Honorable Earl Rudder Commissioner General Land Office Austin, Texas

Dear Mr. Rudder: Opinion No. WW-185 Re: Authority of School Land Board,

by approval ofa unitization agreement, and the Commissioner, by execution thereof, to agree tothe extension ofLease No. M-18948 beyond its twenty-five **year** maximum term. This is in re.ply toyour letter ofMay 9, 1957, which sets out certain facts, hereinafter mentioned, and requests an opinion on the following quoted question:

‘Can the School Land Board, by approval ofthe ,unittzation agreement, and the Commissioner, by execution thereof, agree tothe extension ofthe subject lease beyond the.twenty-five year principal term 7” Inthis same letter you have set out.facts which are as follows:

“On January 16, 1935, Lease No. M-18948, covering Tract 3, Dickinson Bay, Galveston County, containing 147acres, was issued by the Commissioner ofthe General Land Office tothe Stanolind Oil and Gas Company (now Pan American Petroleum Corporation). That lease was for

‘
. ..aperiod of five years and a.slong thereafter as any minerals covered thereby are produced therefrom in commercial quantities not to exceed twenty-five years ...‘
. “In 1947, the Legislature enacted Chapter 82, Page 139 (Art. 534412,V.C.S.), which provided, among other things, that such lease could be amended upon application by the owner filed with the Commissioner ofthe General Land Office before October 1, 1948, to provide that it would remain in effect as long after the expiration oftheHonorable Earl Rudder, Page 2(WW-185)

primary term as the lease produced. The lessee ofthe lease here under consideration did not make application for amendment ofthe lease under the provisions of that **Act.**

**.-**In 1951, the 52nd Legislature enacted Chapter 150, Page 254 (Art. 5382~. V.C.S.), under which statute the State’s interest in any lease may be pooled or unitized. “Pan American Petroleum Corporation has now requested this office to enter a unitization agreement whereby the above land will be unitized with other land to**form** a 630 acre unit. **As** part ofthe unit agreement, the lessee proposes the inclusion of aprovision that the above lease will remain in force and effect as long as there is production from the unit in paying quantities and royalties paid to the State thereon.
. ..* Article 5382~ states inSection 1:

-. ..The Commissioner ofthe General Land Office, on behalf ofthe State ofTexas or any fund belonging thereto, is authorized to execute agreements that provide for the operation ofareas as a unit for the exploration, development, and production of oil and gas, or either ofthem, and to commit to such agreements the royalty interests in oil and gas, or either ofthem, reserved tothe State or any fund thereof
. ..under the terms of any oil and gas lease lawfully made by an official, board, agent, agency, or authority ofthe State; provided (a) that the agreements that commit such royalty interests inlands set apart by the Constitution and laws ofthis State for the Permanent Free School Fund and the several asylum funds, in river beds, inland lakes, and channels, and the area within tidewater limits, including islands, lakes, bays, inlets, marshes, reefs, and the beds of the sea, are approved by the School Land Board, and are executed by the owners of the soil ifthey cover lands leased for oil and gas under the Relinquishment **Act.** Articles 5367 to 5379, inclusive, Revised Civil **Statutes,** 1925, as amended; ”

. ..Section 2ofthis Article provides:Honorable Earl Rudder, Page 3(WW-185)

“Any agreement authorized tobe executed under the provisions ofthis Act may provide
... (3) that the agreement and/or lease, with respect tothe interest ofthe State, shall remain inforce as long as oil and gas, or either of them, is produced from the unit in paying quantities and royalties paid to the State thereon;
. ...” Itis obvious from acomplete reading ofthis statute and its title that the legislative intent is to allow the Commissioner ofthe General Land Office to enter into unitization agreements which in his judgment, and in the considered opinion ofthe officials and members ofthe boards and agencies whose lands are affected by such agreements, are found to be in the best interest ofthe State. The legislative intent is not toprovide another opportunity for holders of State leases to extend maximum term leases previously executed as was done by the passage ofArticle 5344~. ~V.C.S., by the Legislature in 1947.

Section 1ofArticle 5382~. V.C.S., contains the authority for the Commissioner to commit the State’s lands to unitization agreements, and itshould be carefully noted that in both the title ofthis Act and in its ~Section 1the State’s commitable interest is the royalty interest. This is set out definitely and clearly by the use ofthe words “royalty interests in oil and gas” found inboth the title and the authorizing section.

Under Lease No. M-18948, here being considered, there are three separate mineral estates. The first is the leasehold estate now owned by Pan American Petroleum Corporation. Itis well settled in Texas that the estate owned by the lessee is a determinable fee interest. Corzelius v.Harrell. 143Tex. 509. 186 S.W.2d 961 (1945); Brown v.Humble Oil 81 Refining Co., 126 Tex. 296, 83S.W.2d 935 (1935). The State as lessor owns a royalty interest entitling itto l/6 ofthe oil and gas produced, and itowns also the reversionary interest which comes into effect upon the expiration ofthe determinable fee. Murphy v. Dilworth, 137 Tex. 32, 151S.W.2d 1004 (1941); Sheffield v. Hogg, 124 Tex. 290, 77S.W.2d 1021, 80S.W.2d 741 (1934). There is nothing inthe statute authorizing the Commissioner to commit any interests owned by the State other than the royalty interest created by the lease. There is no authority, either expressed or implied, which would allow the Commissioner to commit any part ofthe reversionary interest.

The determinable fee owned by Pan American under this lease is limited by its terms to “as long thereafter as any minerals covered hereby are produced therefrom in commer~cial quantities, not to exceedHonorable Earl Rudder, Page 4 (WW-185)

twenty-five years, ...“. Necessarily the royalty interest continues only so long as the lease is in force. State National Bank of Corpus Christi v. Morgan, 135 Tex. 509, 143S,W.2d 757 (1940). Therefore, as the Commissioner may commit only the royalty interest reserved under the terms of this lease, he cannot continue the lease in force beyond the twenty-five year maximum term without thereby enlarging the determinable fee and the royalty interest. There is no authority to so change the terms ofthe mineral lease.

Some contention has been made that subsection 3ofSection 2 allows the Commissioner to extend the lease term by the inclusion ofa provision that the agreement shall remain inforce as long as oil and gas “is produced from the unit in paying quantities”. We are ofthe opinion that the significance ofthis subsection is toallow production from the unit toqualify as production from the leased premises and thus satisfy the production requirements ofthe lease.

If, however, **by** some interpretation, 

### itwas thought possible to extend the **term** ofthe basic lease beyond its twenty-five year maximum, we are ofthe further opinion that such an interpretation would require an unconstitutional application ofthis **statute** as the extension would be in violation ofSections 44, 51, 53and 55ofArticle III ofthe Texas Constitution. These sections, in effect, prohibit the gratuitous disposition ofthe State’s money, property or contractual rights. Empire Gas and Fuel Co. v. State, 121 Tex. 138, 47S.W.2d 265 (1932); Delta County v. Blackburn, 100Tex. 51, 93SW. 419 (1906).

When Pan American (then Stanolind Oil and Gas Company) bid on and purchased the subject lease in 1935, itwas with the understanding that the maximum term ofthe lease would be twenty-five years. This term lease is what they bargained for and this is what they received. To now extend this term would be togrant tothe lessee an additional property right and to diminish the reversionary interest owned by the State. For this valuable grant there would be no consideration moving tothe State. Even under the provisions ofArticle 5344c, V.C.S., passed in 1947, which allowed amendment ofthen-existing maximum term leases, the School Board was required to fix a fee for such amendment which could not be less than two dollars per acre. Obviously tonow all.ow the Commissioner tomake agratuitous amendment ofthe basic lease which would enlarge the mineral estate originally purchased would violate the constitutional, sections mentioned above.Honorable Earl Rudder, Page 5(WW-185)

SUMMARY **It**.is our opinion that .the School Land Board and the Commissioner cannot agree tothe extension ofthe subject lease beyond the twenty-five year principal **term** by the approval and execution ofthe proposed unitization agreement. .Very truly yours, WILL WILSON Attorney General of Texas

JMM:tiw APPROVED: OPINION COMMITTEE: George P. Blackburn. Chairman James H. Rogers J.Arthur Sandlin Lawrence Jones Wallace Finfrock **BY 0** 

**4** J. Mark McLau Assistant

REVIEWED FOR THE ATTORNEY GENERAL BY: James N. Ludlum