Environmental and Energy Law Blog

Thursday, March 28, 2019

The Timely Payment of Oil and Gas Royalties in Texas

In Texas, royalties for oil and gas production are due at least 120 days after the end of the month of first sale of production from a well. This timeline allows operators approximately four months after a well starts producing to complete required administrative tasks and begin paying royalties. After this, royalties are payable 60 days or 90 days after the end of the month in which subsequent production is sold. However, operators are not required to make timely royalty payments if the royalty owner’s interest is subject to a title defect or a royalty owner declines to sign a division order. Below is some additional information about the timely payment of oil and gas royalties in Texas. 

Statutory requirements

Pursuant to the Texas Natural Resources Code, an operator is entitled as a condition to payment to receive a signed division order from the royalty owner. Therefore, in order to rely on this law as a reason to refuse to pay royalties, an operator must send a division order to the royalty owner and have it rejected. However, it's important to note that it's becoming common for leases to expressly negate this statute by stating that a royalty owner does not have to sign a division order to receive royalties. Therefore, it's important to review all leases with an experienced Texas oil and gas attorney prior to taking action regarding the payment or nonpayment of royalties.

In addition, the Texas Natural Resources Code authorizes an operator to withhold royalty payments in the following situations:

  • When there is a title dispute
  • When there is a reasonable doubt that the payee has clear title to his or her interest
  • When there is an unsatisfied title opinion requirement that involves the payee’s identity, title, or whereabouts

When royalties are unlawfully withheld

When a royalty owner believes that royalties are being unlawfully withheld by an operator, Texas law requires that the royalty owner contact the operator and request an explanation or demand payment prior to filing a lawsuit. Following such notification, the operator then has 30 days to respond with a reasonable explanation for failing to pay such royalties. If the operator fails to respond or provides an explanation that is not legally justified, the royalty owner may then file a lawsuit against the operator. 

Texas Oil and Gas Attorney

If you are involved in a dispute over oil or gas royalties, it's imperative that you have reliable, experienced, and knowledgeable legal representation to aggressively pursue your legal rights. In addition, it's important to ensure that oil and gas contracts are properly drafted to avoid such disputes. At the Law Office of C. William Smalling, P.C., we are highly experienced in the drafting and review of a number of types of contracts, including joint operating agreements, farmout agreements, master service agreements, drilling contracts, licensing agreements for use of seismic or technical data, nondisclosure agreements, and more. Therefore, if you are in need of expert oil and gas legal representation, contact us today for a consultation. 

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