a full mineral interest must appear in the instrument. As mentioned above, merely omitting the express right of ingress and
egress from a grant or reservation of what otherwise is a fully partici-
pating mineral interest is generally not sufficient to accomplish this
result. As an interest limited to sharing only in a part of gross production is commonly referred to as a royalty interest, many instru-
ments are found which convey or reserve an interest which is designat-
ed as a "royalty interest." For example, 0 may convey to A "an
difficulties in negotiations with landowners
who do not understand the purpose for its
inclusion.
161. Early Oklahoma cases drew a
sharp distinction between grants and reser-
vations of mineral interests. Where rights
of ingress and egress were omitted from a
grant of a mineral interest, it was held
that the grant was void. However, if the
rights of ingress and egress were omitted
from a reservation of a mineral interest,
the reservation was treated as valid, and
the rights would be implied. Newbern v. Gould, 162 Okl. 82, 19 P.2d 157 and Mor-
gan v. McGee, 117 Okl. 212, 245 P. 888.
This distinction is no longer followed, and
whether a mineral interest is granted or
reserved, the rights of ingress and egress
for development will be implied. Melton v.
Sneed, 188 Okl. 388, 109 P.2d 509 and
Burns v. Bastien, 174 Okl. 40, 50 P.2d 377.
162. Such implied rights are akin to
easements by necessity implied to one ac-
quiring property surrounded by property of
the grantor and to which there is no entry
way. See Hurley v. Northern Pacific Rail-
way Co., 153 Mont. 199, 455 P.2d 321; Gulf
Pipe Line Co. v. Pawnee-Tulsa Petroleum
Co., 34 Okl. 775, 127 P. 252; Gulf Produc-
tion Co. v. Continental Oil Co., 139 Tex.
183, 132 S.W.2d 553, and cf. Getty Oil Co.
v. Royal, Tex.Civ.App., 422S.W.2d 591,
weighing relative inconvenience to the par-
ties.
§ 2.7IN THE OIL AND GAS MINERAL ESTATE77
undivided 1/16 royalty interest" or "an undivided one-half of royalty" in the oil and gas. What is the extent of A's interest?
In many jurisdictions the word "royalty" has a definite and unam-
biguous meaning denoting a fractional interest in production, free of
costs and expense, which will not share or participate in bonus, delay rentals, or the power to lease.163 Such view is typified by the Texas
case of Schlittler v. Smith, where, in holding that a reservation of an undivided one-half interest in "royalty rights" did not include the right to bonus or delay rentals, the court stated: "The words "royalty,' "bonus,' and "rentals' have a well-understood meaning in the oil and gas business. Likewise, "minerals' and "mineral rights' have a well-
recognized meaning. Broadly speaking, a reservation of minerals or mineral rights without limitation would include royalties, bonuses, and rentals. A conveyance of land without reservations would include all minerals or mineral rights. However, it is well settled that a grantor
may reserve minerals or mineral rights and he may also reserve royalties, bonuses, and rentals, either one, more or all. Here we have a reservation of only "royalty rights.' It is obvious, it seems to us, that this does not include a reservation of bonuses or rentals, but only of an interest in oil, gas, or minerals paid, received, or realized as 'royalty' under any lease existing on the land at the time of the reservation, or
thereafter executed by the grantee, his heirs, or assigns. A reservation of "royalty' on all oil, gas, and minerals which may be produced necessarily implies that the grantor contemplated the leasing of the land for production. He reserved no right of leasing to himself, and consequently the grantee possesses such right." 164
In Kansas, the term "royalty" also has a definite meaning as
including only a portion of gross production. However, in Kansas the
163. 128 Tex. 628, 101 S.W.2d 543.
164. Arkansas: Longino v. Machen, 217
Ark. 641, 232 S.W.2d 826; California: Cal-
lahan v. Martin, 3 Cal.2d 110, 43 P.2d 788,
101 A.L.R. 871; Dabney-Johnston Oil
Corp. v. Walden, 4 Cal.2d 637, 52 P.2d 237,
however, the exact nature of the royalty
interest is somewhat uncertain as the
courts tend to speak of the royalty owner
as a "cotenant" with the other owners of
the mineral estate, which may imply
broader rights than normally attributed to
such interest; Kansas : Bellport v. Harri-
son, 123 Kan. 310, 255 P. 52; Kentucky :
Texas Co. v. Bowen, 292 Ky. 676, 167
S.W.2d 822; Lively v. Federal Land Bank
of Louisville, 296 Ky. 133, 176 S.W.2d 264;
Louisiana: Gulf Refining Co. v. Goode, 212
La. 502, 32 So.2d 904; and see, Cormier v.
Ferguson, La.App., 92 So.2d 507; Mississip-
pi : Palmer v. Crews, 203 Miss. 806, 35
So.2d 430, 4 A.L.R.2d 483; and see Payne
v. Campbell, 250 Miss. 227, 164 So.2d 780;
Montana : see Stokes v. Tutvet, 134 Mont.
250, 328 P.2d 1096, but some uncertainty
appears in the cases; North Dakota : Cor-
bett v. La Bere, N.D., 68 N.W.2d 211; New
Mexico ; Duvall v. Stone, 54 N.M. 27, 213
P.2d 212; Texas : Schlittler v. Smith, 128
Tex. 628, 101 S.W.2d 543; Watkins v.
Slaughter, 144 Tex. 179, 189 S.W.2d 699;
Arnold v. Ashbel Smith Land Co., Tex.Civ.
App., 307 S.W.2d 818; West Virginia :
Davis v. Hardman, 148 W.Va. 82, 133
S.E.2d 77; Wyoming : It is hard to tell the
position of the Wyoming courts from the
case of Picard v. Richards, Wyo., 366 P.2d