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Calculating the Landowner's Royalty

J. Clayton La Grone, Proceedings of 28th Annual Rocky Mountain Mineral Law Institute (1982)

The through the years. There is another paper to be presented at this Institute by Charles W. McDermott entitled Fee Oil and Gas Lease RoyaltyVariations and Problems, which will treat various problems relating to royalties other than those covered by this paper.

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Before getting into a discussion of the various views of the different jurisdictions regarding royalty calculations, I must emphasize the importance of the specific wording of the lease instrument itself. Regardless of the general rules that the courts have followed in determining the amount of the royalty owed to landowners, the specific wording of a given lease will outweigh the jurisprudence of a given jurisdiction in almost all instances. It is most important that you realize this in drafting of royalty clauses, as well as interpreting the effect of a given provision under the circumstances presented.

For purposes of this paper, it will be assumed that the leases contain a sufficient grant of rights to the lessee that all substances produced from the well involved are covered.

Treatment of Taxes

Most states have enacted statutes based on the value of the gross production of oil, gas, and their constituents. To the extent the parties have not agreed otherwise, most of these statutes place the tax proportionately on the lessor and lessee.2 While they vary in scope