Opinion ID: 2165636
Heading Depth: 1
Heading Rank: 15

Heading: overriding royalty interests

Text: The district court overruled Coral and KJJ's summary judgment motion that claimed the preferential right to purchase applied to the transfer of overriding royalty interests to Zecchi. It also sustained EXCO and Zecchi's motion for summary judgment on this claim but did not specify its reasoning. Coral and KJJ assign that the district court erred in failing to find that after Central had sold its Nebraska assets to EXCO, EXCO's transfer of overriding royalty interests in the Nebraska assets to Zecchi triggered Coral and KJJ's preferential right to purchase those interests. This claim is not directed at Central. EXCO and Zecchi argue that because overriding royalties are nonoperating interests carved out of the working interests, they are not subject to the JOA. Initially, we note that the agreement was made binding upon the parties' successors and assigns and required a JOA party to make any sales or transfers subject to the JOA. Thus, EXCO was bound by the JOA's preferential right to purchase, and it does not dispute this point. [39] An overriding royalty interest is a fractional interest in the production of oil and gas, which is free of the costs of production and over and above any royalty interest payable to the lessor of an oil and gas lease. It is an interest retained by the lessee of an oil and gas lease, such as a speculator or oil and gas production company, when the lessee assigns all or part of its lease or allows another party to drill on a site covered by its lease. [40] A working interest is an operating interest under an oil and gas lease that provides its owner with the exclusive right to drill, produce, and exploit the minerals. [41] Under Texas law, an overriding royalty interest `is carved out of, and constitutes a part of, the working interest created by an oil and gas lease.' [42] EXCO and Zecchi rely on law review articles for their proposition that because the owner of an overriding royalty interest has no right to develop the oil or gas, construing preferential rights provisions as applying to these interests does not serve the purpose of preferential rightsnamely, the power to exclude undesirable operators or participants. Implicit in EXCO and Zecchi's argument is the presumption that a preferential right to purchase serves only one purpose. It is correct that a preferential right to purchase ensures that the owners retaining their interest in the contract area have some degree of control in excluding undesirable participants who may not have the necessary financial ability to bear their share of expenditures or who might frustrate development with management and engineering philosophies which current owners oppose. [43] However, this is not the only purpose of a preferential right to purchase: In joint operating agreements, each owner believes that the other interests in the subject property are of some value. The preferential right, therefore, assures each owner the opportunity to purchase those valuable rights should a co-owner of an interest decide to sell his interest to a third party. It thus allows those owners, who may have been at risk in exploratory efforts which contributed to the development of the property, to have an opportunity to acquire an additional interest in the property before a third party who did not participate in such risks. [44] Neither the JOA nor Texas law limits the opportunity to purchase valuable rights in the subject property to operating rights. The preferential-right-to-purchase provision in the JOA broadly applies to a party's sale of its rights and interest in the Contract Area. The parties' amendment showed that the interests Central acquired in the Nebraska properties included overriding royalty interests. Texas Courts of Appeals have held that overriding royalty interests are interests in the contract area and that a preferential right to purchase applies to a sale of these interests. [45] Thus, the only issue here is whether a sale of overriding royalty interests occurred. In the context of oil and gas lease interests, Texas courts require an arms-length's transaction between a willing seller and buyer in order to trigger a preferential right to purchase. [46] Because the district court concluded that a preferential right to purchase does not apply to overriding royalty interests, however, it did not determine whether EXCO's transfer of overriding royalty interests to Zecchi constituted an arms-length transaction. Nor did the parties raise this issue to the court in their motions for summary judgment. Thus, we conclude that the matter must be remanded for further proceedings to determine whether the transfer triggered Coral's preferential right to purchase.